Introduction
When firms collude they give the appearance of competitive rivalry while in fact they have reached an understanding to jointly maximise profits through fixing prices, rigging tender bids and/or allocating customers or geographic territories. Effectively, the agreed price misrepresents the economic value of the good to the consumer and bears no reasonable relation to the costs of production. Less noted are the ways in which cartels ensure their position is protected through manipulation of industrial policies and regulations under the guise of developmental objectives. These forms of influence by firms are consistent with a broad conception of fraud which encompasses deliberate misrepresentation or misinformation for profitable gain.
There is an extensive literature on the direct economic harm resulting from consumers being deceived by cartels. The mark-ups have been found to typically range between 15% and 25% above the competitive price (Connor 2014). There has been less attention paid to collusion in developing countries where there are reasons to believe mark-ups may be much more substantial owing to high barriers to entry and transport costs (see, for example, Khumalo, Mashiane, and Roberts 2014). Barriers to entry can be erected through lobbying for regulatory obstacles as well as strategic behaviour by the incumbents (Levenstein and Suslow 2004). In this way, conduct by cartels is both exploitative and exclusionary in nature (Ndikumana 2013).
The extent of private collusion at least partly reflects simplistic faith in liberalised markets, especially in developing countries where markets are more concentrated and likely to be dominated by transnational corporations (TNCs). The push for ‘business-friendly’ industrial policies, including arrangements to attract inward foreign direct investment (see, for example, Lin 2012), ignores the potential influence of large firms to control rents through collusion.
There are powerful incentives for firms to collude to jointly maximise profits rather than compete and an extensive competition law literature relates to the need to have penalties which are sufficiently high to deter cartel conduct (Connor and Lande 2012). Deterrence requires a credible threat of detection, doubtful if the arrangements are international. The cartel literature, however, further ignores the deeper political economy questions of how firms may set up coordination through skewing markets and influencing regulation rather than an obvious ‘smoking gun’ cartel agreement.
On the other hand, neo-classical economics assumes practically all coordination between competitors is negative and sets up competition and industrial policy as necessarily being opposed to each other. This simplistic view ignores the very real rationales for coordination including where there are substantial scale economies relative to demand, investments are large and lumpy, and there are linkages between related activities including shared infrastructure (Stiglitz 1996). It is also relevant to consider spillovers and other significant learning-by-doing effects in developing productive capabilities. The detailed economic histories of Amsden, Chandler and others (see, for example, Amsden 1989; Chandler, Amatori, and Hikino 1997) highlight cooperative arrangements to support investments in capabilities alongside the critical coordination role of government in late industrial development.
The questions we are concerned with are how collusion works to control market outcomes, including manipulating arrangements which may be ostensibly to solve collective action problems and incentivise investments, to raise barriers. A critical issue is whether the firms have set the agenda to reinforce their market power, including through misrepresentation or manipulation, and if regulatory barriers have been lobbied for and put in place as part of industrial policies which favour a group of established businesses in various ways. It is important to understand whether the state has effective disciplining mechanisms in place to ensure that the developmental objectives underpinning the supportive arrangements are achieved (Amsden 1989; Roberts 2010), and if government policies open up sectors for new firms to compete with incumbents who have often inherited advantageous positions (Budzinski and Beigi 2015).
In this assessment it is important to evaluate the ways in which firms link with elite interests to shape policies (Whitfield and Buur 2014). At the same time, a naïve juxtaposition of elite deals and cartels with untainted ‘free markets’ is clearly wrong and unhelpful. The critical questions relate to whether rents accruing to different actors also lead to productive investment and the development of capabilities (Khan 2000).
The case study industries of cement and fertiliser have been selected because of their importance and the insights provided from the evolution of arrangements, including those uncovered by competition authority investigations. In each sector there are significant local, regional and international dimensions including the role of TNCs. Each sector has been characterised by a history of collusion around the world, as well as cartels having been uncovered in South Africa and, in the case of fertiliser, also in Zambia. In each sector, governments have played an important policy role given the strategic importance of the industries to agriculture and infrastructure. Moreover, the nature of government's involvement has changed from direct coordination and regulation under industry development strategies, including with a legal cartel in cement and price controls and trade protection until the early 1980s in fertiliser in South Africa (van der Linde and Pitse 2006), to engaging with business in liberalised markets. The sectors differ in that cement is produced domestically in the different countries by multinational-owned plants, whereas fertiliser is characterised by supply by multinational traders from international sources with only some local production.
