The clampdown on cartels - Ebrahim Patel

Minister speaks on recent cases handled by Competition Authorities

Statement by the Minister of Economic Development, Ebrahim Patel, to the National Assembly on Competition Commission investigations

2 Nov 2010

Honourable speaker and members

In the New Growth Path adopted by Cabinet a week ago, government drew attention to the high levels of economic concentration and price collusion that characterise parts of the South African economy. We committed to ensure greater competition as a means to draw in new entrants to the market and to grow employment, in order to achieve the target of five million new jobs within the next ten years.

Over the past number of months, and in support of the new framework that was emerging, the Competition Authorities have intensified their focus on anticompetitive behaviour in the local market. An important aspect of this is the investigation in the food sector.

Currently the Competition Commission is investigating several cases along the food value-chain ranging from inputs such as fertiliser and tin-plate used for tinned foods, to products such as vegetable oils and fats, wheat and maize, poultry and fish, to storage and retail including silos and supermarkets. In particular, the commission has investigated five areas of relevance to today's statement.

The first case involves an investigation of the milling industry that includes wheaten flour and maize meal. During the probe into bread price fixing and the market allocation cartel in 2006 the commission received information that the firms involved in the bread cartel, who were also the county's major wheat millers, were involved in price fixing and market allocation for flour. Two of the millers (Tiger Brands and Premier) confessed their involvement and provided further evidence of a cartel and were granted conditional immunity.

Investigations in the flour market revealed that the firms involved agreed to fix prices of milled wheat products; create uniform price lists for wholesale, retail and general trade customers; agreed on the timing of the price increases and the implementation; and allocated customers among themselves. Similarly the agreements were used to secure coordination at both national and regional level.

The agreements were reached through meetings and telephone discussions. The case of price fixing was referred to the Competition Tribunal for adjudication by the commission in 2009. Foodcorp (Pty) Ltd and Godrich (Pty) are the only firms currently defending this case at the Tribunal.

In the second instance the Commission investigated and referred a case in maize milling. The maize milling case was separated from the flour one because the two cartels did not involve exactly the same players. Although the main milling companies, namely Pioneer Foods, Foodcorp, Tiger Brands and Premier were involved in both cartels, the maize milling cartel implicates a larger number of firms.

The investigation revealed that from 1999 to at least 2007, competitors were involved in conduct that contravened the Competition Act by fixing prices of white maize products; creating uniform lists for wholesale, retail and general trade customers; and by agreeing to the timing of the price increases and implementation. These agreements were used to secure coordination at both national and regional levels.

The third case centres on information exchange in the wheat flour and bread market. The Commission initiated an investigation against current and former members of the National Chamber of Milling and South African Chamber of Baking. The complaint was initiated after the commission observed that, although prohibited practices cited earlier had apparently ceased, the market had not become more competitive.

The commission's investigation revealed that firms in the industry submit commercially sensitive information to the two chambers. In turn the firms receive detailed, disaggregated information from the chambers. This information exchange appears to enable members to sustain collusive outcomes without the necessity of meeting. The detailed information exchanged enables the firms to align their behaviour in the market and thus reduce competition.

A similar case was initiated in the maize industry when it was found that competition outcomes were not observable despite the breaking of the cartel. This case also centres on the exchange of information between the Chamber of Milling and its current and former members. Information exchanges have replaced coordination through meetings and telephone discussions. It increases transparency in the market thereby facilitate easy detection of cheating among cartel members. This practice has now stopped after intervention by the commission.

The fourth case involved exclusionary conduct against independent bakeries. The commission received a complaint in December 2008 from an independent bakery in Mossel Bay alleging that Pioneer Foods, through its Sasko Division, had threatened it with a price war if it did not adhere to the fixed prices. One of the means employed to exclude independent bakeries was the introduction of Sasko's "fight brands" Vita and Econo, to undermine independent competitors who had entered in such areas.

The commission found that Pioneer Foods is dominant in the relevant markets and its aggressive behaviour prevented competitors from entering into or expanding within the markets. The object of this price war was to force these independent bakeries to charge prices similar to Pioneer, at above competitive levels, or failing which to force them out of the market, in contravention of section 8 of the Competition Act.

