Introduction
The orientation and interests of large firms and their owners is at the heart of how countries develop (Chandler, Amatori, and Hikino 1997). The nature and extent of competitive rivalry between business groupings is a critical dimension of this, coupled with regulatory disciplines on the power of these groupings. In the case of the South African economy, it developed under apartheid with limited market competition, extensive government intervention and explicit exclusion of the majority of the population from participation in the economy outside of narrowly prescribed areas.
The apartheid regime coordinated an industrialising economy including making investments in economic infrastructure, largely to serve mining interests and energy (which Fine and Rustomjee 1996, have termed the minerals–energy complex) and the white population. It also invested in learning and acquiring technologies, ensuring effort in these areas in targeted sectors and in state-owned enterprises (Khan 2006; Roberts and Rustomjee 2009). Six extremely large conglomerate groupings, most controlled by their founding family, dominated the economy (Chabane, Goldstein, and Roberts 2006). The largest, the Oppenheimer family's Anglo-American Corporation, controlled entities that together accounted for 44.2% of the capitalisation of the Johannesburg Securities Exchange in 1990.
To address the legacy of a relatively concentrated and closed economy with limited competition, post-apartheid policymakers considered liberalisation and competitive markets as key mechanisms for opening up access (see ANC 1994). This chimed with the emphasis on policies to ‘fix’ market failures as part of what became characterised as the emerging post-Washington consensus (Stiglitz 1998). More recently this has evolved into the ‘good governance’ agenda, establishing independent institutions and drawing up rules, while implementing far-reaching liberalisation.1
South Africa is a particularly pertinent case study of implementing competition law as part of an economic reform process undertaken by successive democratic governments from 1994, given the skewed and concentrated nature of the economy. The agenda of economic reforms aimed to restructure the South African economy to expose it to international competition and integrate it into the global economy, premised on the belief that liberalisation would bring investment and technological upgrading. The competition legislation was presented both as part of a standard microeconomic reform agenda to ensure liberalised markets work, and as a tool to address the market power of entrenched business which derived its power from apartheid-era policies favouring the white minority (Roberts 2004). The Competition Act was negotiated in the context of liberalisation and was referred to in the government's Growth, Employment and Redistribution strategy as necessary in the context of deregulated markets (Department of Finance 1996). After an extended process of negotiation and consultation with organised business (dominated by big business) and labour in the National Economic Development and Labour Council (Nedlac), the Act was passed in 1998, and came into effect in 1999 (Roberts 2000).
In this article we examine the reality of competition in three industry case studies, and the role of competition authorities in South Africa. We argue that the expectations reflected a limited understanding of competition and markets which failed to recognise that market failures, market power and imperfect competition are intrinsic features of markets. Our case studies address the nature of competition in practice in three key sectors subject to changes in the form of liberalisation and privatisation. The case studies illuminate how the construction of markets and the main participants reflect a country's economic history, as well as the extent to which the competition regime altered the market outcomes. We find strong continuities in the form of the entrenched business interests being able to protect their positions and the supra-competitive returns they can earn from them. While the competition regime has been relatively effective in blocking anti-competitive mergers and, more recently, in uncovering explicit cartel behaviour it has been relatively ineffective in addressing entrenched market power and opening up the economy to greater access.
Overview of the competition regime
The Competition Act of 1998 made provisions to establish the Competition Commission, whose main responsibility is investigating mergers and anti-competitive conduct, and the Competition Tribunal to rule on cases. The Competition Appeal Court was also established. South Africa is unusual in having a separate Tribunal and specialist Competition Appeal Court. As we illustrate below, in practice this has meant lengthy hearings and extended appeals.
The tension between addressing the apartheid legacy and the liberalisation agenda is reflected in the combination of relatively expansive objectives of the Act with the specification of the provisions in the legislation being quite restrictive, especially regarding abuse of dominance (the provisions that address monopoly power) (Roberts 2012). The relatively narrowly specified provisions for anti-competitive conduct (collusion and abuse of dominance) resulted from the tripartite negotiation of the draft legislation between organised labour, business and government. The business constituency, in particular, emphasised the importance of limiting the discretion of the independent competition authorities (in the interests of ‘certainty’) and ensuring additional checks through having a separate tribunal to adjudicate along with rights of further appeal (Roberts 2000).