The assessment is done through a comparative empirical analysis of quantitative and qualitative information of the two case study industries, primarily through linking characteristics and outcomes of the cartels to the publicly available evidence of the influence of policies, state actors and individual elites which protected or influenced the evolution of the cooperative arrangements. The article draws on competition law decisions which provide unique insights, information from published annual reports, news articles and previous studies (see, in particular, Ncube, Roberts, and Vilakazi 2016).
The second and third sections (‘Coordination and misrepresentation in the southern African cement industry’, and ‘Fertiliser cartels and fertiliser support programmes in southern and East Africa’) consider the arrangements in cement and fertiliser, respectively. The fourth section (‘Comparative assessment of collusive arrangements’) analyses the key issues thematically from the cases, and the final section concludes.
Coordination and misrepresentation in the southern African cement industry
Formation and operation of the cartel in South Africa and SACU
South Africa has a history of coordination of cement production and supply from the 1940s sanctioned by government to facilitate investment and efficient distribution (CCSA 2015; Fourie and Smith 1994). The coordination and industry control of supply was sustained through a series of government exemptions from competition legislation, including a marketing agreement in 1971 and an exemption in 1988. The cartel involved the three major producers selling throughout the Southern African Customs Union (SACU, comprising South Africa and neighbouring countries Botswana, Lesotho, Namibia and Swaziland), being Pretoria Portland Cement (PPC), AfriSam South Africa (AfriSam)1 and Lafarge South Africa (Lafarge),2 who also jointly owned Natal Portland Cement (NPC).
The primary features of the lawful collusion included agreement on market shares for each producer based on respective production capacities across the southern and northern distribution regions in South Africa, and the use of a centralised sales and distribution system (CCSA 2015, 9). This worked through firms’ sales being made according to agreed market shares of 42–43% for PPC, 35–36% for AfriSam and 22–23% for Lafarge, and allocating the NPC production to each of the three main firms. At the end of an accounting period, proceeds from sales would be shared amongst the producers by means of a quota system using a pricing model employing base factories in each region. Until 1982 when price controls were removed, price increases had to be formally sanctioned by government. The removal of price controls saw sharp price increases (Rand Daily Mail 1982), following which government made firmer requirements for reasonable price increases as part of conditions for granting an exemption to the manufacturers in 1988.
In line with the broad policy shift in South Africa to liberalise markets at the time (Habib and Padayachee 2000), the Competition Board withdrew the cement exemption in 1994. A grace period was granted until September 1996 to allow the producers time to establish their own sales, marketing and transport functions (CTSA 2011).
It is now evident from the Competition Commission of South Africa's (CCSA) later investigation that the firms subsequently formed a private cartel. The CCSA uncovered the arrangements following a raid of the cement producers in 2009 and the admission by PPC in exchange for leniency shortly thereafter. Lafarge and AfriSam admitted the conduct when reaching settlements (with substantial fines) (Ibid., 2012).
The operation of the private cartel had some notable features. First, it was formed after a price war broke out between the cement producers from around 1996 to 1998. In mid 1998 and up to 2002 the firms met and agreed to fix market shares once again for the whole of SACU, as well as allocating some provinces of South Africa and countries in the region to individual firms (CCSA 2015; CTSA 2011, 2012). The arrangement between the firms was carefully set up to give the appearance of normal competition and to minimise detection. The producers implemented the market division simply through sharing monthly sales data through Deloitte, an audit firm, appointed by the industry association, the Cement and Concrete Institute (CCSA 2015, 14). Each member received the aggregate data on cement sales by region and end-user category, along with imports. The firms justified the data on the grounds that it assisted in the planning of supplies and investments. Only through the leniency application of PPC, resulting from the CCSA investigation, did the earlier meetings and extent of information shared come to light at all.
The early agreements between the companies also involved common pricing parameters for various cement products, including discounting, and the scaling back of marketing and distribution activities by individual firms and closure of certain depots (Ibid., 13). Again, this meant that going forward the firms could simply follow each other and the underlying arrangements would not be evident.
The political economy of the cartel in cement
The cement companies historically enjoyed close ties with the apartheid state in important ways. First, self-sufficiency in the production of cement was part of the apartheid state's strategic industrial policy. This was due to economic sanctions against South Africa in the 1980s, as well as because of the strong linkages of cement with infrastructure and heavy industry at the core of South Africa's apartheid economy (Fine and Rustomjee 1996).
