*** UPDATED *** 12th May 2012
The best quote we have come across, and which describes the issues of competition debates:
"I wouldn't give a fig for simplicity this side of complexity, but I'd give my life for the simplicity on the far side of complexity".
Justice Oliver Wendell Holmes
Nationwide Poles vs Sasol – Price Discrimination - The Sequel
In the seven years since the Competition Appeal Court decision finding in favour of Sasol, I have not published any comment. Now, at last I feel it is time again to review the circumstances and offer some opinion on the subject. The absence of prior comment does not mean that we have discontinued our efforts to see a free and fair economic system, we have merely not been visible. We continue to assist others in our own quiet way, with the time we have available.
It is proper to say that the decision against Nationwide Poles was a great blow, personally and to the staff of the enterprise. Within three months of the decision, it had become painfully apparent that the business could not survive in the circumstances it faced. The business closed on 28th February three months after the Appeal Court decision. Simply put, we could no longer justify contributing to the general economy without reasonable expectation of profit (and salaries).
At that time the business was costing us about R 20,000 per month caused mostly by the then strength in the Rand affecting wine prices and hence pole demand, with the inevitable knock on effect on the pole industry in general. Our larger competitors survived however, mainly we feel, due to favourable supply terms from wood supplier MTO and Sasol. Simply put, in times of good market potential it is necessary to acquire reserves to be applied in more difficult market conditions. In bad times, the disparities in supply terms become fatal. In our view, while the long term effects of dis-favourable supply terms in a competitive market are inevitable, the timing of these effects is however less determinable.
In context, I am advised and experience tells me that a return of about 10% on sales is considered generally good in the manufacturing sector. For a large business appropriately geared at say 50%, this equates to a return on share-holders investment of about 20%. For the smaller business where funding is generally without gearing, the return on share-holders funds is halved. When one deducts the 4.5% of turnover additional cost of creosote charged to smaller treatment plants, the return to the smaller business shrinks even further. In comparison then, the shareholder return of 20% to the larger competitor should be directly compared to the at best 5.5% return offered to the smaller competitor. This was the significant factor that weighed heavily against the survival of the business. In the absence of supply side pricing and supply parity, there was no reasonable prospect of return on shareholder funds.
I have on many occasions during the past seven years written comment for inclusion into the comphelp.co.za web site. Until now I have refrained from making these comments public. On review, the tone of these commentaries has changed over time, from the initial bitter and devastated reaction to an acceptance and now finally a quiet determination to set the matter right.
The Appeal Court hearing has haunted me for a long time and it is cathartic to now write of this. For many months, I felt that I had let the side down and that our submissions had been less than convincing. Again on review, this was largely due to the broadside unleashed by Adv. Unterhalter for which we were very much unprepared. I had been led to believe that only those things submitted prior and during the initial proceedings were permissable in the Appeal Court. And we had wrongly prepared on this basis. This having been said we have also been complimented on our presentation, so maybe we are being overly critical on ourselves.
More than anything else, I have had a need to satisfy myself that we had explained our position properly. For this reason we have requested a copy of the Appeal court transcript for our own review. This has not been made available to us despite many requests, both to the Registrar and CAC itself, making further review and possible appeal to SCA impossible.
Much has been written about NWP vs Sasol in many forums. Having now had the benefit of a number of reviews of the case and much of it public, we are of the view that somehow things just turned out wrong – for all concerned, Sasol excepted. We have heard many reasons why we lost the case, not all related to the merits. And this commentary comes from generally reputable and informed sources. The reasons rumored and shared with us have changed over time as one would anticipate. Generally, I believe the overall view from those that have examined the case in detail is that we ought to have succeeded in our endeavours. I still believe the case we put was genuine, within the boundaries of the Act and reasonably proven.
