Competition Commission on its 2017/18 Annual Report

Meeting report

Opening remarks
The Chairperson indicated that it was the final meeting with the Commission for the Fifth Parliament, and hoped that all questions for the Commission would be answered. The Auditor-General had briefed the Committee yesterday on the Commission’s audit findings. It was reported that the audit was sitting at 75% complete due to an omission, and that could still be rectified but it has not yet been rectified. Hopefully the Commission will respond to those concerns.

Commissioner’s opening remarks
Mr Thembinkosi Bonakele, Commissioner: Competition Commission, noted the Deputy Commissioner was absent due to other commitments. Other officials who would have been present were delegated to the Multichoice/SABC matter which was undergoing investigation as per the Constitutional Court judgment.

He thanked the Chairperson and the Committee for the support rendered over the years. The support was valued, and in society it was important that there was trust in the stakeholders mandated for enforcement. He believed that this was lacking.

The Commission is dealing with live investigations and matters; hence, it would not engage on certain matters because those live investigations would be compromised. Today he would speak to all the matters Parliament wanted to hear about. It was important that Parliament supported the authorities to ensure that their credibility was not compromised. The presentation was comprehensive, but also provided a snapshot of the past five years to bring things into context.

Briefing by the Commission on its 2017/18 annual report
The Commissioner said the economy showed slow growth and unemployment sky rocketing to higher levels in the country which experienced a recession in the last quarter – these speak to the higher levels of poverty. This also speaks to competition law as it assumes that we are pursuing efficiency goals, but with these adverse circumstances efficiency goals tend to be compromised. When certain companies run to Members of Parliament to cast aspersions on the Commission, it was important that a stern and strong message was sent out to mitigate that behaviour.

The Commissioner outlined a number of priority sectors and indicated cases, to name a few:
- A big case was being pursued for Transnet on excessive pricing – ports and pricing structure on the ports of entry. The investigation is quite advanced and complex
- Important work was undertaken under the pharmaceutical sector for cancer and vaccination drug prices
- The taxi finance model came under the radar and there were excessive rates, and this was addition to the work undertaken on the public transport sector. There were clear inefficiencies picked up and subsidies was brought to the table by the taxi industry because the buses were subsidised.
- On energy, the Commission was at the final stage of the LPG inquiry on price fixing – it would soon be referred to the Tribunal for prosecution
- There is an investigation of Vodacom about the contract awarded to provide ICT technology for government and it is yielding positive results.

The work continues to pile up, and as mergers happen the numbers are increasing. In 2013, the Commission was sitting at about 300 mergers and that number has increased to almost 400. The cartel work load has also increased significantly over the years. The impact of mergers on jobs over the five year period reported that 136 952 jobs were saved through the work done by the Commission in that space.

The Commission levied R4.2 billion in penalties over the last five years. Staff retention has improved and it is above market average especially at management level. However, there is an increasing case load and complexity with more cartel cases and it will not stop with the increasing use of technology through algorithms in which prices are fixed. The Commission needs to adapt and resource itself in that space otherwise it will become more difficult to process these cases.

Litigation has been a challenge with many cases being bottle-necked and it leads to very high legal costs – the budget is now standing at just over R70 million from R35 million. The number is certainly going to grow, and the Commission is working tirelessly to in-source but it will continue outsourcing due to lack of capacity. This was the reason why R50 million was spent on a single firm and the opponents have ensured that this information was put out negatively in the public domain. The Commission was concerned about over-charging on these fees. He suggested that a benchmarking of lawyers fees needed to be undertaken by consideration of their daily fees, the quantum of the work they do, etc. when outsourcing to avoid a situation where the Commission was overcharged by law firms.

In terms of operations, in line with the growth of work, Commission started a re-organisational structure as it needs to position itself to be technologically advanced and retain the human capital necessary to undertake the increasing complexity of the work.

As for finance, revenue increased but expenditure far outstripped that revenue and it has increased significantly by 15%. The Commission incurred a deficit of R69 million. The Commission’s expenditure has been consistently increasing.
 
The inquiry undertaken in the health sector is costing the Commission a lot of money so far having spent R174 million and it cannot walk away from it now. There are so many vested interests and when you are trying to change how things work, even one move is expensive.  We have created the largest database of data collected during the investigation.

Audit Outcomes
The Commission received an unqualified audit opinion with the material finding of irregular expenditure.

The irregular expenditure was incurred over two financial years, and every year the auditors audit the process of procurement of services. When you are going to procure over R500 000 you have to undertake a tender bid process and if you are going to deviate, you must in terms of the Auditor-General’s understanding obtain Treasury’s permission. Treasury said that it would not approve the procurement of lawyers, and suggested that the Commission must create its own database and appoint from that database and if it deviates from that then it must be disclosed. This is available in writing. Now the AG has summed that expenditure for the past two financial years; hence that amount of R126m is so high.

