Alex Constantinou & Linton Reddy
Many countries across the globe (including BRICS countries) now have a competition enforcement regime in place. But why bother? Why is it so important to promote competition? Economics tells us that increased competition can lead to lower prices, increased quantities of goods and services being supplied, greater innovation, improved quality and a wider variety of choice for consumers. It also drives economic efficiency and dynamism, which can stimulate economic growth and job creation, thus contributing to broader policy goals.
Opportunity for foul play can arise when there is little or no competition. In these instances, individual firms can artificially raise prices unchallenged or may even be tempted to collude to increase prices. Such behaviour is bad for the economy and bad for consumers. This is why competition enforcement agencies exist; i.e. to ensure healthy competition.
To this end, the mere presence of a competition agency is not enough to ensure healthy competition, it must also be effective in the execution of its mandate. This means preventing or amending anti-competitive mergers and punishing abusive or collusive behaviour with sufficiently hefty fines to generate a strong deterrence effect.
However, because cartels are typically hidden until someone comes forward, the Commission in 2004 implemented a Corporate Leniency Program (CLP) which grants immunity from penalties to the first whistle-blower within a cartel. As such, the bedrock of the Commission’s success against cartelists lies in its CLP program. Later amendments to the CLP in 2008 guaranteed immunity rather than leaving it at the discretion of the Commission. Additionally, the Commission has also sought amendments to section 73A of the Competition Act which now holds the threat of criminal liability. We consider the impact of these changes to the Commission’s deterrence efforts going forward.
In this article, we focus on the issue of fines for anti-competitive conduct. We ask, what is the distribution of fines rendered by the competition enforcement regime so far? Our analysis focuses on the most fined sectors; namely, intermediate industrial products; food and agro-processing; infrastructure and construction; transport and, information and communications technology. We pay specific attention to the quantum of penalties levied (per sector) for the period 2004 to 2014. We further delineate the penalties according to the type of contravention for the said period. This in our view provides a proxy for the authority’s enforcement efforts over time, and whilst it may be considered a crude measure, our assumption is that an increase in the penalties may indicate an increased deterrence effect going forward. Utilising publically available information, i.e. Competition Commission news reports, Competition Tribunal decisions, and online sources; we have collated information on the various metrics – depicted in the figures below.
As observed in Figure 1 below, the infrastructure and construction, intermediate industrial products and food and agro processing sectors were fined the most between 2004 and 2014. Specifically, these sectors have contributed to 90% of total penalties levied which amounts to approximately R1,46 billion, R1,3 billion and R834 million respectively over the 2004-2014 period.
Figure 1: Distribution of penalties, by sector (Aggregate 2004-2014)
Figure 2 below shows that there have been significantly more penalties levied between 2010 and 2014 relative to the preceding period. There are a number of key events which may explain the rise in enforcement activity post-2008/9, namely;
- 2008: Amendment to the CLP process including guaranteed immunity, and ring-leader protection;
- 2009: Presidential announcement of potential criminalisation if found guilty of being in a cartel;
- 2010: Commissioner announcement that the Commission will pursue stronger penalties;
- 2011: New dedicated cartel division was launched; and
- 2011: Fast track settlement procedure was set up specifically for the construction sector.
Prior to these events, the value of penalties was only R188m, whilst thereafter it rose to R3.8bn. The surge in penalties is partly attributable to a small number of large contraventions such as the construction, fertiliser and cement cartels. As can be seen, the construction fast-track settlement program resulted in a flood of CLP applications in 2010/11 shown in Figure 2, whilst the penalties flowing from this, only reflect later in 2013/14 after the investigative process.
Further, the announcement in 2009 for the potential imprisonment of cartelists if found guilty, might also have spurred a flurry of CLP applications since that time. This also explains the rise in the number of firms fined (101 post-2008, and only 19 prior to this). However, immunity from imprisonment is not guaranteed now that the legislation is in effect (as of 1 May 2016) and may therefore dampen the incentive for the guilty to come forward under the CLP program. This brings into question whether or not the threat of criminal liability and no guarantee of immunity undermines an otherwise highly successful CLP program.
Despite this, it is clear that the authorities’ enforcement activity has increased sharply post-2008 which has thus far resulted in more penalties and therefore a stronger deterrence signal.
Figure 2: Penalties and CLP applications over time, by rand value, (2004-2014)
Figure 3 below further delineates the penalties by the different types of contraventions, where collusion (i.e. section 4(1)(b)(i/ii/iii) infringements) account for roughly 82% of the cases but 87% in value. Here the data show that contraventions falling under section 4(1)(b)(ii), i.e. market allocation (a form of collusion where competitors divide the market among themselves), represent circa 25% of all cases, but 35% of the total penalty value, while section 4(1)(b)(iii), i.e. collusive tendering, represents roughly 11% of all cases, but 26% of the penalties. Firms falling foul of these contraventions have been subjected to relatively higher fines per firm than other contraventions. Most of the 4(1)(b)(iii) fines are attributable to the construction sector and most of 4(1)(b)(ii)’s are attributable to intermediate industrial products such as concrete, pipes and steel. However, of the 54 firms punished under 4(1)(b)(i) for price fixing, roughly a third were relatively low value fines. Most of these fines arise from the grain silo cartel, which explains the higher ratio of firms to fines in this category.
Figure 3: Proportion of the number of firms and the value of fines per contravention (Aggregate 2004 – 2014)
Figure 4 below further reaffirms the effect of the key events mentioned earlier in figure 2, including the CLP amendment and launch of the cartel division. Specifically, it shows the significant increase in section 4 (i.e. collusion related) penalties post-2009. Further, up until 2007 only two dawn raids had been conducted, while an additional 14 were conducted from 2011 – 2016. This could explain the uptick in cartel cases.
Figure 4: Distribution of contravention type, by value (2004 – 2014)
In conclusion, cartels are considered the most egregious form of anti-competitive conduct, the effects of which are widely documented. Drawing on the results above, more penalties being levied across a greater number of cartelists post-2009 is an indication of the Commission’s successful efforts in this area. It is therefore clear that the changes brought about by the competition authorities over the last few years has generated greater enforcement activity, which in turn has increased the agency’s visibility and impact, which may incentivise yet more cartelists to come forward under the CLP provision. Most of the actions taken should enhance their deterrence capabilities, however, there is an open question at this time as to how effective the CLP program will be going forward, now that directors and managers could face imprisonment with no guarantee of immunity for coming forward.