Our failure has much in common with the history of anti-trust law in the USA, until the Morton Salt decision effectively settled the matter. Prior to that case, the refrain was that the effect on competition had not been properly proven, as decided by our Appeal Court in our matter. We had asked the CAC to provide direction for those that followed in this regard. We asked for this consideration because we believe the practice of price discrimination itself must significantly affect competition in the long run. And in any event, what exactly is a "substantial prevention or lessening of competition"? We never had and still have no idea precisely what this entails. Is it the effect on the market generally or the effect on the complainant or the effect on the respondent? And if the former, how does one prove something that could otherwise have been? I’m not convinced it is possible to ever prove a substantial effect on competition (at best a nebulous and slippery concept), other than to say that the long term anti-competitive effects of price discrimination on the disadvantaged competitor are self-evident. This view is incidentally explained and put in the annals of competition law in some detail in the Morton Salt judgement.
What has not generally made public is the views of the Competition Commission upon hearing the verdict in our matter. It’s view was that view that all is not lost in price discrimination cases. In reality however, our view is that cases of price discrimination are now regarded as dead in the water and not worth pursuing. We feel this view arises for three reasons. Firstly the costs of prosecuting a matter of this nature are prohibitive, given the hurdle that has now been set or not set in the absence of CAC commentary. Secondly, protecting the interests of a single small business appears not to be sufficiently newsworthy to justify the resource spend given scarce Commission resources. Thirdly, the Appeal Court has signaled that it protects competition and is not interested in protecting competitors. Discussing now each in turn:
1) The height of the hurdle set by the Appeal Court cannot be met by the resources of a single small business. It is essential therefor that the Commission take the lead in any future price discrimination case. It is my view that it is unlikely that a small business will be able to sustain and survive a price discrimination matter on its own. Sound economic reason suggests that should the Commission issue a letter of non-referral, then this will be the end of the matter.
2) Whether we like it or not, the Commission is constrained by resources, both by way funding and also its own views. As with all state enterprises, the Commission is effectively a tool of the State, and accordingly affected by political will. If money is the issue, one has to wonder what happens to all the penalties paid in consequence of recent investigations. Since the Commission is clearly a very profitable endeavour, additional budget should not take too much convincing. But would the costs of prosecuting a small business interest bring the same return. We think so, there is no reason to believe otherwise.
3) The newsworthiness of the action of protecting the interests of a small business is vastly different from an industry wide collusion investigation. It has been noted that the Commission has not prosecuted a single small business matter brought to its attention. Also noteworthy is how small business cases have been dressed up into industry wide investigations. The fact is that the Commission has not prosecuted a single matter on behalf of a small business. And yet, a reading of the Act in its entirety suggests that this is a prime cause for the establishment of the Commission. We conclude that the Commission is constrained by its own views of its role in Competition issues.
4) Turning now to the matter of protecting
competition or competitors. We have often wondered how
Competition can be protected without simultaneously protecting
Competitors. And we
indeed argued this point in the Appeal hearing.
In this regard at least two aspects and perhaps more
come into play. Firstly,
the Act clearly permits a civil action based on an
anti-competitive finding. This
implies that aggrieved Competitors should have recourse against
those abusing the Act and affecting their ability to compete. In our view, the
correct doctrine is that the law is there to punish and prevent
recurrence of anti-competitive conduct if found, thereby and
henceforth protecting market competitors by making competitive
abuse a less than appealing practice.
A civil action for damages caused by anti-competitive
conduct is simply a by-product and conclusion of Competitions
enforcement. But it
does not change the fact that civil recourse consequent upon
competitive abuse is inherent in the process and the protection
of competitors is an implicit outcome in the Act. This outcome
exists regardless of what the conventional "protect competition
not competitors" wisdom may be. Competition and competitors
cannot be separated as each is essentially inherent in the
presence of the other.
5) Secondly, in our view, the oft quoted doctrine of
protecting competition rather than competitors generates a
subtle but important change in onus that favours the abuser. It
suggests that unlawful activity by a competitor (as made
unlawful by the Act) should go unpunished as long as competition
(whatever that means) is unaffected.
This premise ignores the fact that the whole market
construction may be historically skewed and flawed. But
here is the crucial part, it changes the onus to the
complainant to prove that Competition will or has been be
affected. Unlawful competitive actions should be
presumed to affect competition otherwise how could they be
unlawful? The onus should then be on the transgressor
(all else being equal) to prove that competition was not
The doctrine also suggests that if caught, the transgressor need only change future behaviour in order to reinstate competition. This is a disingenuous view as it ignores what the competitive position and the beneficial effect on consumers and competitors might have been but for the anti-competitive conduct. It also fails to address what the competitive profile in the market may have been but for the anti-competitive acts.