Finally, the Competition Authorities investigated four cases in the poultry market. In April 2009 the commission initiated complaints to investigate anti-competitive conduct in the market for poultry breeding stock and broiler production, poultry products, as well as poultry-feed following initial research that pointed to the existence of anti-competitive behaviour by firms and industry associations.

In addition, the commission is investigating allegations of collusion in the egg industry after Pioneer confessed its involvement in a cartel. The main allegations against particular firms are that:

  • They agreed not to compete in an open market but instead divided various markets by allocating territories and/or customers to each other
  • As a result of the collusion the respondents charged significantly higher prices than the independent or small manufacturers even though their cost bases are similar. Their prices were in some instances 25 percent higher than those of the smaller poultry feed producers
  • Collusion is also reinforced and sustained through extensive information sharing via industry associations
  • The named firms restrict broiler breeders from sourcing breeding stock from alternative suppliers. They supply day-old chicks to independent broiler breeders on condition that they also purchase poultry-feed from the relevant supplier or its subsidiary
  • The firms collude in the markets for the sale of whole fresh eggs, sale of the day old chicks to be reared as egg layers, sale of point of lay hens which are mature hens capable of laying eggs and sale of cull which are live chickens that are past their production cycle.

Honourable Members, I have provided details of these different investigations to contextualise a significant competition settlement that was reached earlier today. The Competition Act provides for parties to enter into settlement agreement with the competition authorities. Following a few months of negotiations, Pioneer Foods, one of South Africa's largest food-processing companies, and the Competition Commission signed a Consent and Settlement Agreement in regard to contraventions of various sections of the Competition Act.

Pioneer Foods produces under brands such as Sasko bread and flour, Duens Bakeries, Weetbix and Ceres fruit juice. Not all these products are implicated in the investigations.

The settlement addresses Pioneer's cases in the wheat, maize, poultry and eggs market and constitutes a resolution of all the current investigations against the company. The Agreement will be lodged with the Competition Tribunal by 3pm today for its consideration and confirmation in terms of section 49D read with sections 58(1)(b) and 59(1)(a) of the Competition Act. It is expected that the Competition Tribunal will decide the matter within the next two weeks and the terms are of course subject to the final decision of the Competition Tribunal. In view of its significance, I wish to provide the house with details of the terms of the settlement and its intended impact.

One, Pioneer undertakes to immediately desist from collusion and price-fixing, not to participate in any activities of any cartel in the sector and to comply fully with the Competition Act in future.

Two, Pioneer undertakes to cooperate fully with the authorities in the prosecution of any other parties who are the subject of the current investigation by the Commission and to provide evidence and testify against members of any cartel it has been involved in.

Three, the company will pay an administrative penalty of R250 million into the National Revenue Fund. The aim of the administrative penalty is to serve as a deterrence and disincentive against anti-competitive conduct.

Four, Pioneer will pay a further sum of R250 million towards a special agro-processing competitiveness fund that will be established and managed by the Industrial Development Corporation. The aim of the fund is to promote competition in the food value chain by supporting the entry and expansion of enterprises including small and medium enterprises. Pioneer will not be able to access any of the money in the fund for its own operations. The rules applicable to the fund will be published by December this year.

Five, Pioneer will reduce the net selling prices of selected bread and flour by a total of R160 million, to benefit consumers who have suffered from anticompetitive behaviour. This will bring much needed relief to consumers who have paid above-competitive prices for bread and wheaten products. It is anticipated that this will stimulate price competition in the bread and wheaten market. The modalities of the price reduction will be announced by the company and the Competition Commission and Pioneer's compliance with these undertakings will be audited.

Six, pioneer has undertaken to increase its planned capital expenditure by an additional R150 million over a two-year period. This is over-and-above the company's planned capital expenditure of R1,2 billion. This commitment is intended to support efforts to improve the company's competitiveness through innovation, upgrading of equipment and expansion of operations, instead of reliance on price-fixing and collusion with competitors.

Finally, pioneer agreed to drop its cross-appeal against the R195 million penalty levied on it by the Competition Tribunal earlier this year.