The objectives of the Act emphasise the ability to participate in the economy, including by small and medium enterprises and by historically disadvantaged persons. They also identify the need to address the legacy of apartheid in terms of concentrated ownership and control. The Act specifies effects-based tests for evaluating mergers and most anti-competitive conduct, framed as whether there is a substantial prevention or lessening of competition. Mergers are also subject to a separate public interest test. There are four defined categories of public interest, including the effect on employment which was strongly pursued by the labour constituency (Roberts 2000).
The competition authorities spent much of their first eight years seized with merger evaluation (Competition Commission and Competition Tribunal 2009; Makhaya, Mkwananzi, and Roberts 2012). This was the result of the introduction in the new legislation of compulsory pre-merger notification (above a defined threshold). The merger review provisions had little effect on the position of the large conglomerates which already stretched across the economy.
A more proactive approach to identifying cartels adopted by the Competition Commission from 2006 led to a substantial focus of the authorities on this conduct given the widespread collusive activity uncovered (Makhaya, Mkwananzi, and Roberts 2012). Cartels were found to be prevalent across the economy and highlighted the ways in which industry insiders had continued to ensure they sustained high profits while keeping out possible new entrants.2
By comparison, there have only been a few abuse of dominance cases ruled on under the Competition Act (Roberts 2012). Of the total of eight cases where a finding of abuse has been upheld or a settlement was reached which included a substantive remedy, just three companies have had to pay a penalty – South African Airways (twice), Foskor, and Telkom (all currently or formerly state-owned). Considered against the high levels of concentration this appears to be a very low level of enforcement.
Case studies
We examine through three industry case studies the conduct and strategies of a dominant firm or group of firms in concentrated sectors under privatisation and liberalisation, and the ways in which the competition authorities and regulatory bodies have influenced the evolving patterns of corporate conduct. The case studies cover the following sectors: milling of maize and wheat; telecommunications; and chemicals, fuel and fertiliser. These sectors are important in their own right as well as providing insights into the influence of firms with market power derived from different sources. The milling industry is a tight-knit oligopoly of firms with roots either in co-operatives supported by the apartheid state or the main conglomerates. The telecommunications case examines where the state network utility has been privatised and subject to regulation. The chemicals, fuel and fertiliser case focuses on the legacy of state support for strategic reasons to create an entrenched dominant firm in the form of Sasol, which is integrated into various downstream chemical operations including fertiliser.
Agriculture liberalisation and outcomes in the milling of maize and wheat
After the Union of South Africa was established in 1910 a comprehensive system of support for white farmers was developed. This included the establishment of the Land and Agricultural Bank, and the passing of the Co-operative Societies Acts of 1922 and 1939 and the Marketing Act of 1937 (consolidated in 1968). A range of supportive measures included the provision of agricultural finance, extended land tenure, the securing of input supply, and the provision of marketing services for white farmers. The Marketing Act put in place a system of controls which effectively regulated the movement, pricing, quality standards and marketing supply of the majority of agricultural production in South Africa. Approximately 80% of all agricultural products were subject to the control of marketing schemes (‘control boards’). These involved a range of arrangements for the control boards to set prices, control marketing and remove surpluses (see Bayley 2003; Doyer et al. 2007).
Support and subsidies to white farmers were also provided, including through parastatals. The result of this was a large expansion of cultivated farm area, as well as an increase in yields. The assistance was concentrated in field crops led by maize (Edwards, Kirsten, and Vink 2009). This reflects the influence of maize farmers as a constituency in the National Party governments under apartheid.3 In addition, an important component of support was subsidised finance for the acquisition of machinery. There were direct subsidies to commercial farmers through the provision of capital, credit extension under the Agricultural Credit Act of 1966, and loan finance through cooperatives and by the state-owned Land Bank (Edwards, Kirsten, and Vink 2009). Liberalisation started in the 1980s, as in other parts of the economy, however, the control boards remained in place. The first democratic government which took office in 1994 continued the liberalisation. The Marketing of Agricultural Products Act, No. 47 of 1996 abolished control boards. And, under the trade liberalisation programme, quantitative trade restrictions on agricultural products were converted to tariffs and reductions were made in the tariffs themselves. The South African Futures Exchange (Safex) was set up for the trading of agricultural commodities.4
While the liberalisation represented a significant change, the steps taken after 1994 built on those already made. We assess how agro-business, which included the farmer cooperatives, responded to the changes.