6) The traditional doctrine of not protecting competitors has found much favour amongst those accused of anti-competitive conduct. It permits them to deflect attention from their particular conduct to a review of a more generic and market orientated consideration. It permits the import of market dominated effects (and all the speciality evidence that this entails) into localised and specific circumstances. Implicit in competitive effect is proof by way of prior based evidence on a future competitive position, a proposition unachievable by ordinary mortals and by its predictive nature one full of doubt. For this reason, we are wholly against this most onerous burden of proof, none should be afforded favour or advantage by way of burden when investigating specific or particular anti-competitive acts.
7) If one is focused on protecting Competition, then it is essential to understand that anti-competitive conduct is, by definition, aimed at creating or affording to a competitor an advantage relative to other competitors. Always, either in the first line or in the second line by way of alternative advantages accrued. That's why the abuses are contained in and made unlawful through the Competition Act. Since one or another competitor is favoured by anti-competitive conduct, it is necessary to:
i) punish the causative conduct of competitive abuse in order to generically rectify the now less than competitive state of the market,
ii) create some specific restitution as to what historically should have been but for the anti-competitive conduct and
iii) to act as a warning in the future to others not to try the same tricks.
In achieving the aforementioned, one or another market competitor must then be advantaged from their original disadvantaged position. i.e. a competitor is protected at the expense of another competitor in order to protect competition in the market. After all, the initially advantaged (and now punished) competitor is now disadvantaged relative to their initially relatively favoured position. By protecting a competitor, simultaneously competition is enhanced and restored.
8) The one crucial area that we struggled with was how to prove the effect on competition. The Act requires that for a price discrimination case to succeed it must prove that competition is substantially prevented. So difficult was this question that we asked the Appeal Court to give direction for those that follow. This it failed to do. But that having been said something has come to light which may ease the apparent burden. And it has to do with the definition of the word “prevent”
The word prevent means to stop, keep or hinder from doing something, and it is this sense of the word that we feel is applicable in the relevant section of the Act. Note the meaning includes “to hinder” as well as the absolute sense of stopping something. We never appreciated this nuance and it is to our regret that we never fully understood this extended meaning of the word prevent. Had we done so at the time, our argument which was put forward would have appeared much stronger supported by the definition (Shorter Oxford).
As I recall, we argued in the Appeal Court that Sasol’s actions did not stop us from competing in an absolute sense, but that the reduction in profitability affected cash flow and hence resources available to compete. And that this effect was substantial to us and our business. Also that by implication this effect would be similar on other similar sized small businesses. And that the combined effect would be to substantially affect competition generally in a negative sense. (I did not have the specific word “hinder” in my mind at the time we argued the matter.) I remain convinced of the truth in this argument and it is self-evident in my view. This inevitability of effect is supported by the rationale so clearly elucidated in the Morton Salt matter and the historical developments leading to this visionary precedent.
Turning now to other matters:
The general economic thesis argued in favour of consumer good, namely that greater economies of scale will ultimately lead to lower prices is in our view, fundamentally flawed. In essence, if economies of scale always resulted in lower prices and hence consumer benefit, the economies of scale must result in competitive advantage to the firm which controls and can sell the largest volume of a given good. This competitive advantage would, all things being equal, translate into the lowest prices and hence ultimately the sale of all goods produced. Smaller competitors competing for the same market would all go out of business due to higher input costs and higher marginal costs of production. This would lead to increased investment and lower marginal cost by the largest producer (with associated fall out of smaller competitors due to pricing pressures) until the point is reached where monopoly supply prevails. If this argument were true in all respects, all supply would be dominated by a single global supplier, the logical ultimate end game of the thesis of consumer good through economies of scale.