The Commission met with the Auditor-General, Mr Makwetu, and said that it would not be a problem if this was agreed to with Treasury. They agreed with Mr Makwetu that the teams would meet with Treasury and there would be adjustments with these requirements and this was still ongoing. It was not the first time that this finding came to the fore, it happened in 2011 and it is then that the matter was resolved in accordance with the direction of the Treasury. There was a resolution then but in 2017 we are back to the same thing.

The Commissioner met with the AG on the 14 September 2018, both the AG and the Commissioner was present with their teams. Mr Makwetu was very sympathetic and understanding about the matter. The Commissioner was not challenging the outcome, and he would take responsibility for it. He had arranged a meeting with the AG and Treasury to find a resolution but that would be for the future.

The Commission indicated that it has resolved to host workshops for auditors so they can understand the type of work done by the Commission to avoid the same situation happening. He stated unequivocally that he hoped he was not perceived as defensive but he thought that the facts should be presented to the Committee, but he took responsibility for the outcome.

Discussion
The Chairperson was alarmed that Members of Parliament were interfering in the work of the Commission and stated that this was an indictment on all Members, especially if this was done on behalf of the respondents instead of the public.

Dr M Cardo (DA) commented on the interference stating that he was not aware of any politicians suggesting that the Commission should not prosecute the banks collusion case. It is not interference to draw attention to the judgment issued by the Competition Appeal Court in the Standard Bank case. Judgments may be overturned on appeal which is common practice but the Judge did note that the Commission was guilty of a serious breach of its duty of good faith because it had withheld certain information and failed to disclose material facts. He thus asked what the Commissioner would regard as interference on behalf of respondents and how it would prove that.

He referred to the irregular expenditure which was reported to be in contravention of supply chain management practice for forensic, economic and legal experts used on cases. He asked if any of those costs related to the work done by Ndzabandzaba Attorneys, Matlama Consulting and Cybertech Consulting. How many experts are on the database and how do you go about determining when deviations should take place. In the case of Ndzabandzaba Attorneys, he accepted the point that attorneys were expensive but it appeared that they were given a disproportionate number of cases, 31 out of 44 cases between 2016 and 2017 – is that not anti competitiveness in itself? How many law firms do you have on the supplier database for cartel cases and how is the work allocated?

The cartel workload has increased dramatically as shown in the Annual Report. He asked the Commissioner to comment on whether the Commission had a tendency of going after small firms instead of going after the big ones as there was an incentive. The total cost for Commission protection services was R14.9 million following various criminal acts against Exco members in 2017 – was the R14.9 million budgeted for and if not, where did the money come from? Allied with that, which Exco members were still utilising the protection services and how far is the State Security Agency with its comprehensive assessment of the security requirements of the Commission. Finally, on the extent of market concentration in the country, is there any independent research commissioned to substantiate the previous comments made by the Commission on market concentration in South Africa.

Mr P Atkinson (DA) referred to the Commission supplier database and asked if the Commissioner share the names of the law firms and other experts in that database. He asked if any internal documents were sent out to other firms to request quotations for the services required.

Mr S Tleane (ANC) commented that it was true that legislators must ensure and enforce accountability but the posture presented by legislators must not be that of pity politics games. We need to be seen as creating an enabling environment in which government institutions and law enforcement authorities operate without fear or favour. As the Commission looks back on the past five years, what is the rate of success by firms appealing decisions and compare that to the success you get?

The Annual Report stated that the Commission saved over 137 000 jobs, so what platform or publicity channels are in place to ensure that this message is communicated to the public given the plight of unemployment. Given the challenge of resources what would be a sustainable solution in the long term to mitigate this? On the judgment in KwaZulu Natal, the presentation states that an explanation was given by the Commission to the judge, but what is the Commission going to do about the judgment?

The Chairperson noted that the Auditor-General accepted the explanation but it wanted proof from Treasury to validate the explanation because normally when you apply to Treasury for a deviation, the channels of communication are in writing. So the AG’s issue is that the Commission did not produce such a letter or proof of the granting of the deviation. The non-adherence to legislation poses a challenge because it would serve as a precedent for others. This issue was raised in 2016 but it was not resolved then, and this was because we did not look at prior years. We are trying to ascertain if it was an error on the auditor’s side or not. This can be corrected and no one is accusing individuals, it was the pressures that the Commission was under that this situation occurred. With that being said, she praised the good work done by the Commission and the effectiveness of its outreach programme.

