Public Interest Provisions in the South African Competition Act

Public interest provisions in the South African Competition Act-

A critical review

Authors: James Hodge, Sha’ista Goga, Tshepiso Moahloli

Competition Policy, Law and Economics Conference 2009

Abstract

The South African Competition Act No 89 of 1998 was enacted ten years ago with the specific purpose of promoting and maintaining competition in South Africa. One of the ways in which the Act differed from those enacted in other jurisdictions was the innovative inclusion of public interest objectives. These objectives are reflected in the preamble and purpose of the Competition Act and are explicitly detailed in sections of the Act dealing with the assessment of exemptions and the assessment of mergers.

This paper examines the motivation for the inclusion of public interest provisions and the shape they took in the Act. It then discusses how the Competition Tribunal has chosen to interpret these provisions through a series of cases over the ten year period, and in so doing establishing the case precedent in relation to public interest.

The paper then critically assesses the manner in which public interest has been interpreted. It finds that whilst public interest has not yet trumped competition considerations, the approach adopted by the Tribunal has generally been both in line with the original motivation and sound practice. Yet challenges remain in ensuring that public interest does not gradually slip off the agenda of competition authorities and that it is rigorously assessed in the event that a substantive public interest case does emerge in future.

1Introduction

Given the potential for mergers to impact on government policy objectives, many other jurisdictions including the UK, Germany and Canada provide a mechanism for politicians to overturn otherwise anti-competitive mergers under particular circumstances. One concern is that this leaves the competition process, which should ideally be independent, open to some form of government interference. The South African Competition Act is unusual in that it has provided mechanisms to resolve conflicts between policy and competition, but has limited the discretionary component by placing the responsibility for determining whether a merger is required for public interest objectives in the hand of the independent competition authorities.

However, several problems nonetheless remain in contrasting and weighing up competition effects on the one hand, and public interest on the other. This is particularly evident where the units of analysis are quite different.

This paper seeks to discuss the public interest objectives of the Act and how they have been brought to the fore, assessed and dealt with in South African precedent. We conclude that while the competition authorities have dealt well with public interest considerations in the past, we may face particular challenges going forward.

The paper is structured as follows:

The first section provides a background on the public interest provisions South Africa by discussing some of the motivation behind the inclusion of public interest in the Competition Act, and outlining the actual provisions.
The second section outlines the way in which the Tribunal has interpreted and dealt with public interest provisions in the past 10 years.
The third section provides an assessment of the Tribunals approach, and discusses some challenges that may occur with respect to the assessment of public interest in the future.
The fourth section concludes.

2A background on public interest in South Africa

The Competition Act of South Africa is written in a manner that explicitly acknowledges the importance of public interest and therefore provides a role for the consideration of factors that go beyond the boundaries of competition. This is at the first instance reflected in the preamble and purpose of the Competition Act and is furthermore stipulated as a consideration in the both the assessment of exemptions and the assessment of mergers. We first discuss the motivation and context for the introduction of public interest in the Competition Act before outlining the provisions within the Act that relate to public interest.

2.1Motivation and context for the public interest provisions in the South African Competition Act

Discussions on an appropriate competition framework for South Africa began in the late nineties at a time when the South African economy was being restructured in numerous ways to redress the dual legacies of an uncompetitive, concentrated economy and a country replete with socio-economic inequalities. The government at the time was looking to create a comprehensive framework that would achieve a competitive and fast-growing economy. Competition policy was seen as a core part of this strategy.

Improved competitiveness would assist in furthering the government’s public interest objectives on two levels. Firstly, it would support the national macro-economic strategy and secondly, it would support microeconomic restructuring in that it would promote efficient firms and industries. According to the DTI, this would occur through the optimisation of ‘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’,[1]

A well-structured competition policy was therefore seen by the DTI as something that would lead to a more competitive and efficient economy with the following benefits.

(a)It would lower costs along the value chain.

(b)It would enhance the attractiveness of South Africa to foreign investors.

(c)It would allow for a more balanced regional economy.

(d)It would stimulate entrepreneurial activity.

(e)It would promote international competitiveness of South African firms.

(f)Through its influence on production processes it would assist in furthering the government’s socio-economic aims.

In addition, competition policy was also seen to directly assist in the promoting particular socio-economic objectives. For example with relation to small and medium enterprises the DTI noted that ‘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.’[2]

While taking cognisance of the standalone benefits of competition policy, the government recognised that the competition policy that they wished to develop needed to be aligned to the broader government policies and objectives of redress and development. This is important because there are likely to be instances in which a transaction would result in small private gain but extremely high social costs. Thus, competition in this instance would be undesirable in that it conflicts with other objectives.

