Competition policy, industrial policy and corporate conduct

Simon Roberts

3 July 2012

Paper written in personal capacity, does not reflect the views of the Competition Commission

Introduction• Expansion of competition laws, vigorously promoted by IFIs, USA

o ‘one size fits all’ form aimed at minimal intervention to correct market failures (‘cartels’)

• Industrial policy and competition policy conflict or complement?o Competition means removing constraints, industrial policy is about imposing

distortions and constraints to meet government’s objectivesOr:o Competition requires effective rivalry, this means need a number of firms which might

require industrial policy to support entrants and smaller firms• In practice there is great diversity in competition regimes• Are competition institutions only appropriate at a stage of development where

they will not be undermined by powerful business interests? o North, Acemoglu & Robinson – competitive markets as part of ‘open access’ (note:

antitrust in US promoted by farmers)• I argue that competition policy needs to be viewed in context of policies to

address orientation and conduct of big businesso Competitive rivalry is important source of disciplineo The approach and conditions vary by country

Competitive rivalry and industrial development

• Orientation of big business is central to countries’ industrial development– Investments to adopt and adapt new technologies, realise economies of

scale and scope, build production capabilities, skills– Nature of relations with smaller firms is important for their development

also• Rapid industrialisation to ‘catch-up’?

– ‘Unbalanced’ growth through interventionist industrial & trade policy; this context is explicit in mandate of Korea FTC

– Discipline needed to ensure firms build new capabilities rather than entrench positions to extract rents – the evolution of ‘business enterprise systems’

– Different sources of discipline – using export performance; contests for state support etc, as part of wider framework.

– Dynamic rivalry and ‘optimal’ competition – competition relates to behaviour not structure

Practice of competition law in developing countries

• Competition law, under wider competition policy framework, embodies particular choices

• Competition law and tests should depend on country conditions – especially tests for abuse of dominance– Entrenched incumbents? May be created by state, now may be TNC owned.

• Competition policy and law in practice reflects local factors, in terms of influences and needs– SA law reflects fear of ‘business confidence’, need for ‘certainty’; and fear of the state

– independence and checks– KFTC – took USA law, and adapted it to ‘free and fair competition’, promote ‘balanced

development’, meaning a very active set of instruments addressed at large firms, chaebols

– New law in 1981, 1987 – addressing ‘unreasonable’ practices and ‘unjustifiable’ restrictions on competition, including subcontracting arrangements

– KFTC promoted ‘shared growth’ of large firms and SMEs, synchronised with industrial policy

– Other countries with laws not implemented but notionally independent institutions

South Africa case study• Two different motivations:

– addressing apartheid legacy of concentration of control – as part of making liberalisation work Reflected in tension between broad objectives of law, and specific,

narrow provisions relating to particular conduct

• Act following international best practice (Australia, Canada, EU)• Independent institutions, with strong legal checks on their action

– separate Commission, Tribunal, Appeal Court– Mergers – substantial lessening of competition test; public interest test– Cartels– Abuse of dominance – separately specified contraventions; pro-

competitive defences• Very concentrated economy: 1994 – Anglo-controlled companies

accounting for 43% of JSE; top six conglomerates 84%

Outcomes?• Mergers

– Pre-merger notification above thresholds meant around 400 merger to evaluate per year

main area of work for first 7 years• Cartel prohibition: agreement or concerted practice which is:

– direct or indirect price fixing, market division, bid rigging; or– has SLC effect (no penalty for first offence)– Dependent on pro-active enforcement to identify, together with Corporate

Leniency Policy 125 leniency applications over three years– cartels coupled with exclusionary strategies

• Abuse of dominance:– Exploitative (excessive pricing)– Exclusionary abuses– Over 12 years, only 18 cases referred to the Tribunal, plus 2 settled prior to

referral = 20– long and drawn out cases, extensive legal proceedings, often 3-5 years from

referral to hearing.

Of the 20 abuse cases:• To date 9 decided and 5 settled• Tribunal found abuse in 6 of 9 cases on which it ruled• 2 over-turned on appeal (Sasol-Nationwide Poles, Harmony-

Mittal) 4 cases where finding stands: South African Airways (2);

Patensie (agric co-op); Senwes (former agric co-op)• 3 of 5 settlements with substantive undertakings (Sasol Nitro,

GSK&BI for ARVs, Foskor)• Former state-owned, regulated and/or supported in most

cases, protecting existing monopoly margins:– SAA(2); Telkom (2); Sasol (3), Foskor; Mittal Steel (formerly Iscor)– Cigarettes and beer (SAB, BATSA)– Forestry and agriculture (Safcol, Patensie, Senwes, Rooibos, Astral)

Example of fuels, chemicals, fertilizer• Initial development related to:

– requirements of mines and agriculture– Apartheid state concern to reduce dependence on imported oil

• Sasol, as infant industry (now grown up), and Anglo subsidiary• State providing capital; infrastructure• Source of discipline? Interests of constituencies – agriculture, mining.

– regulation (of fertilizer, fuel)• Firm strategies - adapting to liberalisation?

– control inputs – access to alternative feedstock (natural gas)– raise entry barriers – downstream firms with outside options, include them in coordinated

arrangements– consolidation – attempted two mergers

• Fertilizer and polymers – by-products from coal to liquid operations• Liberalisation ≠ competition• Other levers?

– Infrastructure; fuel regulation; mining rights?– Or: competition law??

Competition law and corporate conduct in Southern and East Africa

• Arrangements by and between large companies operate across region, examples:– Beer

‘This agreement enabled us to develop opportunities’, justified, Najil Fairbass, SABMiller Communications Director. Before adding: ‘There may be antitrust laws at the national level, but none covering the continent. I don’t see what the problem is.’ (Philippe Perdrix Le marché de la bière africaine monte en pression Jeune Afrique 10/09/2008, cited in Jenny, 2009)

– Cement: cartel across SACU– Construction: bid-rigging across continent– Fertilizer: overland market, including ‘Export Club’

• Entry also easier from adjacent markets (in the region), for example, poultry (from Zimbabwe/Botswana); steel rolling (from Kenya). – potential entrants can also be undermined such as ArcelorMittal acquisition in

Mozambique.• Rivalry more likely across the region rather than in individual countries, if are

substantial scale economies• Regional Comesa authority

Conclusions• Competition law is part of framework for regulating conduct of large

corporations; as is industrial policy• Competition does not result from liberalisation, nor simply in the absence of

explicit cartels – is about effective rivalry• Choice of model for competition regime matters

– diversity of options: free competition, prosecutorial model; or fair competition standard in administrative model (Germany, Korea)

• Depends on institutional capabilities• Will regimes simply be undermined by elite interests?

– depend on mediation of interests, – provides information/insight into business practices even in absence of effective

sanctions• Examples from e.g. Kenya, Tanzania, Zambia point to building of popular

support, pressure for greater powers, autonomy leading to laws strengthening authorities (e.g. Tanzania ruling on Breweries)