Second, the cement producers were closely associated with three of the six major conglomerate groups that dominated post-war economic activity in South Africa, with core interests in mining and finance and extensive political and economic influence. PPC was part of the Barlow Rand group associated with SA Mutual, Blue Circle (sold to Lafarge in 1998) was affiliated with Sanlam, which was a vehicle for the development of ‘Afrikaner’ financial capital from the late 1940s, and Anglo Alpha (later Holcim and then AfriSam) formed part of the Anglovaal group, which held interests in cement to generate high profits which it could use to finance investment in prospecting for new mines (Ibid., 118).
The central role of the companies in apartheid industrial policy meant they received support, including being allowed to coordinate. Importantly, however, support was conditional on investments being made to meet growing demand and efficient use of available capacity, and pricing was subject to scrutiny and justification (De Wet 2003; Engineering News 1994; SACPA 1989). The continuation of coordination was allowed by government in the face of objections from different interest groups including the building industry association (Collins 1987; Rand Daily Mail 1982; The South African Builder 1976). In 1986 the government issued new regulations banning various restrictive business practices (including horizontal coordination) following the debt crisis in 1985, which increased the government's concerns with concentrated industries. However, the members of the South African Cement Producers Association (SACPA) were allowed by the Minister of Trade and Industry, under whom the Competition Board fell, to continue with the collusive arrangement for two years apparently on condition that price and market allocation arrangements were relaxed. A formal exemption was then issued in 1988 as government decided in favour of the cement manufacturers on grounds of the cartel's ‘public interest’ benefits (Anderson 1988). The confidence of the cement industry was reflected in Blue Circle's 1986 public statement that the termination of the cartel was ‘never seriously on the cards’ (Financial Mail 1986).
Effects of coordination and collusion
The cement industry had mounted a vigorous defence of the government-sanctioned coordination on the grounds of the efficiencies as well as on the absence of harm to buyers or potential competitors (SACPA 1989). The claimed efficiencies included reduced marketing and distribution expenses, reduced bad debts, and discounts obtained from collective negotiation of rail transport rates. These were additional to the core rationale of coordinating and planning investments in new capacity to ensure security of supply as an industrial policy goal.
It is true that coordination meant less need to spend on marketing and less duplication of transport and logistics. However, the evidence on the claims relating to investment and optimal utilisation of capacity is mixed. Significant investments in the early 1980s had been incentivised. But, the ‘most efficient’, lowest-cost Dwaalboom plant (PPC 1998), built by PPC in the mid 1980s, remained mothballed with the decrease in demand in the late 1980s, up to 1998, instead of it coming on stream and the older less efficient facilities of other suppliers being closed. An agreement based on rigid market shares in fact implies that production will not be optimised. This was recognised by the Competition Board in its 1994 decision to end the exemption (The Civil Engineering Contractor 1994).
The industry's arguments about a lack of market power and low barriers to entry also do not stand up to scrutiny. Indeed, the companies regularly cited high-capital investment costs as a motivation for above-market returns on capital, and for the industry being unattractive to entrants (Pretorius 1996; SACPA 1989). In addition, rights to limestone are important for an entrant and the mineral reserves were largely in the control of the incumbent cement companies. The first new entrant (leaving aside NPC) since 1934, Sephaku Cement, only acquired the mining rights for limestone from Anglo-American in 2006 (Sephaku 2013), as a result of the new ‘use-it-or-lose-it’ policy under the Mineral and Petroleum Resources Development Act (2002) and took until 2014 to bring its plant on stream. The incumbents also controlled access to other key inputs such as flyash and slag which were blended into cement as well as over the shared distribution facilities.
With the ending of the legal arrangements, the oversight of pricing by government also ended. Competition was expected to play the disciplining role policed by a new competition law (coming into force in 1999). The evidence reveals that this was naïve. Instead illegal collusion resulted, and in fact there was an evolution from local, non-secret coordination between the firms, to secret collusion involving global TNCs not subject to the close oversight and disciplines that were previously enforced by the government.
This is consistent with the history of close interactions between the firms in South Africa, and the recidivist nature of cartelists in general given both Lafarge and Holcim (now merged) have a history of collusive arrangements internationally (Connor 2010, 2014). It was Lafarge that initiated new discussions on reconstituting the cartel in 1998 as soon as it entered the South African market after acquiring Blue Circle, and Lafarge's managing director that enforced the ‘rules of the game’ in the South African market (CCSA 2015).
