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This presentation provides an overview of the performance and highlights of the Economic Development Commission for the 2014/2015 fiscal year, including M&A, enforcement and exemptions, cartels, market inquiries, and impact assessments.
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Annual Report 2014/2015 Presentation to Parliament’s Portfolio Committee on Economic Development Commissioner Tembinkosi Bonakele 17 November 2015
Content • INTRODUCTION • PERFORMANCE OVERVIEW • HIGHLIGHTS: • M&A • Enforcement & Exemptions • Cartels • Market Inquiries • Impact Assessments • Advocacy • CONCLUSION
Organizational Profile (1/2) • 186 staff complement + 28 graduates (12.7% increase in staff complement from 2013/14). • 52% female, 48% male.
Performance Against Targets • Won 80% of cases in the courts (4/5). • Exceed targets for initiation of new cartel and abuse of dominance cases. • 40 annual performance targets: • 25 Met, 14 Not Met, 1 N/A • Received a record number of merger notifications (395). • Average turnaround time for mergers was 34 days (23, 46 and 67 respectively).
Finances • Changes Revenue • Government grant increased from R177 million to R188 million • Fee income increased from R44 million to R52 million • Changes in Expenditure • Employee costs increased from R121 million to R140 million • Surplus • R25million • Mainly due to delays in the commencement of the health care market inquiry • Audit Opinion • Clean Audit (Financial information, Predetermined Objectives and Compliance with Legislation)
3. M&A HIGHLIGHTS
Mergers & Acquisitions: Conditions Imposed • A total of 43 mergers were approved with conditions. • BEHAVIOURAL to address competition concerns (3). • STRUCTURAL to address market distortions (1). • PUBLIC INTEREST (39) • EMPLOYMENT- restrictions on job-losses. • SMALL BUSINESS- promotion of entry. • INDUSTRIAL SECTOR/ REGION. • Monitored over 100 merger conditions for compliance; closed off 52 conditions which had lapsed. • Net impact on employment +2 746 (+1657 in previous year).
Jobs saved in Ellerines (African Bank) rescue • The Commission received three merger applications arising from the collapse of African Bank and Ellerines being placed under business rescue. • 1) Coricraft& Dial-A-Bed, 2) Lewis Stores & Bears and 3) Shoprite & Ellerines. • The Commission approved the three mergers, but imposed conditions to ensure that the remaining employees retained their jobs. • The Commission’s decisions on the three mergers resulted in the saving of 892 jobs. • A further 126 new employment positions were created by the Lewis/ Bears transaction.
Prohibition of Dairy firms merger • The dairy industry falls under one of the Commission’s priority sectors (“Food & Agro-Processing). • The Commission prohibited the merger between Clover SA and NkunziMilkway, due to concerns on its negative impact on small farmers & SMMEs. • Small farmers would not be in a position to negotiate better terms with Clover as they would with Nkunzi. • Further, the merger did not have any benefits that could outweigh the potential negative effects likely to accrue to the farmers or likely retrenchments that may occur. • The merger was eventually approved with the following conditions: • Imposed a pricing formula for the Ayrshire milk in order to protect small farmers; • Continuance of supply to (small) processors of the milk.
Prohibition of the Hospitals merger • A merger application was brought by Life Healthcare, Lowveld Hospital Group and Interstate Clearing. • Healthcare is one of the Commission’s priority sectors. • The Commission prohibited the merger as it would lead to higher hospital fees i.e. a significant increase in hospital tariffs for Lowveld Hospital which would adjust upwards to Life Healthcare prices. • The merging parties initially filed an appeal of the Commission’s decision at the Competition Tribunal but later abandoned the merger.
Zimco & Atlantis merger approved • The Commission received a merger application from Zimco Metals & Atlantis Metals, firms operating in the Commission’s priority sector (“Intermediate Industrial Products”). • The two firms operate in the lead anode market, an industrial input in mining. • The Commission found that the merger was anti-competitive as it would lead to a monopoly. • However, if the merger did not proceed, there would be several adverse effects: • Substantial job losses as Atlantis would exit the market. • Zimco would remain a monopoly. • Impact on the local mining production processes. • The Commission thus decided to approve the merger, subject to several conditions: • Continuity of supply to domestic customers. • Retrenchment moratorium. • No relocation of plant outside of South Africa.