Honourable Members, the effect of this settlement, if confirmed by the Competition

Tribunal, is that the company would pay, inclusive of the fine levied earlier this year, penalties totalling R445 million plus it would transfer R250 million to a competitiveness fund for the agro-processing industry plus it would commit to reductions in the net selling prices of selected products totalling R160 million.

These three components amount to R855 million in commitments that are for the benefit of the fiscus, competitors and consumers. Added to this is the commitment to increase capital expenditure by a further R150 million above the company's previous decisions, bringing the total commitments as a result of this settlement to slightly over one billion rands (R1 005 million).

This constitutes the largest settlement in the history of the Competition Commission involving any one company:

  • Taken together with the bread penalty, it amounts to the largest penalty ever imposed on a single company, totalling R445 million
  • It contains provision for a novel mechanism to promote competition and new enterprise development in the agro-processing sector by committing funds from the perpetrator of anti-competitive conduct, to finance new competition in the sector
  •  It provides, for the first time, relief to consumers, through a commitment to reduce prices on specified products up to a sum of R160 million. These products are bread and flour, key staple products that ordinary South African rely on.

I take this opportunity, subject to confirmation by the Competition Tribunal of the settlement, to call on bakeries, supermarkets and the retail trade to pass the price reduction on to consumers. Government wants to see that bakeries and retailers do not divert price reductions into higher margins. I have asked the Competition Commission to monitor the actions of bakeries and retailers to ensure that the benefit reaches the intended beneficiaries and to provide a written report to me that I intend to table in parliament.

Honourable Members, in the New Growth Path, government identified the agricultural value-chain, which includes agro-processing, as a key driver of new job creation. But to achieve the jobs we expect, we need to get a number of policies right in the sector, including reducing input costs and ending cartels and price-fixing that keep new entrants, particularly small businesses, out of the market.

This settlement shows the resolve of the competition authorities to act swiftly and effectively to promote a competitive food-processing sector. Vertically integrated firms in the milling and poultry markets leverage their control of critical inputs like wheat or poultry feed to exclude other firms or to sustain cartel arrangements. For this reason, both structural and behavioural measures are important to bring in new players along the value chain. The new, pro-active stance of the competition authorities, coupled with a strong investigative capacity, makes it harder for companies to escape with anti-competitive conduct.

This action I have highlighted today follows on a number of other recent steps by the authorities, including action to address monopoly-conduct in the fertiliser market that resulted in a fine of R250 million levied against Sasol, the selling off of five of Sasol's six fertiliser blending plants to new competitors and action against Foskor that resulted in price reductions in their fertiliser products.

In addition to these actions, the commission will continue its investigations against other companies implicated in the cases that involved Pioneer. We call on other perpetrators to follow the example of Pioneer Foods and come forward and settle with the competition authorities. The free ride at the expense of consumers and jobs that some companies had for many decades in South Africa is over. Our resolve is firm to act against contraventions of the Competition Act.

In the New Growth Path, government recognises the fact that anti-competitive conduct is pervasive and entrenched in certain sectors of the economy. Where this is the case, consumers, including downstream enterprises, face high prices and limited product choices and competitors are denied entry or forced out of the market. Firms focus less on innovative strategies to compete than on coordinating their activities or abusing their dominance. Anti-competitive conduct seeks profits from narrow and backward-looking strategies based on inherited positions of market power. Such conduct ultimately implies lower levels of output, investment and employment.

For this reason, Honourable Members, the commission's investigations in the food sector go beyond the scope of the cases that involve pioneer and cartels it was involved in. The commission will accelerate existing investigations into market conduct in supermarkets, poultry, fish, vegetable oil, tin plate and storage. Outside of the food sector the commission is now focusing on other key priorities of government, including investigations of collusion and unlawful behaviour in construction and infrastructure; inter-mediate industrial products and finance and banking.

In conclusion Honourable Speaker, may I on behalf of government congratulate the competition authorities for the excellent work they are doing. A properly resourced, professional and effective competition authority is critical to the achievement of the economic and employment goals of the New Growth Path. We are committed to provide the competition authorities with the support they require to undertake this important mandate.

Thank you.

Issued by the Economic Development Department, November 2 2010

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