The effect was higher mark-ups over cost than under the legal coordination, as reflected in PPC's profit margins as a percentage of turnover (Figure 1). The average profit margin of PPC from 2001 to 2009 was 34%, compared with 18% in the period of intense competition from 1996 to 1998 and around 25% under the legal coordination. Notably, PPC reported an average operating profit margin of 24.9% over the period 1982–1991 (PPC 1991).
PPC profit margins (%). Source: PPC annual reports (PPC 1991, 1994, 1998, 2015) and Osiris database.
Notes: Margins reported on the basis of PPC’s financial year, which ends in September. Profit margins recorded as profit/loss before tax divided by turnover (includes operations in neighbouring countries which accounted for less than 30% of total revenues in 2015).
The margins declined sharply after 2009, and even further from 2014 once Dangote entered (as Sephaku Cement) to levels consistent with the previous period of competition. The comparison of the secret cartel with the legal coordination is not, however, straightforward as it is important to take account of the lower costs of PPC through efficiencies made following the price war in 1996–1998, as reported in various annual reports from the early 2000s, while there was also a construction boom in the second half of the 2000s.
The main point is that the faith placed in liberalised markets proved misplaced. The companies were not deterred by competition rules as they sought to carefully maintain control of the market while cynically portraying a competitive picture. For example, a senior executive of Anglo Alpha in writing to customers in 1996 stated that the firms would never risk exposure to high penalties for collusion under the competition legislation (Anglo Alpha 1996). The new CCSA even targeted the cement companies for its first search and seizure operation in August 2000; however, the cement companies successfully challenged it in court on legal and technical grounds (SCA 2002). The firms continued with the planned collusion through the information exchange arrangements, apparently unperturbed by the new authority's powers.
At the same time, the cement companies positioned themselves as critical partners in the Reconstruction and Development Programme, which included large-scale housing projects for previously disadvantaged communities (PPC 1994). The companies had even committed to moderate price increases for three years. Most striking is that these commitments were being made by the companies publically even as the firms met during the grace period to discuss and agree a new secret collusion.
Lastly, we note that vigorous competition did not simply come from enforcement of the competition law but required the entry of Sephaku. This depended on a number of factors including the provisions which opened up access to limestone inputs. Furthermore, while the authority in South Africa was able to identify the conduct, authorities in other countries such as Zambia, Kenya and Tanzania have identified prices that are not reasonable in relation to costs as well as issues around the operation of industry associations in cement (Mbongwe et al. 2016). Notably, none of the other manufacturers in the region entered the Zambian market where Lafarge operated as the only large manufacturer, until the entry of Dangote. This suggests that there may have been a regional agreement between manufacturers not to compete with Lafarge in Zambia, consistent with the market division arrangements in SACU. The competition authorities in these countries do not appear to have been able to uncover the arrangements that underlie the outcomes.
Fertiliser cartels and fertiliser support programmes in southern and East Africa
As with cement, fertiliser production in South Africa was developed as part of the apartheid state's industrial strategy (linked with production of explosives for mining), albeit with a significant role for, at the time state-owned, Sasol. The other producers were AECI/Kynoch (owned by Anglo-American until 2001 when AECI sold its remaining shares in Kynoch to Norsk Hydro/Yara)3 and Omnia.4 Price controls existed in the industry from the early 1940s, along with trade protections, until 1984 when controls were abolished (van der Linde and Pitse 2006). In 1984, following the removal of controls, Sasol established its own fertiliser company having previously only supplied to other manufacturers. Omnia was formed in 1953 as a family-owned business, subsequently listed.
In contrast with cement, there is almost no production in other countries in southern and East Africa which therefore rely on imports by multinational corporations as distributors, and local traders. The scale required for international trading in fertiliser means that there are only a few major companies who control its supply in most African countries (Ncube, Roberts, and Vilakazi 2016). Internationally, production of the primary nutrient raw materials phosphorus and potassium (potash) is controlled by four major groupings of firms effectively organised as government-sanctioned export cartels (Jenny 2012). Nitrogenous fertiliser supply is more diverse, led by Yara, which has historically held the largest share of African markets (ACB 2014; Yara 2017), although there are strong indications of international cartel arrangements in these products also (Hernandez and Torero 2013). In the regional market, South African producers also play a significant role given their domestic production and exports to neighbouring countries, although overall South Africa is a net importer of fertiliser products.