The alignment of these policies was seen as achievable since the government believed that ‘competitiveness and development are mutually-supporting rather than contradictory objectives, if policies are properly aligned’[3]. The key challenge in developing the legislation was therefore to design legislation that would ‘ensure policy alignment between goals of competitiveness and development.’[4]

As such, alignment was required in two areas. Firstly, it was believed that competition policy needed to be aligned with industrial and trade policy in order to synchronise varying domestic and international development tools. This is something that is particularly important for developing countries as these tools are often used in activist government policies to nurture the economy[5].

Secondly, competition law needed to be aligned with the policies that the government needed to address the ‘challenges that follow from our legacy of economic distortions.’[6] As such, competition policy was also seen as something that should be complementary to efforts to improve employment, support emerging entrepreneurs (particularly those from historically disadvantaged backgrounds) and complement consumer transparency.

Aligning competition policy to these public interest objectives was crucial to the success of the Competition Act and the envisioned Competition Authorities. A disregard for major public interest issues would have led to a loss in credibility in the eyes of the public and the government agencies which would have meant a reduction in the stature of the Competition Act and the Competition Authorities enforcing it. The DTI therefore attempted to create guidelines with features that would be attractive both to those stakeholders who value market discipline and those who prefer direct intervention and therefore combines competitiveness and development as its aims. The DTI at the time of drafting its guidelines viewed public interest as a broad concept:

‘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- although each must be satisfied that the end result fairly addresses their concerns.’[7]

A key aspect of this was creating a role for public interest within the competition framework in a manner that supports developmental aims via competition as well as through other policies. The result was a Competition Act that explicitly required the consideration of particular public interest objectives in merger evaluations. Its more novel features include the following:

It placed the responsibility for public interest decisions at the hands of independent competition authorities. This limited the scope for political interference. In addition, this reduced the likelihood that processes could be derailed through lobbying that might occur if political bodies had the discretion to overturn rulings on the basis of public interest considerations. This is especially true given the transparency and public nature of the competition processes defined by the Act. By allowing the same body to assess the competition and public interest aspects it allows for a weighing up of the relative merits of both aspects of the case.
It limited the scope of public interest by defining in detail the grounds on which public interest could be considered. By detailing the public interest the Act creates structure and provides a filter for the public interest analysis.

2.2Public interest in the Competition Act

We now outline some of the key provisions of the Competition Act that relate to the public interest. This occurs in three parts, the preamble and purpose of the Act, the consideration of mergers and exemptions.

The preamble of the Competition Act discusses the context and reasons for enacting the Competition Act and is the first place in the Act that refers directly to public interest. It states that the Act will benefit all South Africans and is necessary in order ‘to regulate the transfer of economic ownership in keeping with the public interest’.

Section 2 of the Act outlines the purpose of the Act as the provision and maintenance of competition in order to achieve six outcomes. This includes several that can be seen as not directly related to competition, but rather to public interest. These include the promotion of employment and advancement of the ‘social and economic welfare of South Africans’, expanding opportunities for South African companies in world markets, providing equitable opportunities for small and medium sized enterprises and to promote a greater spread of ownership, particularly with respect to historically disadvantaged individuals. These key themes are reiterated throughout the Act and developed further with respect to mergers and exemptions.

The concept of public interest with respect to the consideration of mergers is more fully developed in section 12(A) which states that in addition to competition and efficiency considerations it is also necessary to assess whether a merger ‘can or cannot be justified on substantial public interest grounds by assessing the factors set out in subsection (3)’.[8]This is to be done whether or not a merger is found to be anticompetitive.

Subsection 12A(3) builds the understanding of public interest further by outlining the factors that are seen as public interest grounds. These factors mirror those outlined in the purpose of the Act:

‘When determining whether a merger can or cannot be justified on public interest grounds, the Competition Commission or the Competition Tribunal must consider the effect that the merger will have on-

a)a particular industrial sector or region

b)employment

c)the ability of small businesses or firms controlled or owned by historically disadvantaged persons to become competitive;

d)the ability of national industries to compete in international markets’.

