South Africa Targets Sasol, Arcelor in Cartel Breakup Push
South Africa is stepping up efforts to fight an unexpected legacy of apartheid: cartels in industries from supermarkets to steel that push up prices, deter investment and damp competition.
The Competition Amendment Act, signed into law by President Jacob Zuma in August 2009, will put South Africa among a minority of countries willing to put executives in jail for knowingly committing antitrust violations. Only one-third of the members of the Organization for Economic Cooperation and Development impose such penalties.
The Competition Commission got Sasol Ltd., the world’s biggest producer of motor fuel from coal, to sell almost all its fertilizer plants in July to boost competition. The agreement was the first in South Africa to require a company to divest units rather than pay a fine for breaking antitrust rules.
“Any potential investor is more likely to invest in a country where they are guaranteed fairness of opportunity in the marketplace,” Shan Ramburuth, chief executive officer of the commission, said in an interview in his Pretoria headquarters. “They’re comforted by the fact that there’ll be strong competition regulation, ensuring that markets are not contrived in any way and that transgressors will be dealt with.”
The initiative may help spur investment in South Africa and curb prices for inputs, such as steel, for manufacturing exports. The government says exports must be boosted to create jobs for the one in four South Africans without work.
“If you open up the market, on balance you’ll have more competition, better allocation of resources and lower prices,” said Jean-Francois Mercier, an economist at Citigroup Inc. in Johannesburg. “Greater competition is positive for the economy as a whole.”
Only 11 countries, or a third of OECD members, have laws that can imprison company officials in antitrust cases, said Antonio Capobianco, a senior expert in competition law enforcement at the Paris-based OECD, citing his own research.
South Africa joins Brazil and Indonesia as non-OECD developing countries monitored by the group that also make violations a criminal offense. The South African penalties, which include jail terms of as long as 10 years, haven’t yet come into effect.
Under U.S. law, a company can be fined $100 million, or twice the gross gain of the violation, or twice the gross loss to the victim. If the defendant is a big company, the fine under South African law of 10 percent of annual sales, which is similar to the European Union’s statute, could be “potentially a lot higher than the U.S.,” said Keith Hylton, a law professor at Boston University.
In the U.S., company officials who receive prison sentences of up to 10 years “committed the crime” and aren’t just passive observers, said Stephen Calkins, a professor of law at Wayne State University’s law school in Detroit.
Many of South Africa’s cartels were built up during apartheid, when sanctions banned trade in steel and coal and led companies, including Barclays Plc, to pull out of the country.
“A lot has changed, definitely for the better,” Bruce Lyle, managing director of fertilizer maker Nutri-Flo CC, which first complained to the commission in 2003 about excessive prices Sasol charged it for ingredients, said in a phone interview from the company’s headquarters in Umhlali in the eastern Kwazulu-Natal province. “It opens up the market.”
Three Times as Many
The commission initiated 31 investigations in the year through March 2010, involving companies such as Tiger Brands Ltd., South Africa’s biggest food producer, and Shoprite Holdings Ltd., Africa’s biggest grocer. That’s up from 23 in the previous year and triple the number in the year before, according to data from the commission. ArcelorMittal South Africa Ltd., which meets 70 percent of the country’s steel requirements, is being probed in four antitrust cases.
“The prevalence of anticompetitive behavior was much higher than we anticipated when we started our work,” Ramburuth said. “Collusion seems to have been very accepted behavior in the previous period.”
Zuma last year transferred responsibility for the antitrust regulators to Economic Development Minister Ebrahim Patel, a former trade unionist who has pushed for a crackdown on cartels. To boost jobs, South Africa needs “strong and consistent action to promote greater competitiveness” in key industries, Patel said on July 5, following the Sasol agreement.
Confessing to Price-Fixing
Leniency applications revised in 2008 made it easier for cartel members to seek exemption from prosecution if they confessed to price-fixing and disclosed details of collusion. That spurred the commission into action, allowing it to initiate investigations, refer complaints and recommend penalties to the Competition Tribunal. The Competition Appeal Court is the final arbiter in antitrust cases.
“We are seeing a commission that’s becoming increasingly aggressive in its technique,” said Nick Altini, a director in the competition department of law firm, Cliffe Dekker Hofmeyr, a member of Chicago-based DLA Piper LLP, in a phone interview from Johannesburg.
The commission’s approach, including its push to impose maximum penalties for cartel members and investigations that stretch on for years, has raised business concerns that investment in South Africa may fall.
“Why would people come here to invest if this is the scrutiny they will face and you have a Competition Commission that’s motivated by patriotism or ideology?” asked Richard Downing, an economist at Johannesburg’s South African Chamber of Commerce and Industry.
Omnia Holdings Ltd., South Africa’s largest fertilizer maker, said June 9 that a seven-year investigation into collusion had resulted in “significant legal costs” and occupied “an enormous amount” of management’s time. Rod Humphris, Omnia’s managing director, declined to comment further, he said by e-mail.
The World Bank supports the antitrust push, saying in a July 29 report that South Africa is still characterized by “excessive concentration” in the economy, backing up the case for a more “activist” competition policy.
South Africa’s four biggest lenders account for 85 percent of total banking assets, the central bank said in a March report, while the four largest grocers accounted for 60 percent of industry sales last year, according to the commission. In the U.S., the top five banks held 38 percent of deposits as of the third quarter of 2009, the Federal Deposit Insurance Corp. said in a report on its website.
Johannesburg-based Sasol said in an e-mail on Aug. 20 that its action doesn’t mean it’s guilty of the offenses. The company, South Africa’s biggest ammonia producer, wanted to take a “proactive position” on the investigation, which began in 2003 and had “created continued uncertainty” for its business, Sasol said.
“This kind of remedial action is a welcome move,” said John Purchase, chief executive officer of the Pretoria-based Agricultural Business Chamber, which represents banks, including Absa Group Ltd. and suppliers of farming services, such as Afgri Ltd. “This is not just about slapping fines, but it’s about solving the problem.”
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