The importance of fertiliser for agriculture and the generally low fertiliser usage in sub-Saharan Africa has been the rationale for extensive fertiliser subsidy programmes (FSP) supported by donors in a number of African countries such as Malawi, Tanzania and Zambia (Chirwa and Dorward 2013). These have generally been targeted at small farmers to increase their agricultural yields.
Cartels and coordination in fertiliser in southern and East Africa
In 2009 far-reaching collusion was revealed between the major suppliers in South Africa, namely Sasol, Omnia and Kynoch, which affected southern Africa (CTSA 2009; Makhaya and Roberts 2013). The Zambian Competition and Consumer Protection Commission (CCPC) has also found two companies (one of which is Omnia) to have rigged the tenders to supply fertiliser to the government (CCPC 2013), where their position had been entrenched by bidding rules apparently to ensure the reliability of suppliers. The nature of the arrangements reveals how manipulation can be hidden behind an apparently innocent visage, with firms misrepresenting supply conditions and benefiting from FSPs while fronting as development partners.
The arrangements in South Africa tied these firms together such that Omnia and Kynoch were rewarded with collusive margins while paying Sasol the monopoly prices on upstream products (CTSA 2009; Makhaya and Roberts 2013). The true nature of the arrangements was, however, concealed in the workings of the industry association in the period from 1996 to 2005, along with secret meetings (CTSA 2009). The firms were members of the Fertiliser Society of South Africa (FSSA), through which information was exchanged including using various committees (Das Nair and Mncube 2012). FSSA ostensibly ensured security of supply, planning of imports and exports, and benchmarked prices, which facilitated coordination while maintaining the façade of a competitive market.
The underlying cartel conduct, implemented in large part through the various clubs and committees, only came to light when competition complaints were lodged by two small independent fertiliser blenders. The companies were not aware of the cartel and raised issues about the largest company, Sasol, not supplying them on fair terms. The collusion had continued until around 2005, raising the price of fertilisers supplied domestically and to southern Africa (CTSA 2009). Along with dividing markets, the cartel also involved an agreement about price and cost build-ups including which international benchmark prices to use and the cost add-ons to get the agreed list prices, and discount levels. Monitoring supplies and setting price build-ups meant inflated margins could be maintained even while the FSSA and its members claimed to be ensuring cost-effective supplies to farmers.
In Zambia, Omnia and Nyiombo Investments were found by the CCPC to have rigged government contracts for fertiliser supply between 2007 and 2011 (CCPC 2013). The two firms were fined for the conduct, which was found to have largely affected the supply of fertiliser to farmers under the government's FSP, involving the allocation of geographic markets and price fixing. Omnia and Nyiombo have in recent years also been linked to allegations of fraudulent relations with the government agents that were in charge of facilitating the tender process (Bupe 2010; Sinyangwe 2012). The conduct was estimated to have cost the government over US$20 million over the cartel period (CCPC 2013).
While the arrangements in South Africa and Zambia appear clear in hindsight, and noting that there is still an appeal pending in Zambia, this is to miss the point that the arrangements were structured in such a way as to look innocuous and in the interests of ensuring supply to the agricultural sector.
Coordination, subsidies and improved supply?
High prices to farmers in southern and East Africa persist (as illustrated below) despite various initiatives led by major fertiliser companies to improve logistics. As almost all countries depend on imports, transport and logistics are crucial to controlling supply. Port handling, storage and bagging facilities along with overland transport are decisive in terms of the relative competitiveness of alternative sources of supply. At the same time, the position of the main local traders is associated with their relationship to international suppliers and their influence over logistics in different countries. For example, when the Zambian government sought to bypass Omnia and Nyiombo to import direct from Saudi Arabia in 2013 they faced major challenges in transporting the fertiliser by rail from Dar es Salaam, the same route used by Nyiombo with TAZARA railways.