The Competition Amendment Bill seeks to address some of the challenges but the Commission must ensure that it plans effectively for its work. The deficit shows a lack of proper planning, and this needs to change. She commented on the re-structuring of the Commission that it was indeed necessary so the Commission can sustain itself and do away with the deficit. She asked about the percentage of employment of people living with disabilities in the Commission.

Dr Liberty Mncube, Commission Chief Economist, replied that in merger control we are asked to use a standard which looks at whether a merger is going to lessen competition and then we have to define the market by looking at the number of firms in that market, and then calculate HHIs which is a standard measure of concentration. What we have done is go back to the merger reports over a period of time to look at how the Commission defined the product markets, the market shares and HHIs in each report and that is aggregated to a sector level to provide a state of concentration in the market. In a competition setting, this is not controversial and we are looking at a static level of concentration at a point in time to work out what concentration levels are. The study revealed that in many products that we have defined we have concentrated markets.

No one has done it the way we have done it in South Africa; there are very few studies in the country that look at concentration. It is only the 2014 World Bank study that has looked at market concentration in South Africa, but that study focused only on the manufacturing industry with exports. It concluded that only five firms account for 93% of exports suggesting that it was concentrated. The claim was repeated in 2016 to argue that in manufacturing there are high concentration levels. There was a similar claim in the IMF and OECD work. They look at sectors but we look at sector and market concentration studies. There are product markets with high concentration levels which are grouped in the priority sectors as noted in the presentation.

In a merger report, there will always be differences of opinion amongst the economists.

Commissioner Bonakele added that even the Advisor to the President lists market concentration as a major problem, so we have to study the economy and it is hard to debate this with journalists who are not economists by admission. Business Day has written in its columns that it did not believe that cartels are a problem. The Commission seeks to work with SARS because it has a lot of data to try and understand this problem – it has data on exports and inputs, and if we can combine the data, it would be productive. The World Bank is also interested in this.

The Commissioner replied that we do not have a database for cartels but for the Commission, and this information can be provided with the list of legal firms, economists as well as forensic experts. In the country the Commission is the only agency that is trying to develop the expertise required by the country to deal with certain cases. Needless to say, the lack of the expertise is problematic, more especially for lawyers and economists – it takes so long to develop this. The Commission utilises two white economists and they are paid a lot of money because they are experts in Competition Law, and nobody has ever asked why we only utilise the two, yet if it were black economists, the Commission would be chastised left right and centre. In the past financial year alone there were three contested mergers, two abuse of dominance cases and about 80% of the work in those cases was done internally through the expertise developed within the Commission. The market is still very white and there is no expert that is black. Law firms are not interested in developing black experts in this line of work so the Commission took it upon itself to do so.

As for law firms, the rates charged by lawyers is too much, so it would be a profitable exercise to benchmark their prices on how much an investigation actually costs. If Bowmans charges R100 million for an investigation over one year yet you complain for paying a black lawyer an average of R12 million a year – why should we apologise for what we are paying the lawyer. That only applies if you allege an impropriety that the lawyer is giving the Commission kickbacks. This is the narrative repeated in Business Day, but it has no substance. Why have people not looked at why Bowmans charged SAA R100 million for an investigation, is it because it was done by Bowmans not Ndzabandzaba? These questions are fair but you must go beyond that otherwise we are stuck on this race question. We can provide fair answers to the question but people must also be fair to us. It was not unfairness to contract people that previously worked for the Commission, and fairness demands you look at the entire picture before casting aspersions.

Commissioner Bonakele said that Mr Kimi Makwetu told him that he was developing auditors and these black auditors would go to Mpumalanga and set up firms and he would give them work because it is his duty to develop them and sustain them. Whether they worked for the AG is irrelevant because the AG must produce black accountants, and the Commission must produce black lawyers. And after they leave we must give them work and if that is wrong, it must be so everywhere. He suspected that a storm in the teacup was being created. People can have opinion but must not manufacture facts.

The Commission has a database of lawyers, and it has a documented process of how to appoint people. We will have a case that must be pursued; we will look at the database which excludes Sandton lawyers because they are conflicted. If the case requires a specific set of expertise, this will be clearly stated in the database, and through a process of elimination which is documented we will arrive at a conclusion based on who is available, not conflicted, how much they are charging and their experience and then decide who to appoint.

The Chairperson remarked that the points raised were very relevant because dealing with transformation is a challenge – there will be opposition. She wanted to understand the point that if a white firm was paid R100 million why question paying R12 million to a black firm.