The ending of the marketing arrangements and liberalisation of trade were premised on a belief in efficient market outcomes. The volatility of commodity prices would be countered by the use of hedging and derivative instruments by farmers (LAPC 1994). A new strengthened competition regime, under the Competition Act of 1998, was viewed by the Department of Finance as the main tool to correct market outcomes post-liberalisation (Department of Finance 1996). Institutions and governance would enhance market outcomes.
The liberalisation ushered in restructuring of the agricultural sector. The number of farmers fell by around 25% from 1996, with consolidation to form larger farms at high levels of mechanisation (Tregurtha et al. 2010). There was also a shift in patterns, with less land used for crops such as maize and wheat, as lower-yielding land was no longer used following the ending of the regulated prices guaranteed to farmers.5 Agricultural employment in 2011 was around 40% lower than in the mid 1990s.
The cooperatives rapidly converted into private companies and consolidated into large agro-processing concerns, commodity traders, and suppliers of farming requisites (see Bernstein 2012). A series of mergers led to the emergence of diversified agricultural conglomerates, first as the smaller local former co-operatives were acquired by the bigger, led by Afgri (formerly called OTK, of the eastern Transvaal), and then through vertical integration. Multinational traders now play a significant role in local trading of agricultural commodities, along with South African banks, and have formed associations with the largest conglomerates.6
The liberalisation and privatisation of the co-operatives effectively bequeathed powerful positions to processors and owners of key infrastructure such as silos (Bernstein 2012). The consolidation and increased vertical integration that followed liberalisation made these positions even stronger, and entry more difficult. While it is likely that these trends were associated with improved efficiencies, the implication of the high levels of concentration is that development of important segments such as wheat milling has been determined by the decisions of just one or two firms.
The focus on market reform in agricultural policy appears to have been at the expense of understanding the realities of market power within value chains and what is required for firms to enter and build capabilities. The latter implies attention to access to finance, advisory services, support for research and product development, as well the state's role in the provision of necessary economic infrastructure for new firms (such as rail transport links). Instead, the relevant department was cut back and a separate National Agricultural Marketing Council was established to advise the government, which in practice has strong links with the main industry participants. At the same time, the government has pursued land reform and food security, apparently without confronting the links with the conduct of large agro-processing business (Bernstein 2012).
Coordination and the protection of profits in milling and baking
Successive Competition Commission investigations from 2006 onwards revealed wide-ranging collusive conduct by the major processing food companies across maize meal, wheat flour and bread, the major staple foods in South Africa. In effect, the industry participants maintained a set of close relationships from the end of the control boards. Industry bodies in the form of the National Chamber of Milling and the Chamber of Baking provided a forum for regular interactions and communication through which a common understanding about how to organise the industry was maintained.
Under liberalisation, power moved away from farmers to the major agriculture and food corporates. These firms have had a dual challenge of dampening competition between themselves and keeping out emerging rivals (Grimbeek and Lekezwa 2013). Detailed information was collated by the Chambers of Milling and Baking which enabled the firms to track each other's behaviour. And, despite being subject to volatile price movements on the key grain inputs now being traded on the SA Futures Exchange, the processors were able to ensure relatively stable prices and market shares.
There are four major milling and baking companies, Tiger Brands, Premier Foods, Pioneer Foods and Foodcorp/Ruto Mills. Pioneer and Foodcorp have their origins in former cooperatives, while Tiger Brands and Premier Foods were associated with large diversified South African conglomerates. In milled maize meal, which can be undertaken at low scale, there are a number of smaller regional producers.
There were both national and regional arrangements to collude in maize meal while the wheat flour arrangements were limited to the main national producers.7 The wheat flour arrangements of the four major millers effectively involved setting prices and dividing markets (Bonakele and Mncube 2012). There was coordination on national pricing and trading conditions including maximum discounts. Meetings were also held in the main regions to maintain stability and allocate particular customers, such as independent bakeries.
Coordination in bread baking added a further layer of collusive arrangements. While flour prices followed wheat prices to an extent, bread prices had a history of only increasing but never falling, indicating that margins over costs in baking are variable, and further collusive mark-ups over the flour price were earned (Chabane, Rakhudu, and Roberts 2008). The conduct regarding bread distributors also points to the ability to segment customer groups for the purpose of exercising pricing power.