Regrettably, I have little faith in monopoly commerce, of its own free will, applying benevolent consumer friendly pricing strategies. Because the fundamental aim of business is to acquire and distribute wealth to its owners (and as a by-product, bonuses to its management), the profit maximising pricing strategy will prevail. But since potential competitors to a monopoly market are aware that marginal pricing as a competitive weapon will soon drive out any new competition due to lowest costs of production generated by economies of scale, there is no incentive to invest in and compete in a monopoly market. And if the aim is to promote competition and consumer choice, it follows in this line of thought that extremes of economies of scale are in essence bad for the consumer due to the inevitable ultimate presence of monopoly supply and pricing.
What becomes clear then is that economies of scale are a good thing and bad thing up to a point. When economies of scale generate lowered costs of production which in turn drive out competition, then the very same economies of scale that initially advantage consumers become an ill that promote and support monopoly pricing. Where then is the tipping point in this equation? And when exactly do economies of scale become monopolistic profiteering? And who is to determine precisely when this happens?
Not being a qualified economist, I would
suggest that the point would differ according to specific supply
in a market and the nature of the capital required to invest in
the business. No
doubt someone clever will one day answer this question based on
empirical research. Until
then we need recognise that all economic argument is rational
only in context. Our
view (and indeed that of the Court) is relevant only to the
frame of reference which we observe or are led to observe. In the real world,
context and frame of reference changes daily, weekly and
annually, depending on the nature of the business and particular
demands placed upon it. This understanding must bring into
question the whole concept of market analysis and review as a
tool of competitive analysis.
Also in retrospect I would like to touch on the aims and purpose of the Act. It is clearly linked to ensuring a competitive economy. But there are other issues that are also covered. The preamble mentions small business and disadvantaged persons as being particularly important. I am advised that generally, legal interpretation (in SA) does not generally consider the preamble to an Act. The aims and purposes of an Act appear to be superfluous to the meaning contained in an Act when read in context. This I cannot change, it is past legal doctrine.
But what if the legislature specifically directed the Courts to take into account the aims and purposes of the Act in question? Does this change the rules of the game? When the new South African Competition Act was passed, a reading of Hansard reveals some peculiarities which are perhaps unique. Firstly the house was unanimous in its views, the new Competition Act was supported by all parties in the legislature. Secondly, much emphasis was made on what the Act was expected to accomplish. Finally, as recorded in Hansard, the then Minister of Trade and Industry specifically directed the Courts to take into account the Aims and Purposes of the Act.
My reading of Hansard in this regard is
interpreting the Act, the Legislature intended that the Aims and
Purpose of the Act should be taken into account by the
judiciary, so said the House as it was recorded.
This point we argued in the CAC, but no mention of this
was made in the judgment, strangely we thought, as it is a vital
and very important part of the Act if the Act is to fulfill its
intended societal role. The
preamble provides direction and context and the most important
thing of all, the frame of reference within which Parliament
intended the Act to be construed and interpreted. Did the
CAC miss a golden opportunity to bring about necessary and
appropriate change, well we believe so.
Not being legally qualified, it seems most strange to me that clear direction from Parliament is ignored even in the presence of specific direction to the jurists. The view of the dispassionate outsider towards competition jurisprudence is somewhat jaundiced due to prior experience. This is I believe generally acknowledged (the long existing and ongoing spat between the CC, CT and CAC refers). That having been said, it is hard to conclude that the wishes of Parliament should be ignored particularly in light of the unanimity of consensus of the Act when at Bill stage. What is particularly hard to understand is that legal technical argument should override the express wishes of our primary governing authority. It is wholly indefensible in these circumstances that the aims and purpose of an Act should be effectively excised and ignored when considering the Act's application.
Also all, in terms of our constitution, have a right to work. Implicit in that right is the right to fairness and equity in the workplace, a theme not uncommonly expressed in the labour environment. This is reinforced by the principles of natural justice, a recurrent theme in history and I believe a fundamental building block of our constitution. If the concept of fairness and equity is valid as a primary social concept or construct, then it should be held equally valid in the relationships of commerce, and by extension between competitors themselves. And this fairness and equity should be enforced as intended by the Act. Only once the playgrounds are fair and level can Adam Smith's invisible hand of of the market freely effect its own justice.