Multinational suppliers have positioned themselves as key distributors of fertiliser and development partners, leveraging strategic investments in, and control over, logistics to reinforce market power. Yara has been at the forefront of several initiatives related to logistics,5 and has positioned itself as an ‘advisor’ to the Malawi government although the details of its role are not transparent (Holden and Lunduka 2010). The Beira Agricultural Growth Corridor was launched in January 2010 as a joint venture between Yara, AgDevCo (a company established by the UK's Department for International Development) and the Mozambique government (BAGC n.d.). Yara has also been a strategic partner in the Dar es Salaam Corridor Group, established in 2004, which included the only purpose-built bulk terminal in sub-Saharan Africa able to handle fertilisers.6 In September 2015, Yara then launched its own US$20 million fertiliser terminal in the port of Dar es Salaam as part of the Southern Agricultural Growth Corridor of Tanzania (SAGCOT).7
These initiatives on logistics and port handling stand in stark contrast to the actual pricing realised as well as the challenges of smaller companies and entrants seeking to import directly and to bypass the multinational traders (Ncube, Roberts, and Vilakazi 2016). Prices across countries suggest that there have been artificially high prices sustained for some years. Prices of urea, a benchmark fertiliser product, increased significantly in Tanzania, Zambia and Malawi in the second half of 2011 and early 2012 (Figure 2). Prices in Zambia increased first, followed by Malawi and then almost 12 months later by price rises in Tanzania. These price increases are not explained by increases in fuel, transport and shipping costs which remained relatively stable during the period (see Ibid.). In 2013, however, prices in Zambia were close to those in Tanzania, which is not consistent with the inland location of Zambia and indicates more competitive outcomes in Zambia consistent with the opening-up of the market after the cartel was uncovered. There was also strong growth in Zambia of ETG, a Kenya company, which interestingly was not competing vigorously in Kenya at the time.
The price mark-ups are highest in Malawi, where a number of measures such as restrictions on transport and storage protect the interests of the small number of significant traders of fertiliser (Chinsinga 2012; Ncube, Roberts, and Vilakazi 2016). The substantial margins over international prices in Malawi also come at the time of higher fertiliser subsidies being provided.
FSPs have been in place for many years but were expanded substantially in many countries through the 1990s and 2000s with donor support to ‘make markets work’, address perceived market failures and improve affordability. However, the interventions instead appear to have underpinned high prices and suggest misrepresentation and manipulation by firms, as illustrated in the programmes for Malawi, Zambia and Tanzania.
The different programmes have been undermined by challenges in implementation and corruption. For example, it appears that the structure of subsidy programmes has meant that larger farmers in both Zambia and Malawi have benefited at the expense of smallholder farmers being targeted (Chinsinga 2012), and in Tanzania local political elites and wealthy households have gained disproportionately (ACB 2014). Furthermore, in Tanzania's National Agriculture Input Voucher Scheme, launched in 2008, which benefited from World Bank support from 2009 to 2012, it appears that many fewer tons of fertiliser were actually being purchased with vouchers than were being recorded (Ncube, Roberts, and Vilakazi 2016).
In many ways, Malawi has been the ‘poster child’ for subsidy programmes. In 2005–2006 the government of Malawi implemented a very large-scale initiative (the Agricultural Input Subsidy Programme) because of the persistence of food security concerns despite earlier programmes and the fact that private sector companies did not invest in the market as expected when fertiliser supply was liberalised in the 1990s (Chinsinga 2012). The programme has been credited with significantly increasing fertiliser usage. Some donors supported the programme while others did not, and there were concerns about the high cost, poor targeting and limited role of the private sector (Ibid.; Chirwa and Dorward 2013; IFDC 2013). In 2012, the programme was substantially ramped up (IFDC 2013, 37), although prices were some 20–25% above the benchmarks for competitive prices in neighbouring countries (benchmarking against prices in Zambia, Figure 2 above), which meant that, in effect, the subsidies were being set based on inflated prices proposed by traders, to the government. In fact, some of the traders had limited experience in importing fertiliser but won contracts owing to close political ties despite bidding at much higher prices than rivals (Chinsinga 2012). As such, the subsidy is set so high that it seems to have set a price floor and had the effect of supporting higher overall prices, including for the substantial proportions of fertiliser which are not subsidised (Ncube, Roberts, and Vilakazi 2016).
In Zambia, the cartel conduct described above was directly related to the tender to supply the Fertiliser/Farmer Input Support Programme (FISP) (CCPC 2013). Historically, Nyiombo and Omnia dominated supplies for the FISP and their position was reinforced by tender bidding requirements that favoured incumbents and inhibited an open and competitive process (Sinyangwe 2012). The bidding requirements had stipulated that bidders should provide evidence of having supplied fertiliser including quantities provided and proof of contracts previously awarded (Ibid.). Other requirements included a credible track record and the capacity to deliver on the order, along with the ability to store fertiliser around Zambia which meant suppliers required access to extensive warehousing and logistics infrastructure.