Maize meal cartel meetings happened at a range of venues over 1999 to 2007, including church halls, hotels and corporate boxes at sporting events. Arrangements were bolstered by information exchanged through the National Chamber of Milling.
The combination of vertical integration with the coordination undermined rivals that are only able to enter one level of the value chain. In the wheat value chain, bread baking is probably the activity with lowest barriers and scale economies. However, a bakery must source its wheat flour from its largest rivals, exposing it to exclusionary or abusive conduct. Given these structural characteristics, there are diverse ways in which entrenched producers can exclude and undermine smaller actual and potential participants and to protect profits (Mncube 2013). Based on the results of the listed firms, Tiger Brands and Pioneer Foods, profit margins in milling and baking increased strongly until 2010 (Grimbeek and Lekezwa 2013).
Telecommunications
In telecommunications the policy framework as set out in the 1995 White Paper sought to adopt a process of managed liberalisation that combined incentives for investment, introduction of new technology and extension of services across the country with a rules-based regime for moderating market outcomes through regulation and competition law. The developments over almost two decades provide a good illustration of the importance of understanding the interplay of interests in determining the actual outcomes.
Fixed-line telecommunications in South Africa is dominated by Telkom, the former state-owned utility (in which the government still owns 40% and the Public Investment Commission 11%). In mobile telephony two licences were initially granted in 1994, to Vodacom and MTN. Telkom held a 50% stake in Vodacom, with the other major shareholder being the multinational Vodafone. A third mobile company, Cell C, started operating in 2001. Our assessment is, however, focused on the developments in fixed-line telephony.
Under the Telecommunications Act of 1996, the government embarked on a process of liberalisation and privatisation. This was designed to attract investment and introduce new technology into Telkom from a ‘strategic equity partner’ in a partial privatisation while setting a timetable for competition governed by an independent regulator.
A 30% stake was sold to Thintana, a consortium comprising of Malaysia Telecommunication and the USA's SBC Communications. A shareholders agreement gave far-reaching management control to Thintana. To increase the attractiveness of the stake, a five-year exclusivity over voice telephony was granted until 2002, coupled with universal service obligations (see Makhaya and Roberts 2003). Prices were regulated through an average cap on price increases for a basket of services over which Telkom had a legal monopoly, set for the same five-year period.
The exercise of market power was thus to be constrained by the telecommunications regulator, the South African Telecommunications Regulatory Authority (Satra) –later the Independent Communications Authority of South Africa (Icasa), and the competition authorities. The government sought to benefit from private incentives in the running of Telkom while enhancing the market outcomes through the oversight of independent regulatory bodies.
The failings in this strategy have been well documented (see, for example, Horwitz and Currie 2007). Telkom has engaged in strategies to extend its monopoly in terms of duration and scope and to maximise the returns from this monopoly position. The price cap regulation allowed considerable scope to adjust prices while complying with the average cap on increases, meaning Telkom could, for example, increase prices sharply on peak-rate local calls and line rentals (Makhaya and Roberts 2003). Partly as a consequence, there was a net decline in fixed-line penetration over the legal monopoly period.
The protection of its monopoly position took the form of an effective legal strategy and various mechanisms to undermine new entrants and rivals in market segments where they were allowed to operate. In successive legal battles with the regulator, Telkom argued for a wide interpretation of the public switched telecommunications services (PSTS) over which its legal monopoly had been granted. It also sought to undermine rivalry in activities where there could be competition such as downstream value-added networks services and Internet service provision.
In addition, the legal monopoly was effectively extended with the new entrant, Neotel, only receiving its licence in December 2005 and launching its services in August 2006 (Horwitz and Currie 2007). Neotel's ability to compete has been further undermined by obstacles to it accessing the local network connections (the ‘local loop’) owned by Telkom but to which the latter is obliged to provide access to other licence holders. Telkom had declined to conclude an infrastructure sharing agreement with Neotel, favouring a case-by-case approach to managing access. This approach was favoured by regulatory uncertainty. In 2007, a policy decision was taken to commence with local loop unbundling. However, this has not occurred, nor are there regulatory provisions governing third party access.
