Saving capitalism from capitalists

2012-06-26 00:00

WHEN David Lewis began his job at the Competition Tribunal, he found in his apartheid-era office an enormous safe. It was empty, an appropriate symbol of the work of the old Competition Board, which had concentrated on merger oversight and achieved a single conviction (with a R100 fine) for resale price maintenance in the furniture sector.

Lewis has used his formidable writing skill, employing metaphor and an occasional humorous or blunt aside, to describe how competition (anti-trust) law has been brought out of the darkness of apartheid into the sunlight of democracy. Having toyed with the idea of an opening line reading “It was a dark and stormy night”, he goes on to suggest that the new era of openness and transparency may again be under threat from secretive deals in smoke-filled rooms. Sounding a loud alarm bell about Ebrahim Patel’s Department of Economic Development (DED), in particular over the Walmart case, he argues that if the DED desires to implement radical trade and industrial policy it should do so without using the back door of anti-trust enforcement. By contrast, he is full of praise for former Minister of Trade and Industry, Alec Erwin, who insisted on the independence of competition oversight.

Anti-trust law is a matter of making sure that markets operate optimally, “saving capitalism from capitalists” in Lewis’s droll phrase. Just as the Constitution regulates the power of the state in relation to the citizenry, so the Competition Commission, its tribunal and the Competition Appeal Court keep a watchful eye on market power and the consumer. Lewis sounds a warning about price regulation, arguing that truly competitive markets are in the best interests of producer and consumer. This is the big picture that he concludes is crucial to the public’s understanding of competition law, although in large swathes of his book he indulges in detailed, microscopic argument.

BREAD CARTEL

The public perception of competition probably rests on cartels, or collusion to rig the market at the expense of the consumer. The most famous example, which brought the Competition Commission national fame in 2007, was investigation of the bread cartel. Pioneer was eventually fined over R250 million in a case notable for “mendacity and dissembling”. The culture of cartels runs deep: the cement cartel endured for 34 years and clearly involved several generations of company managers and salespeople indoctrinated in the system. The belief that cartels are inherently unstable is obviously misplaced.

Other outrageous cases described in detail by Lewis involve abuse of market dominance (technically a share of 45% or higher). South African Airways was fined R45 million for paying not just a commission on sales, but running a loyalty rebate scheme as a direct incentive to exclude competitors. The case brought by Harmony against Arcelor Mittal also earned considerable media coverage. Its practice of import parity pricing, charging for domestic steel as if it had been imported, was found to be a clear-cut case of excessive pricing with a fine originally set at R692 million. But the matter was referred back to the tribunal by the Appeal Court and the two parties subsequently came to a confidential settlement. So much for transparency.

Predatory pricing, exclusionary policy, refusal to supply and tying arrangements all distort markets to the detriment of consumers. Some of the cases before the Competition Commission and Tribunal have an air of David versus Goliath about them. In the instance of Northern Poles versus Sasol, the commodity in question was as banal as creosote, a product of marginal significance to Sasol. Yet Goliath won, courtesy of the Competition Appeal Court.

PUNITIVE MEASURES

Lewis entertains several questions recently raised in public debate. Punitive fines are very popular among consumers, but should they be a percentage (up to 10%) of affected or total turnover? And how should the consumer benefit? Do offences under the Competition Act warrant criminal prosecution of individuals? Lewis believes that this would be counterproductive as significant information about market manipulation has come to light through voluntary submissions. The threat of a criminal record could discourage these.

The commission has, of course, continued to assess mergers, most of which Lewis argues have no purpose other than massaging egos and boosting the income of investment bankers. In his view, economic efficiency is not a major consideration and often involves inflated claims before the commission and tribunal. Issues around black economic empowerment (BEE) are similarly exaggerated. The details of such cases are complex and often lead to unexpected conclusions that relate to context. Judgments lack precision because they are based on probability: economics does not have the definitive answers the law may sometimes appear to possess.

The appearance of powerful members of the business community before the Competition Tribunal to face inquisitors in the glare of media publicity opened a new chapter of accountability light years away from the culture of the old control boards. Transparency in business methods was initially an entirely novel idea, but it is one that has been fruitfully developed by the press. The spotlight has shone on outrageous claims of confidentiality and cases of vexatious intervention. In this connection, the name of Caxton has more than passing interest for The Witness — Lewis argues that Caxton should have been sanctioned on at least one occasion.

GRATUITOUSLY OFFENSIVE

But the gains of a change in business culture have been diluted by responses from the Competition Appeal Court that Lewis describes as “gratuitously offensive”. He has choice words for legalistic interpretations of the Competition Act that disregard economic arguments and the sections of the legislation that invoke public interest that relate potentially to small business and BEE. Economic understanding, he records, often amounts to little more than school textbook level combined with use of the Shorter Oxford Dictionary. In the case of Medicross and Prime Cure, the tribunal found against the merger on social grounds: more innovation was needed in this new area of capitated health care. But the Appeal Court reversed the tribunal’s decision on “mechanistic, unimaginative grounds”. Lewis makes the important point that at a time of global economic uncertainty concerns about unemployment should be a factor in competition law decisions. Whether the legislation’s clear public interest agenda is being fulfilled is open to debate.

Perhaps the main value of Lewis’s study of post-apartheid anti-trust oversight lies in his broader observations. As a self-described barefoot lawyer, his opinion of the established profession is relatively low. The frustrations of procedural obstruction he describes are well known in many circumstances in which justice is denied. And he promotes the “intelligent application of qualitative evidence” (common sense to you and me) that takes serious note of moral issues and their social significance when it comes to matters of national importance in both public and private sectors. But like so much else, this depends on the strength of civil society.

• Thieves at the Dinner Table: Enforcing the Competition Act by David Lewis is published by Jacana. Lewis now works for Cosatu’s Corruption Watch.

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