Commissioner Bonakele replied that he was providing comparisons for prices charged for investigations. Werksmans Attorneys charged just under R200 million for the PRASA investigation. This information should be requested so that we can understand why Werksmans was paid so much. Yet the Commission is questioned for paying R12 million to a black firm. Last year, the Commission paid about R80 million for the 100 cases for its investigations. Those with expertise would get a disproportionate amount of work, it is true that the work needs to rotate but capacity needs to be created. On the list Members would see that there are a number of firms that are utilised but just not as much. This is the same challenge with advocates. The problem is that skills are very limited.

The Chairperson said the Committee would like the Commission to do a comparison with other countries, perhaps in the BRICS, and ascertain the cost of legal fees for competition cases. Members were aware of the quantity of interns taken in by the Commission and developed to build the capacity of the pool of lawyers. She welcomed the point about giving work to former employees of the Commission; however, she emphasised that it needed to be done within the law. The main question was whether that was done within the law, if not, it cannot be entertained.

Mr Molatlhegi Kgauwe, Chief Financial Officer, said that the communication with National Treasury was shared with the Auditor-General's Office and the email correspondence with Treasury could be provided. Treasury seems to stick to principles when they respond to some of the questions posed to them and the AG was looking for something specific that talked to the point. The meeting held with Treasury and the AG will speak to this.

The 2016/17 clean audit was raised with the AG – we had a clean audit from the AG that year, and the appointment of experts was cleared. We are yet to have a discussion with the relevant stakeholders to ascertain what happened.

Commissioner Bonakele said that this matter will definitely be followed up and what will happen is that Treasury will have to clarify a particular process for appointment of experts. We are in a transitional phase to advertise for the reconstitution of our database and then Treasury said they are centralising the database so we still need to clarify with them if that will proceed. All the experts in our database will need to be put into that database as well, and we are currently re-looking at our procurement policy. Treasury will provide some guidance in terms of what needs to happen in the future. We also need to sit down with the AG so that the standard is made clear to us and we accept the outcome of the standard.

The AG did not target particular suppliers, they used a sample and after looking at that sample they asked about the process with respect to all procurement. When this information was furnished, the AG grouped the entirety of the process together with last year’s as irregular expenditure. Therefore, anybody the Commission procured from on the list was deemed irregular.

We do not have the information on the size of the firms we pursue readily available. The prioritisation in the Commission is very large businesses such as banks and construction. We debate a lot about the small firms and there are many of them. In the Eastern Cape we found that so many people in construction organise bids with their families but these are small projects but we have not prosecuted those firms. We will launch an outreach programme where we educate these people about the laws as well as the municipalities. We are alive to prioritisation, it may not be perfect but we could perhaps collect the data that would show the sizes of firms that we pursue. The Commission would prefer that Members asked the Commission directly about this and not rely on the commentary from media.
           
A Commission official noted that the smaller firms that are being investigated are not even brought up by the Commission but by third parties as formal complaints.

Commissioner Bonakele replied that Protection Services was a sensitive matter. We are witnessing a transformation - when these cases where just administrative and fines were imposed there were no problems but now the stakes are higher and we are seeing a lot of criminal elements. This information sometimes comes from dawn raids, and it can be very shocking. There are interim measures and we are waiting for the SSA to conclude the investigation. He was reluctant to get into details as this was very sensitive as people had been held at gunpoint. It is important for this matter not to be seen as just a problem of the Commission's making, and he would really wish government could take responsibility for it.

In litigation one does make mistakes, and we are not saying that the Commission does not make mistakes. The question is when is it appropriate for politicians to intervene? If the NPA prosecutes somebody and they lose and that person gets acquitted, should the politicians now get involved to review the case and want to fire the director? No, that would unbalance the system. Prosecutors would be afraid to take on the cases. There must be a balance.

Now a finding by a judge, the judge made an error and this is uncomfortable to admit as a lawyer. Where you have a clear dispute of facts before the court, it is respectful to allow the court to clear the dispute and it is not a debate between the Commissioner and Members of Parliament. If finally the court says the Commission acted in bad faith, then one would need to look at the materiality of the case and if there was bad faith. It would be better if it was the respondent that complained and then one could understand the possibility of the executive authority getting involved and intervening. We do not want a situation where Members of Parliament get involved in prosecutorial matters in independent institutions. For example, every person being investigated by the Public Protector potentially has a complaint about the Public Protector.

Mr Atkinson said that the finding raised by the AG was not being politicised. It is something that is in the AG’s audit report which Members should ask questions about.

Dr Cardo said unequivocally that it is not role of independent agencies to dictate to politicians what questions they should ask.