In 2004 the Competition Commission referred a case against Telkom that it had been undermining its competitors in value-added network services by not providing them with access to the fixed-line network. Extensive litigation meant the Competition Tribunal only ruled on the matter in 2012, when it found that Telkom had contravened the Competition Act, and imposed a penalty of R449 million (approximately US$69 million).8 Another case of Telkom abusing its power to exclude rivals was referred to the Competition Tribunal in 2009 and is scheduled to be heard in 2013.9
In 2007 the Competition Tribunal also prohibited Telkom from purchasing the Business Connexion (BCX) Group.10 BCX was an effective provider of managed network services to enterprises.11 The Tribunal argued that the real rationale for Telkom's proposed acquisition of BCX was to defend its monopoly revenue and to prevent Neotel from partnering with managed network services providers. The Tribunal ruled that the transaction was ‘an attempt by an erstwhile monopolist to thwart the beneficial impact of de-regulation in the form of greater economies of scale and scope for rival MNS providers and lower costs for customers’.12
The Tribunal also found the merger to be an attempt to stifle innovation so as to maintain monopoly margins in infrastructure and voice services. This was argued to be in keeping with Telkom's strategy, discovered in its internal documents, to lock customers into long-term contracts, with the likely cumulative effect of tipping the managed network service market in favour of Telkom.
The protection of rents and delay of competitive rivalry
Despite only an apparent partial privatisation through the sale of a 30% stake, the minority shareholders had strong incentives to increase the profitability of Telkom and had management control through the shareholders agreement. Thintana lobbied to protect Telkom's privileged position and ensure the value of its equity stake, sharing a common interest with government in Telkom's profitability. The regulatory framework to constrain the market power of Telkom was undermined by ministerial discretion in key areas regarding the regulatory dispensation (Horwitz and Currie 2007). The regulatory institution was thus established in an environment that was not conducive to its independence.
Moreover, the extent to which Telkom could use litigation to make the enforcement of regulations and competition legislation ineffective had been underestimated. Alternatively, the decisions over the regulatory regime represented a further deliberate privileging of shareholder interests.
The interests of shareholders became more closely intertwined with powerful business and political interests when the Thintana consortium sought to sell its 30% stake in 2004. The leading bidder was the ‘black economic empowerment’ Elephant investment consortium, headed by Andile Ngcaba, the former director-general of the Department of Communications. The Elephant consortium was unable to put forward the finance required to buy Thintana out and, in a deal that attracted much controversy, the government's Public Investment Commission bought the stake in Telkom, ‘warehousing’ it for the Elephant consortium until finance could be raised (Cargill 2005).
Overall, the actions of the state as owner have been contradictory to its aims as a reformer and economic policymaker. It has been argued that the imperatives of privatisation, including the desire to maximise the value of Telkom upon listing on the stock market, overrode other policy concerns such as independent regulation and competition (Horwitz and Currie 2007). Interests protecting Telkom's profits and its entrenched dominant position have effectively worked through the state, including inhibiting the development of Icasa into a strong regulator.
Telkom's battle to keep competitors from offering voice services has also been enabled by the Department of Communications, which delayed giving clarity on the extent to which voice services could be provided. A case brought by Altech13 confirmed that value-added network service providers can convert licences into individual electronic communication services (I-ECNS) and roll out their own networks. This uncertainty, eventually resolved in the courts, suggests the government protected its shareholding at the expense of robust competition, lower prices and innovation.
The competition authorities have been able to intervene through merger control to prevent a transaction that would have undermined the development of market competition in the telecommunications sector. In this way, the prospects of the entrant, Neotel, were safeguarded against prospective exclusionary strategies by the incumbent. The value-added network services case, and the related 2009 case follow in this vein as they address allegations of exclusionary conduct by Telkom. The competition authorities have taken on a government-aligned company in the interests of opening markets. This demonstrates the role these institutions and competition policy can play in ensuring access to the market, even in the face of powerful incumbents. But, the difficulty of prosecuting cases, including the litigious tactics of respondents and the technical, industry-specific expertise required, suggests this cannot be enough in the absence of a strong regulator and a strong competition orientation across government.
The competition authorities can play an important role as ‘doorstep institutions’ that expand access to the economy by new market entrants. However, context matters and the extent to which they can disrupt the traditional distribution of rents is dependent on the actions of other regulators and policymakers.