Structural Remedy in the Holcim/ La Farge Merger • The Commission approved the merger between Holcim Ltd and Lafarge SA with a divestiture condition, demonstrating its ability to impose structural remedies. • The merger provided a potential platform for industry collusion as Holcim has a minority shareholding in Afrisam and has access to Afrisam’s commercially sensitive information arising from a previous relationship. • Both Holcim and Lafarge have been involved in collusion previously, locally and internationally. • The Commission thus required that Holcim divest of its Afrisam shareholding, as a condition of the merger. • Further, Holcim’s Afrisam shareholding could not be sold to any of the major cement producers.
4. ENFORCEMENT & EXEMPTIONS HIGHLIGHTS
E&E Overview • Decrease in complaints received from previous year (167 in 2013/14) • Most complaints in Food& Beverages, followed by Automotive and Telecoms sectors. • Increase in Commission initiations, from 3 to 7. • Exemption applications received: x3 Built Environment, X1 Airline. • Exemptions granted: x1 Healthcare, x1 Airline, x2 Fishing.
Abuse of Dominance: Media 24 Predatory Pricing • The Commission won its predatory pricing case against Media 24. • First such case to be prosecuted by the Commission. • The case related to the community newspaper market in Goldfields, Free State. • Media 24 used “Forum” as a fighting brand to undercut “Goldnet News” out of the market. • This was done by Forum offering prices below its marginal or variable costs, such that Goldnet News would not be able to compete. • The aim of the Media 24’s predatory pricing was to secure the market for its lucrative newspaper, “Vista”. • The Tribunal will hold a hearing on the remedies in the new financial year.
Abuse of Dominance: Sasol appeal at the CAC • The CAC overruled the Tribunal’s finding of excessive pricing against Sasol. • The Tribunal had imposed a R500million penalty to Sasol for excessive pricing of propylene and polypropylene to domestic customers (2004-2007). • The CAC upheld Sasol’s appeal, finding that Sasol’s markups were reasonable. • The Commission has approached the Constitutional Court for leave to appeal, on the following grounds: • the CAC’s failure to take into account that Sasol acquired its dominance through state support rather than through innovation and risk-taking. • the CAC’s failure to assess the impact of Sasol’s pricing on downstream industries. • the contradictions in the Court’s reasoning in the Arcelor Mittal case and the Sasol case on how to evaluate excessive pricing, leading to confusing precedence. • Currently awaiting decision of the ConCourt on the leave to appeal.
Exemption granted to National Hospital Network • The Commission has powers to grant or refuse applications for exemption from the application of the Actc, according to s.23. • The NHN applied for permission to collectively agree on prices it entered into with medical schemes and medical scheme administrators (collective bargaining), and to market their services collectively. • NHN is a co-operative controlled by a group of small, independent hospitals; it is unlisted. • The Commission granted the NHN an exemption for four years, in an effort to assist these small hospitals to compete in a very complex and concentrated market. • This allows the small hospitals to gain market share and to better compete against the “big three” hospital groups (Mediclinic, Life & Netcare).
Exemption granted to Squid & Lobster Industries • The first exemption application was filed in July 2013 by African Marine Products (Pty) Ltd, Oceana Lobster Limited, Ovenstone Agencies (Pty) Ltd, Premier Fishing SA (Pty) Ltd, and Ruwekus Fishing (Pty) Ltd. The Applicants are South African companies active in the catching, processing, marketing and exporting of different species of lobster. • The application was filed in respect of practices by which the Applicants would engage in coordinated sharing of commercially sensitive information for purposes of marketing and selling lobster in foreign markets. • The Commission took a view that the exemption would help the Applicants achieve this objective, and an exemption was granted for five years. • The second exemption application was filed by the South African Squid Exporters Association (“SASEA”). SASEA is a non-profit organisation that promotes the collective interests of South African exporters of LoligoReynaudi squid (“Squid”). • In terms of the application, SASEA requested it and its members be permitted to exchange commercially sensitive information in order to become more competitive. South African exporters of squid are at a disadvantage when negotiating with foreign buyers due to information asymmetry. • The Commission took a view that exempting the applicants from the conduct will provide them with a platform to overcome information asymmetries that exist in relation to foreign markets, strengthen their bargaining position and improve their international competitiveness. As such, the Commission decided to grant the exemption for a period of five years.