The involvement of local elites in distorting tender processes for supply, and in corruption related to actual delivery of products, essentially undermines the effectiveness of interventions to increase fertiliser access. The mechanisms used to implement FSPs may undermine their impact and the programmes are subject to manipulation, in many cases favouring incumbent firms.
Comparative assessment of collusive arrangements
A comparative assessment provides insights at different levels as to how businesses in such tight-knit industries have actually organised markets in the transition from state-directed to liberalised markets, supposedly ‘policed’ by independent institutions. There are obviously elements of deception and misrepresentation in the secret cartels which were uncovered in South Africa and Zambia, where businesses portrayed a sense of competition to buyers and influenced government actors; meanwhile they had rigged the market to extract higher profit margins. In this section, we extend the analysis to first consider the nature and evolution of the arrangements in more depth under the broad policy shifts that have occurred. Second, we draw conclusions from the two case studies as to the ways in which large firms have misrepresented the role of big business in economic development, and the actual and potential role of institutions such as competition authorities.
The nature and evolution of cartels
The case studies firstly emphasise some important lessons about competition enforcement and collusion in developing country jurisdictions with limited experience, enforcement capacity and resources. The conduct may be in plain sight, in two quite different senses. First, the cases reveal that large firms in these two oligopolistic industries have become increasingly sophisticated in presenting an image of competition, while rigging the market. The exchange of information between firms in cement and fertiliser, through industry associations under the cover of legitimate industry business, was deliberately set up to enable monitoring of a common understanding. The arrangements avoid the need for explicit ongoing agreements in order to reduce the risks to the firms of detection and prosecution.
This highlights the limitations of competition law enforcement as a ‘governance fix’. It is unlikely that young agencies, which are resource- and technically constrained, will be able to uncover increasingly sophisticated conduct. The case studies show that, even once the existence of the arrangements could be demonstrated, there are further challenges in terms of the ability to successfully prosecute cases, with the fertiliser case in Zambia having been appealed in terms of the penalties set and the CCSA initially making crucial legal mistakes in the execution of the first dawn raids on cement companies in 2000. The cement companies clearly also weighed up the likely penalties as very low relative to the cartel returns being made, given they pursued the conduct regardless of the first intervention in 2000. In South Africa, the prosecution of two of the three fertiliser companies in the cartel was held up by technical legal challenges relating to the referral of the case. The case was concluded in 2018, when Omnia settled the matter with the Competition Commission and admitted to price fixing and market allocation in relation to its Nitrochem business (CTSA 2016, 2018), while Yara's business in South Africa had been wound up.
The institutions also do not have the powers to regulate, having been set up as independent bodies to undertake ex post investigations, as part of the push to deregulation. There is therefore a role for complementary policies and quasi-regulatory measures to set new rules for conduct by firms, such as on the type of information that can be shared. For example, the UK's Competition and Markets Authority has made such an order in the cement market (CMA 2016).
Second, there are likely to be understandings and agreements reached between TNCs which cannot be detected and addressed by a national authority (effectively concealed in plain sight), especially one in a developing country given the international and regional nature of the supply relationships and arrangements. In fertiliser, the arrangements include international export cartels in potash and phosphates, and involved regional export agreements between the main South African firms. In cement, the same companies own production across southern African countries and collusive agreements had a regional scope and involved de facto allocation of countries to individual suppliers. This points to the fact that the effects of collusion and legal enforcement need to be understood at a regional level, which is yet to happen.
The increasingly sophisticated and internationalised arrangements are harming developing countries. Significant mark-ups arise from the collusion. In cement there were mark-ups of some 15% across the region, generating substantially worse economic outcomes than the legal cartel had done up until 1994. The fertiliser cartel in southern Africa ensured higher prices substantially above the costs of sourcing the product. The effects of the lack of effective competition more broadly on fertiliser prices from 2010 to 2015 have been very significant even while the arrangements remain opaque.