Chemicals, fuel and fertiliser
The development of the basic chemicals industry in South Africa has been closely intertwined with the needs of mining and agriculture, and with the apartheid government's objective of reducing dependence on imported crude oil for liquid fuels (see Dobreva et al. 2005; Fine and Rustomjee 1996; Roberts and Rustomjee 2009). These objectives were pursued through a combination of state ownership, government support including development finance and trade protection, and regulation. In particular, the state established Sasol as a company that manufactured synthetic liquid fuels (synfuels) from coal (Roberts and Rustomjee 2009). Under apartheid it appears the industry was disciplined by the powerful mining and agricultural interests who relied on it for inputs. It is notable that it was not developed in order to build linkages with downstream manufacturing industries (Fine and Rustomjee 1996).
Regulatory arrangements in liquid fuels represented a bargain between the multinational refiners (the ‘other oil companies’, OOCs) present in the country (including Shell, BP, Total and Chevron) and Sasol together with the South African state. In 1954, the government brokered the Sasol Supply Agreements (subsequently known as the Main Supply Agreement) where the OOCs agreed to purchase all of Sasol's production at import parity prices (the In Bond Landed Cost) according to their market shares in the inland market defined as the Sasol Supply Area.14
When Sasol expanded its capacity, further support for the OOCs was provided in the form of a synfuels levy, used to compensate the crude oil refiners for having to mothball a substantial portion of their refining capacity. The arrangements meant the crude oil refiners agreed to purchase all Sasol's output in exchange for a guaranteed margin at the marketing level, which Sasol agreed not to enter. Competition between fuel producers was thus removed in the interests of supporting the profitability of Sasol.15
Sasol was also supported by tariff protection when crude oil prices fell below a defined floor price of $23/barrel (the level at which it was estimated Sasol would earn a 10% return on assets). When oil prices rose above $27.7/barrel the producers had to pay back 25% of the additional revenue into the ‘Equalisation Fund’ until the quantum of state protection previously received had been repaid (see Rustomjee 2012). State support for Sasol not only enabled its development in liquid fuels, but also enabled low-cost production of chemical feedstocks, key to products such as fertiliser.
In 1998 steps were taken to end both the guaranteed purchase and support in the form of a price floor. At the end of that year, Sasol gave the required five-year notice to end the Main Supply Agreement in December 2003. In 1998 the government also released Sasol from the obligation to repay any outstanding subsidies it had received during the tariff protection era (National Treasury 2007). Price regulation remains on some products, principally retail petrol where the pump price is set.16
Sasol's main strategy to respond to changes in regulation and protection was to consolidate its position through mergers and remain indispensable for the country's security of supply. In the second half of the 1990s, Sasol and rival AECI sought to merge their interests in ammonia, fertilisers, explosives and polymer chemicals. The merging parties abandoned the deal due to the onerous nature of the proposed conditions imposed by the Competition Board on the behaviour of the merged entity in order to address these competition issues.17
The second industry-reshaping merger planned by Sasol was in 2005 with one of the major oil refiners to create a new entity to be called uHambo. This was to secure a downstream retail and distribution footprint as well as to control refining capacity at one of the large crude oil refineries on the coast. The uHambo transaction would simultaneously provide Sasol with a route to market for its own product so it could credibly threaten not to supply the OOCs, and refinery capacity at the coast (the Engen refinery). The Tribunal prohibited the merger due largely to the effect of the former. While Sasol had a dominant position upstream, its reliance on the distribution operations of the OOCs meant there was bargaining over the price (Corbett, Das Nair, and Roberts 2011).
In 2012 the Competition Commission referred a case of collusion against the oil companies after finding that by exchanging information on sales, at a disaggregated level, the oil companies undermined incentives to compete (Das Nair and Mncube 2012).
The case of fuel and basic chemicals highlights the danger of equating competition with the absence of constraints. Instead, liberalisation of restrictions may well mean consolidation under the largest firm, especially where it is able to leverage off its existing advantages. Competition law is not necessarily a very effective answer to the challenges of entrenched dominant firms. While the two large planned mergers by Sasol were blocked, similar outcomes (consolidation under Sasol) were achieved through industry shifts and restructuring. Similarly, addressing collusion does not necessarily undermine the power that derives from the inherited position.