Commissioner Bonakele said that politicians should not interfere with dispute of facts and it should allow the courts to clarify the facts. It is his duty to defend the independence of the Commission.

The Chairperson commented on the interference of politicians matter and said when one looks at the audit by the AG on page 160, item 34, under financial and performance management, it says that sufficient guidance was not obtained from National Treasury for the procurement for the site visits which are dawn raids and utilisation of expertise of legal counsel for prosecution of cases as part of normal business operations conducted by the Commission. This resulted in numerous supply chain management irregularities by the Commission. Therefore, it is not fair that interference is claimed when Members ask questions because this information is in the report and Members are justified to ask these questions.

Commissioner Bonakele agreed that there is an audit query, and therefore provided context that one of the issues about dawn raids was that you cannot alert many people. When we approach a service provider, it must be one service provider and it must be a trusted one.

The Chairperson said the explanation must be provided on the management letter, and this was the final finding by the AG. The Committee understood the Commission but the issue is whether this was sufficiently raised with the AG.

Commissioner Bonakele agreed. He said the second issue was the court judgment and the Commission has a dispute of facts with the firms in question and he asserts that in fairness people should let the courts do their job. The Commission has some very sensitive and damning information and it is working with the prosecutorial agency on the criminality involved in the matter. The information possessed by the Commission was very sensitive and this information was obtained through the dawn raids. Putting this information in the public domain would interfere with the investigation process and if this session was closed he would disclose it. Putting this information out in the public would be very risky, and this was still in the investigation stage.

The Chairperson said that this had been discussed and resolved before about when the Commission has a sensitive matter that cannot be responded to. Members have a responsibility to the public as well as the Commission to ensure that the work it is doing was safeguarded.

Dr Cardo said he was not clear about the material facts that were put in the public domain that could jeopardise the case. What material facts not already in the public domain were put in the public domain? And who was in charge of interference? This needs to clarified.

Commissioner Bonakele said there is a dispute about whether we disclosed an affidavit or not, and we have a whistleblower who provided the affidavit who is quite sensitive about what goes out. In fact, one of the breaches was that the manner in which the process unfolded was that the other respondents were able to identify the whistleblower. The whole thing leads to the identification of the whistleblower and it has not yet collapsed the case and the whistleblower’s cooperation with the Commission was now somewhat compromised. The Commission involved the criminal investigative authorities on the matter, and when they see this in the public domain, there would be some apprehension that the investigation is compromised. It is unusual to intervene at the investigation phase, and the matter is sub judice. We need to wait for the Constitutional Court to make a ruling.

The Chairperson said that Parliament does not deal with sub judice matters, there is a ruling on the case but the Commission appealed to the Constitutional Court. The response should have ended there.

Commissioner Bonakele replied that the Commission could still improve on outreach but for now it has been going quite well. He did not have the full report here on the rate of success for the Commission’s performance measures but it meets and exceeds its targets. For instance, on dawn raids, all the challenges on the warrant have been defeated. On mergers, there is a 100% confirmation of our decisions by the Tribunal and the courts. The Commission has more wins than losses before the Tribunal and the courts.

On people with disabilities, the Commission has 1.7% of its staff as people living with disabilities. It has 20 interns, and our system says that we must have up to 20 but in this financial year we decided to increase the number in order to develop the required skills. The programme has been revamped and the number doubled to also ensure that previously disadvantaged individuals get to participate meaningfully.

Commissioner Bonakele replied about funding, saying that this question belongs to the Ministry. However, tthere should be some consideration of the penalties that the Commission brings into the system even if a portion is ring-fenced for enforcement.

The Chairperson said if the Commission contributes about R4 billion, what does it mean by a portion. She suggested that the Commission conducts a costing in light of the new amendment legislation and motivate for more financial resources in order to meet its obligations as the Commission.

Dr Cardo asked if the market concentration study was publicly available.

Dr Mncube replied that the report was available but not the data set that informed the report with the names of the firms and their market share sizes.

Commissioner Bonakele said that some of the data might be sensitive in the sense of confidentiality but it is something that would still be considered. So it is not currently available.

The Chairperson asked how far the Commission is on Corporate Leniency Policy and on criminalisation and consulting with the NPA.

Commissioner Bonakele replied that the work has been very slow, and there has not been a prosecution of any criminal act of a cartel and a proposal was made but all role players must be brought together to agree. The major challenge is who investigates and who prosecutes as well as what kind of capacity they would draw from. The capacity resides with the Commission and the prosecution with the NPA.

The Chairperson thanked the Commission for its input and presentation. The Committee will wait for the requested documents so that it can consolidate its report.

The meeting was adjourned.