It is possible for smart coordination by companies to be very effective as long as they remain a small group of insiders, with strategic barriers to new firms who might otherwise challenge their position. The studies have highlighted that the obstacles can also be erected or reinforced by government policies, including as a result of lobbying by the insiders who likely have maintained strong links with the political elites. The obstacles include access to critical inputs and infrastructure, as well as policies and regulations which directly favour the incumbents. Instead, proactive industrial policies and regulations are required, such as development finance, to support local rivals.
The policy agenda: how markets work, collusion and disciplining large internationalised businesses
The studies point to a deeper set of questions regarding the ways in which the policy agenda has been influenced and manipulated by cartels, but also the role of governments in creating the conditions for coordination. This reflects the alliances formed between international and local business and local elites as has been observed in South Africa (Chabane, Goldstein, and Roberts 2006; Makhaya and Roberts 2013). Firms can mislead government to get support, for example, pretending they are not profitable or misrepresenting the extent of barriers, costs or competition that exists in order to get protection.
At a more fundamental level, the case studies here ask important questions about the liberalisation agenda and the promotion of investor-friendly policies, with partnerships such as those relating to fertiliser. The companies vigorously working with international donors and governments on these have at the same time been ensuring that they corner the markets to ensure extractive rents. Similar insights have arisen in the literature on tax evasion and tax avoidance, which has gone hand-in-hand with investment incentives and tax breaks for multinational companies (Ndikumana 2013).
The debates in fertiliser have been narrowly framed in terms of factors such as high transport costs, and have diverted attention away from the conduct of the main firms (IFDC 2013). The firms cast themselves as partners to government in making investments to improve ports and logistics, just as key investments were made in cement, while at the same time firms inflated the prices.
It is therefore not market failures or weak institutions which underlie policy failures but rather the nature of elite alliances (Whitfield and Buur 2014). The shifting nature of these alliances has played an important part in changing outcomes in some countries. This points to the potential for positive changes. In particular, the disruptive entry by Dangote in cement and by ETG in fertiliser has impacted on prices in a number of countries including South Africa and Zambia. Competition authorities have played a part in making the nature of business strategies clearer and in the revealing of information. However, the power of elite interests in many countries may mean that direct enforcement is unlikely or ineffective, while the arrangements themselves are increasingly sophisticated and internationalised.
Competition, and the work of competition authorities, is better understood as part of a set of measures by which power can be disciplined, although there are clearly limitations as discussed. The competition enforcement needs to be accompanied by appropriate regulations to discipline the conduct of incumbent firms, and industrial policies to build capabilities, including constructive measures to support entrants. Rather than debates for and against industrial policies and coordination, critical engagement with these issues needs to assess the premises on which the policies have been formulated and the interests being served. This is part of an agenda which starts from a recognition of the intrinsic nature of rivalry and market power and the misrepresentation which is part and parcel of firms’ behaviour.
Conclusion
Countries such as Malawi, South Africa and Zambia have undergone a dramatic opening-up of their domestic economies over the past 30 years and have swept aside regulations based on a platform which is premised on competitive markets and limited industrial policies. The findings here indicate that tight oligopolies have controlled supply and exerted substantial power. There are also important feedback effects, as the substantial rents ensure intensive lobbying by business and an elite orientation focused on division of these rents rather than on productive local investment.
In cement, liberalisation following the period of government-sanctioned arrangements in South Africa ushered in a period of secret collusion absent any direct government disciplines on the conduct of firms and in the presence of a new competition authority, which led to much higher profits for the companies involved. The fertiliser case study demonstrates the power of elite interests in shaping and distorting the outcomes of notionally developmental subsidy programmes at the expense of targeted groups in Malawi and Tanzania, which have relatively high fertiliser prices. In each case, collusive arrangements operated covertly through industry associations exchanging information and secret agreements to maintain a façade of competition, reinforced by lobbying of government and posturing as ‘development partners’ or ‘advisors’. The promotion of business groupings and their interactions with government as part of the private sector-led development discourse has supported this façade.
Competition law enforcement in developing countries, particularly for young authorities, is constrained by resource and technical limitations, and needs to be understood as part of a broad set of measures to discipline market power, including facilitating new entry through appropriately crafted industrial policies. Competition investigations have played an important part in information revelation. In this context, large firms have misrepresented their behaviour and manipulated markets for profits, even as key investments were made as part of understandings with governments and political elites. This highlights the wider political economy issues which underpin many collusive arrangements, and the importance of understanding the nature of, and changes in, elite alliances and the interests being served by regulations, which can also be influenced by misrepresentation and distortion of markets on the part of firms.