Entrenched dominance and collusion in fertiliser
The nitrogenous fertiliser value chain runs from ammonia through to the supply of blended fertiliser products (including other nutrients in addition to nitrogen) to farmers.
Following the Competition Board's decision in the proposed Sasol-AECI merger, AECI shut down its ammonia operations in 2000 and bought ammonia from Sasol instead. Sasol became the sole producer of ammonia and remains the only player in the market that is vertically integrated from ammonia to ammonium nitrate and derivative fertiliser products.
Entry barriers are relatively low at the level of blending and supply of fertiliser, in terms of scale economies and the initial investments required. Two relatively small firms, Nutriflo and Profert, started to grow their businesses aggressively in the early 2000s. These companies bought the key nitrogen fertiliser components, mainly limestone ammonium nitrate and ammonium nitrate solution from Sasol, and blended them in order to on-sell to farmers. Both laid complaints in 2002 and 2003 that they were being subject to exploitative and exclusionary conduct on the part of Sasol.
The Competition Commission's investigation identified Sasol abusing its dominant position upstream, charging prices as if these products had to be imported. These arrangements meant farmers in southern Africa had been paying more than farmers in Europe for locally made fertiliser. Sasol was also found to be in a cartel with two other major producers of intermediate fertiliser products, Omnia and Kynoch (the former AECI subsidiary subsequently acquired by the multinational Yara).18
The cases highlight the links between protection of a monopoly position and coordination by a small group of insider firms to exclude others and exploit buyers. Sasol was potentially subject to bargaining power on the part of buyers as it had few alternatives for its ammonia other than be sold into fertiliser and explosives. Its ability to charge the full monopoly price ceiling depended on not being credibly threatened by buyers to withhold purchases by turning to alternatives. The arrangements with Omnia and Kynoch can be seen in this light – by tieing both of these firms into a coordinated arrangement they were rewarded with collusive margins while paying Sasol the monopoly prices on upstream products.
The growth of firms such as Profert and Nutriflo, which based their businesses on the responsiveness to farmers' needs, undermined the cartel margins which were the reward for Omnia and Kynoch continuing to pay the monopoly prices for ammonia and ammonium nitrate. The conduct reflects the interrelated nature of protecting a position of market power and its exercise, with restrictive and coordinated practices at multiple levels of a value chain.
In these circumstances competition is not simply about removing the obstacles to entering and growing in a market. Nor is the enforcement of competition law necessarily a quick remedy. The Commission referred the cases in 2005 and 2006. Sasol settled in 2010 without an admission but with substantive remedies around non-discrimination and withdrawal from fertiliser distribution apart from close to their main production site. Omnia subsequently has invested in an expanded production facility for which it is seeking to import ammonia on a large scale, while also bringing an excessive pricing case of its own against Sasol on the prices it has been charged for ammonia.19
Critical assessment
A strong path dependency is evident in all the industry cases, where the markets are constructed and shaped by the previous investment decisions and state intervention and the interests working behind and through the dominant firms and the state. In the maize and wheat milling value chains, the focus historically was on supporting white farmers and their cooperatives. Telecommunications was similar to other countries with a state-owned telecommunications utility, and the additional dimension that both the services and employment were skewed towards the ‘modern’ white economy. The development of fuels and chemicals was driven by strategic objectives under apartheid, of the needs of mining and agriculture, and to reduce vulnerability to imported oil.
In each of the case studies liberalisation was premised on a belief in the benefits of competitive markets while the reality has been entrenched dominant firms being able to continue to defend their position through anti-competitive arrangements. Firms have also been able to shape the new regulatory frameworks in their favour. In the case of telecommunications, the relative impotence of the regulator is at least partly a result of the influence of Telkom. In fuel, the regulatory framework has similarly continued to ensure the profit margins of Sasol. In food, the power and influence in the value chain has moved to the conglomerates in processing and providing agricultural inputs and services. These firms coordinated their conduct in order to increase the rents accruing to them.
The concentration of business interests in developing countries might be expected to undermine attempts to establish independent and effective competition authorities (see, for example, Mateus 2010). In South Africa, the experience points rather to limitations in the understanding of competition which underpins the competition regime, as well as the challenges of enforcement through the courts.