5. CARTELS HIGHLIGHTS
Cartels Overview • Most of the CLP applications received also in the automotive components cases. • Most cases initiated were in the automotive components sector (over 100 components).
Dawn Raids Conducted • SimeDarby Hudson & Knight (Pty) Ltd and Unilever BestfoodsRobertsons (Pty) Ltd (Fats and Edible Oil) • The two firms allegedly concluded a collusive agreement in terms of which Sime Darby will not supply margarine pack sizes that are less than 20kg and which are supplied by Unilever to the retail sector. In addition, Unilever will not supply industrial customers with its Flora brand edible oils while Sime Darby will not supply retail customers with its Crispa brand edible oils. • EldanAuto Body CC and Precision & Sons (Pty) Ltd (Panel beating) • The companies are alleged to have colluded on auto repair (panel beating) tenders by exchanging cover quotes whenever they are required to bid. • Investchem (Pty) Ltd and AkuluMarchon South Africa (Pty) Ltd (Surfactants) • The companies are alleged to have agreed to fix the price of surfactants and divide the market by allocating customers to each other in the market for the supply of surfactants. • Belfa Fire (Pty) Ltd, Cross Fire Management (Pty) Ltd, Fireco Gauteng (Pty) Ltd & Fireco (Pty) Ltd, Technological Fire Innovations (Pty) Ltd and Fire Control Systems (Pty) Ltd (Fire control and protection systems) • The companies are alleged to have colluded on fire control and protection tenders by exchanging cover quotes whenever they are required to bid.
Cartels: Phase 2 Construction Fast Track • Phase II Construction Fast Track Settlement (CFTS) process was begun during the year under review. • Phase II is for firms who did not participate in, or refused to settle in the Commission’s Fast Track Settlement process, which allowed lenient penalties in exchange for voluntary disclosure of cartel conduct. • The Commission entered into 5 settlement agreements during 2014/15 and referred 17 cases to the Tribunal for prosecution. • All investigations on the CFTS completed. • The prosecution of remaining firms is continuing in the 2015/16 financial year.
Settlement Agreement in Scrap Metal • The Commission referred a price fixing case to the Tribunal on 7 August 2013 against firms in the scrap metal industry (ArcelorMittal, Columbus Stainless, Cape Gate, Scaw, Highveld Steel & Vanadium Corporation, Cape Town Iron & Steel Works and the South African Iron and Steel Institute(collectively "Respondents"). • Scrap metal is a strategic input in construction and manufacturing and falls under the Commission’s priority sectors (“Intermediate Industrial Products”). • The Commission alleged that from 1998 until at least 2008, the Respondents entered into an agreement, or engaged in a concerted practice of directly or indirectly fixing the purchase price of scrap metal. • In November 2014, after the Commission’s referral of this matter, the Commission and Columbus reached agreement to settle in the amount of R32 576 835 and an admission by Columbus of having contravened section 4(1)(b)(i) of the Act. • The remaining respondents in this matter are ArcelorMittal Limited and Cape Gate (Pty) Ltd. Scaw is the leniency applicant. Highveld, CISCO & SAISI non-referral. • The prosecution against the remaining respondents continues.
Settlement Agreement in Electric Cables • On 3 December 2014, the Tribunal confirmed a settlement agreement between the Commission and ATC (Pty) Ltd in respect of its involvement in a cartel with Aberdare Cables (Pty) Ltd, MaleselaTaihan Electric Cables (M-Tec) and Alcon Marepha (Pty) Ltd. • This conduct occurred from 1998 to at least 2010. • ATC admitted having fixed prices, divided market and tendered collusively with Aberdare when supplying power cables to mining companies and municipalities. • It also admitted to having divided market and tendered collusively with Aberdare, M-Tec and Alcon Marepha when supplying Eskom tenders Corp 89 and Corp 90 with electric power. • Further, ATC admitted to colluding under the auspices of the Association Electric Cables Manufacturers of South Africa wherein members discussed and agreed on a quotation basis to escalate prices when bidding for short- and long-term tenders to supply power cables. • ATC agreed to pay an administrative penalty of R80 million, which represented 5% of its turnover for its 2010 financial year.