The presence of competitive disadvantage in a market mandates that one competitor is favoured above another. And by implication, that the advantage so gained is to the benefit of one competitor and to the prejudice of another. The advantaged competitor (generally the larger competitor) has greater resources to withstand the tides of commerce whilst the latter bails tirelessly in efforts to remain afloat. Being a cut-throat commercial world, the advantaged competitor presses home the gains when the other competitor is most disadvantaged. The laws of commerce dominated by personal interest and pursued without relent. In these circumstances, it can then be argued that decisive and marginal based pricing flowing from unfair competitive advantage will lead to the inevitable and ultimate demise of the latter.
Only once the playing fields are fair and even, can the spirit of commerce truly flourish rewarding those that take risk and come through relatively unscathed. Only once the principles of fair and free competition are established can our economy and its peoples emerge from the economic apartheid of the past. Then alone can the shackles of oppression be struck free by the self-determining right to be the best that one can be and to make of individual what one can.
Only once the principles espoused in the Act are taken as its intent and as a lighthouse for our jurists can the principles of fairness become reality in commerce. Absent this direction, technical juristic argument prevails to the ultimate detriment of broad based commerce, and thence to society at large.
Much has been written about the various schools of economic thought in relation to competitive matters. This again goes into detail at a factual level specific to each matter heard. And this is a good thing – as long as – fairness and equity prevail in markets resulting in the ability to work freely, fairly and equitably.
The principles fairness and equity in the
workplace cannot justifiably be argued against (the alternative
being anarchy). The benefit of free and fair economic trade
appears to be fundamental to our whole economic structure and
societal well-being. If
these prepositions hold, it then seems to follow that fairness
and equity (including competitive fairness and equity) in the
commercial world is by implication entrenched in the
constitution through the right to work. If they do not
hold. then we face entrenched economic subjugation through a
distorted invisible hand.
Even now, I find it impossible to contemplate the intricacies of competition law without a guiding beacon to direct my own enquiry and focus. The intricacies and arguments on the subject are detailed, many and contrary and consequently always there will be doubt. Nothing it seems is ever simple in competition law. Complexity of evidence and procedure are inevitable and this appears to weigh heavily in favour of the status quo. (If a person does not understand it, how can they possible rule against it?). This leaning due to the creation of doubt is particularly onerous as defendants have every economic motive and opportunity to appeal and appeal again until finally the complainant ceases to exist.
It is my view that for this reason that the
aims and purposes of the Act were so drafted and incorporated in
the preamble to the Act. They
are intended and present to give primary direction and guidance
in areas of massive complexity. (And hence the quote
And anyway, what’s wrong with principles of fairness, equity and impartiality? It seems to me that all law is or should be founded on these principles. It seems to me that our new South Africa was founded to avoid in the future and undo the unfairness, prejudice and inequality historically previously prevalent. It is time now to undo the historical blights of skewed advantage still present in our economy and enforce fair play. Indeed the time to do so is long overdue. It’s time overdue to create fertile ground for new businesses to grow. It's time the Competition Authorities played their part to that end, bravely and without fear of consequence.
In my view, competitive fairness ultimately creates a bigger and more equitable cake for all, once the adjustments in previously distorted economic investment practice have occurred. In achieving this, some will be relatively advantaged, others disadvantaged. And just maybe, maybe a competitive economy could be a good thing in the long run for all that participate in that economy. For none should be favoured either by history or by unwarranted advantage in a truly great country. The creation of a truly great country must as a society, be our aim and vision. And as our constitution demands it, so in this vision should equity, fairness and impartiality be. And these are the guiding lights of our Competition Act. How we get there and by when, in the final analysis, is I guess up to our Courts to decide.
I hope this helps someone, somewhere, sometime. If this is so, then we
have achieved that which we intended.
Nationwide Poles & Jim Foot
Updated 12th May 2012
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Disclaimer: This site does not profess to offer legal assistance or interpretation. It’s content reflects the view and experience gained by of the author during a hearing at the Competition Tribunal of South Africa. It may help you to figure out what happens & why.