The competition authorities have been largely concerned with mergers and, since around 2006, with cartels. Both cartel enforcement and mergers are premised on there being effective competition in the absence of the agreement or transaction in question. In other words, markets are assumed to generate efficient competitive outcomes in the absence of such arrangements. The abuse of dominance provisions are about addressing the legacy of existing entrenched positions, and the implications of market power that persists. The legal framework emphasises checks and balances on the exercise by the authorities of their powers in constraining dominant firms.
Altering the balance of power in favour of new entrants and diversified segments of the economy outside of the dominant interests in the economy depends partly on changing the landscape in terms of the provision of infrastructure and policy support. Liberalisation does not achieve this as the existing structure remains, whether it is railway lines, grain silos or petroleum pipelines.
Countries differ on the weight to put on the ability of entrants and smaller rivals to participate in ‘fair’ market circumstances (see, for example, Budzinski 2008; Fox 2003). A country's competition laws, and the values and conventions which develop along with them, have been characterised as crucial elements of its ‘economic constitution’ (Gerber 2010). The particular nature of the apartheid regime with economic exclusion at its centre in terms of both explicit blocks on the black population engaging in most types of economic activity and in the skewed provision of public goods meant advantage was locked in unless a proactive stance was taken to access. A reactive competition regime premised on efficient markets will have a limited impact on such entrenched dominance and power. It should also be noted that competition policy and the competition regime extend beyond the law and mandate of the authorities. It includes the links with the regulatory provisions as well as the host of other laws and actions that impact on entry and effective competitive rivalry.
Why then has competition policy in South Africa not played the larger role expected of it, in altering the development path of the economy by undermining the market power of the dominant firms? First, the competition law and institutional regime in South Africa reflected the contest of ideas and interests (Roberts 2000), and provided for lengthy legal proceedings against well-resourced incumbents. Second, the expectation was based on a misunderstanding of the nature of competition and markets which viewed anti-competitive arrangements as aberrations rather than understanding market power as an intrinsic feature. Competition law and policy can be part of disciplining the power of large corporations, but needs to take a dynamic rather than static view, and to be linked with other policies (Possas and Borges 2009). Third, it needs to acknowledge a continued active role for the state. This includes addressing obstacles to entry such as the finance needed and the externalities that exist through complementary industrial policies. For example, in South Korea industrial policy supported new activities with temporary protection from competition in the local market for infant industries (or activities) creating what can be characterised as learning rents, while firms were simultaneously forced to compete in export markets (You 2012). The South Korean competition authorities also play an industrial policy role in actively monitoring the conduct of the large chaebols, such as their subcontracting arrangements.
The framing of the South African law took into account prevailing ‘international best practice’ in the second half of the 1990s, as expressed by institutions such as the World Bank and OECD. The big business constituency in the negotiations pressed hard on the need not to undermine business confidence and to provide certainty, on which they largely won (Roberts 2000). The law itself took from recent legislation in jurisdictions such as Canada, Australia and the European Union. It went further to check the power of the institutions by explicitly writing in restrictions on their discretion in exercising a rule of reason analysis, especially in the abuse of dominance provisions (Roberts 2012). South Africa is also unusual in having a separate Tribunal and specialist Competition Appeal Court. Decisions are only taken through rulings of these bodies, after lengthy adversarial hearings, compared with most jurisdictions internationally which empower the authority evaluating the conduct to take a decision as part of the wider set of administrative bodies regulating firm behaviour.
The South African framework has enabled business interests to continue to earn short-term rents and to delay any changes to their conduct with extensive litigation. The competition authorities are unable to open up the economy to new entrants and increased rivalry given the framework adopted. At best, an idealistic view was adopted of what could be achieved under the competition law. Our case studies also demonstrate the limitations of action by the competition authorities to address the exertion of market power by a monopoly when the independence of the regulator is being undermined, as in telecommunications. The persistence of uncompetitive outcomes coupled with the persistent barriers to new entrants means access to the supra-competitive rents has instead been sought through shares in the incumbents rather than in rivalry with them. This is consistent with the black economic empowerment provisions which encourage the sale of substantial minority stakes. The natural consequence is that the new shareholders have a stake in maintaining the status quo to protect the rents, while the incumbent firms have an interest in seeking politically connected investors to protect their existing position.