Settlement Agreement in Pelagic Fish • On 9 July 2014, the Tribunal confirmed a settlement agreement concluded between the Commission and Premier Fishing (SA) (Pty) Ltd in respect of Premier’s involvement in a cartel in the pelagic fishing market. • Pelagic fish is canned fish, often consumed by the poor, and falls within Commission’s priority sector of “Food & Agro-Processing”. • The cartel conduct was firstly, in respect of price fixing of the catching fees that processors paid to skippers and crew for pelagic fishand secondly, indirect price fixing of the price of canned fish in the context of processing agreements with other processors. • The cartel conduct took place from 2001 to 2008. • In terms of the settlement agreement Premier agreed to pay a penalty of R2 121 400 for contravening section 4(1)(b)(i) of the Act.
Update on the Private Healthcare Market Inquiry • The Inquiry is progressing well. • Now at the evidence gathering and analysis stage, following the thousands of pages of submissions received from stakeholders. • Gearing up for final process of public hearings from 1 February 2016. • Will thereafter compile report and table recommendations to the Commissioner for further processing. • Expected end date is 15 December 2016.
Launch of the LPG Market Inquiry • An inquiry into the Liquid Petroleum Gas market was launched in August 2014/15. • The inquiry seeks to understand the structural features of the market, particularly factors such as the high switching costs and the generally low usage of LPG by households. • Since the launch, the Commission has engaged with stakeholders through targeted information requests, meetings and site visits. In total, the Commission received more than 68 submissions from stakeholders across the LPG value chain. • The Commission recently made a call for further submissions, after market participants indicated specific factors that may have an impact on competition. • The expected completion date is March 2016.
The Pioneer Agro-Processing Competitiveness Fund • 2010 settlement agreement with Pioneer Foods for cartel conduct in the bread, wheat and white maize milling, poultry and egg industries. • Administrative penalty of R500 million; of which R250 million was allocated to establish the Agro-Processing Competitiveness Fund, administered by the IDC. • Over R182 million of the fund has been allocated to 29 enterprises, and over 60% has been disbursed. • Non-financial business support to the value of R2.8 million awarded to 11 enterprises. • Of the enterprises funded, 8 are start-up companies and 21 are existing enterprises that qualified for funding to expand their business operations. • The Fund has led to the creation of 2 266 jobs; 969 of the jobs are attributed to the start-up enterprises. • 11 enterprises are active in those sub-sectors that were cartelised, specifically poultry, animal feed, and the flour milling and bread industries.
The Massmart Supplier Development Fund • 2010 Walmart/ Massmart merger approved by the Commission. • Stakeholder concerns on import-substitution, impact on SMMEs and HDIs’ manufacturing firms and adverse impact on domestic employment. R242 million Massmart Supplier Development Fund (MSDF) established. • Over 50% of fund has been committed to support projects in agriculture, manufacturing and support services. • The Ezemvelo Direct Farm Programme- helps small to medium-sized farmers, particularly HDIs, to enter Massmart’s fresh produce supply chains. • The Manufacturing SMMEs Programme- for cluster projects in the building materials, bricks, processed commodities/ foods, and clothing& textiles sectors. • The Developing Wine Brands Programme- assists emerging black-owned and empowered wine brands to gain market access by integrated them into Massmart’s supply chain. • The Services to Suppliers Programme procures services such as food safety compliance, financial and business management, as well as training, on behalf of enterprise beneficiaries.
Stakeholder Relations • Undertook various training workshops on bid-rigging to firms, local and national government. • Public awareness & Outreach initiatives to numerous stakeholders, including Provincial Governments, Business, SOEs, Trade Unions, Industry Associations and Students. • Resolved an important case on School Uniforms which affects a large number of South Africans: • Related to exclusive agreements for school uniform and sportswear between schools and specific retailers. • Limited choice and competitive prices for parents. • The Commission partnered with the Department of Education to issue a circular for all schools to open school uniform procurement to tender. • Also embarked on an extensive awareness campaign with school governing bodies.