The Competition Act provides no scope for public interest arguments to be considered once a prohibited practice investigation is under way (see sections 4, 5, 8 and 9 of the Act). However, public interest considerations can enter the assessment of whether or not to provide an exemption to a practice or agreement that may be considered ‘prohibited practices’. S10 which discusses exemptions notes that an exemption may be granted for an agreement or practice (or category of agreements or practices) if itcontributes to one of the four objectives listed below. This allows a measure of flexibility regarding practices that would be anti-competitive if they are necessary for the public good. These are:

(i)‘Maintenance and promotion of exports

(ii)Promotion of the ability of small businesses, or firms controlled or owned by historically disadvantaged persons, to become competitive

(iii)Change in productive capacity necessary to stop decline in an industry; or

(iv)The economic stability of any industry designated by the Minister, after consulting the Minister responsible for that industry.’

3Interpretation of the Act by the Competition Tribunal

The interpretation of the Act with respect to public interest has centred on the evaluation of mergers. Over the past 10 years the Tribunal has assessed numerous mergers with a public interest component. While to our knowledge ‘no transaction has been determined on grounds of public interest alone’[9](as David Lewis himself noted), the Tribunal has built up a wealth of knowledge and tests related to the assessment of public interest. We now consider how the Tribunal has interpreted the Act in various cases by outlining some of the key points that have emerged from their rulings.

A)Public interest can serve to salvage an anti-competitive merger or can lead to the prohibition of a procompetitive merger

S12A(1)()(ii) of the Competition Act states that in assessing the impact of a transaction on public interest it is also necessary to assess ‘whether it can or cannot be justified on substantial public interest grounds by assessing the factors set out in subsection (3)’.This has been interpreted by the Tribunal to mean that public interest can work in two directions or ‘can have both adverse or benign effects.’[10] On the one hand it can be used as a basis for approving an anti-competitive merger and it can be used to prohibit a pro-competitive merger. The Tribunal has stated that

‘a merger that has failed the competition test can still be passed on the public interest test and hence be approved. Conversely, that a merger that has passed the competition test could still fail the public interest test and hence be prohibited’.[11]

B)Public interest needs to be considered regardless of the competition analysis

In s12Aof the Act it is stated that the authorities should determine the competition effects of the merger and if it is likely to impact on competition determine the efficiency effects. According to s12A(1)(b) it should‘otherwise, determine whether the merger can or cannot be justified on substantial public interest grounds by assessing the factors set out in subsection (3)’. The use of the word ‘otherwise’ has been interpreted by Tribunal as meaning that an evaluation of public interest must be undertaken whether the competition analysis has a positive or negative outcome.

The argument regarding the phrase surfaced in the large merger between Anglo American and Kumba Resources[12] in which the Tribunal found that ‘the use of the word ‘otherwise’ in section 12A(1)(b) means that the public interest evaluation must still be undertaken by the Tribunal, regardless of the outcome of the section 12A(2) ‘competition’ analysis. As we have previously stated the public interest can operate either to sanitise an anticompetitive merger or to impugn a merger found not be anticompetitive.’[13]

C)Public interest needs to be substantial

The Act does not only require the Tribunal to assess public interest, but s12A(1)(b) requires that the public interest grounds should be ‘substantial’. However, the Tribunal argues that the Competition Act does not provide further guidance in determining what constitutes ‘substantial’ public interest. In the merger between Distillers Corporation and Stellenbosch Farmers Winery[14] the Competition Tribunal noted that ‘the legislation offers no criteria as a yardstick.’[15] In addition, they note in para 38 of the Shell-Tepco ruling[16] that the Act ‘does not otherwise guide us in balancing the competition and public interest assessments except insofar as section 12A(1)(b) requires that the public interest grounds should be substantial’.

This has at times proved to be problematic to interpret. For instance, in the Distillers Corporation and Stellenbosch Winery case the Tribunal notes

‘How many jobs must be lost before one has grounds for substantial public interest? The legislature wisely does not seek to answer that for us, nor can we assume that it should be a uniform figure for all merger- it would depend on the context.’[17]

D)The tribunal is only concerned with the residual public interest

Given the lack of guidance as to what constitutes substantial public interest, the Tribunal’s approach is therefore to focus on‘residual public interest or that part that is not susceptible to or better able to be dealt with under another law, is substantial’.[18]In practice the Tribunal has applied this to both HDI and employment.

In the Shell and Tepco merger, the Tribunal noted that its role is secondary in matters where there is already legislation. In paragraph 58 the Tribunal stated that ‘the role played by the competition authorities in defending even those aspects of the public interest listed in the Act is, at most, secondary to other statutory and regulatory instruments in this case the Employment Equity Act, the Skills Development Act.’