New teeth for Competition Commission

Posted 01 April 2013 Written by Ciaran Ryan

New powers granted to the Competition Commission are likely to be put to use in the healthcare sector, which government suspects has engaged in anti-competitive behaviour. It’s a pity that these new powers will not be applied with ferocity on state-regulated sectors such as energy and telecommunications, where inflationary impulses fester and multiply. 

As of 1 April 2013 the Competition Commission has powers to conduct market inquiries without waiting for someone to complain of anti-competitive behaviour. Until now, the Competition Commission has been largely reactive, waiting for someone to alert it to competitive misbehaviour. This will now change.

Healthcare is a worthy subject for investigation, given that cost increases have been running well above the national consumer price index of 5,6%. But a better target for investigation, in my opinion, would be Eskom and its ruinous impact on the economy. Or telecommunications. That happy day will come when unstoppable economic forces compel government to abandon its deluded faith in central planning as a solution to service provision.

Runaway healthcare costs is a story that seems to have changed little in the last 10 years. I remember writing about it in the mid-1990s, when the solution was supposedly to crack down on medical fraud, place caps on claims by service providers and introduce standardised medical protocols to prevent over-medicating patients. (This is a different story altogether that we shall tackle in a later post, though medical inflation is typically higher than CPI due partly to higher utilisation of medical services as the insured population ages).

In a recent presentation to the Parliamentary Portfolio Committee on Economic Development entitled Market Enquiry into the Private Healthcare Sector, the Competition Commission said there were certain unique characteristics in the healthcare markets, such as information asymmetries (ie. not everyone has access to the same information at the same time), agency relationships and distorted incentives.

Constitutional objection likely

The healthcare sector is almost certain to raise a constitutional objection to the new amended powers of the Competition Commission, which have been described as “massively invasive.” Werksmans Attorneys director Neil Kirby says the inquiry is likely to look not just at the nature of price determination in the industry, but “the interactions between selected segments and their contribution to healthcare costs.”

Kirby adds that any market inquiry into the private healthcare sector would have to recognise the degree of regulation already existing in the sector and the likely effects on the provision of healthcare services in South Africa. There are just 3,7 million members in medical schemes in South Africa out of a formal workforce of 8,3 million (13 million if the informal sector is included). A recent study by Alexander Forbes Health found that the costs of membership are forcing people to downgrade their cover or opt out of schemes altogether.

This, and the ongoing discussion around the introduction of a National Health Insurance Scheme, are factors that have placed the healthcare sector in the government's crosshairs.

Market inquiries are recognised globally as an important tool in promoting competition in the economy. A market inquiry is a formal inquiry into the general state of competition in a market for particular goods or services, without necessarily referring to the conduct or activities of any particular named firm.  The Commission can initiate a market inquiry if it has reason to believe that "any feature or combination of features of a market for any goods or services prevents, distorts or restricts competition within that market; or to achieve the purposes of the Competition Act as amended."

According to the Commission, the amendment provides for the conduct of market inquiries, including the selection, initiation, conduct and outcomes of such inquiries. The outcomes of a market inquiry may include recommendations to the minister for new or amended policy, legislation or regulations; or recommendations to other regulatory authorities in respect of competition matters. On the basis of information obtained during a market inquiry, the Commission may also initiate a complaint which may be settled or referred to the Competition Tribunal without further investigation, or that may be investigated further. The Commission may also choose to take no action.

Better for consumers

Will the Competition Commission’s new, sharpened teeth be better for consumers?

Sure, at least in the short run.

There’s nothing like the cold, harsh winds of an imminent Competition Commission investigation to temper the inflationary tendencies of the bean counters who nod and wink at their “competitors” as they crank out annual budget projections.

That’s called oligarchical behaviour. Sometimes, they’re not even discreet enough to nod and wink. They meet in the same room and brazenly carve up the industry to maximise profits for themselves, as has happened in the bread and construction and engineering sectors. In late 2006, the major bread companies upped the price of a loaf by 35 cents each. There was no attempt, seemingly, to disguise the nature of the collusion. The bread cartel, comprising Pioneer, Tiger Brands and Premier, as well as dozens of smaller companies involved in grain milling and storage, have so far paid R1,25 billion in fines, with more to follow.

The construction and engineering cartel is reckoned to have operated for decades and cost the country untold billions in exaggerated costs. The projects involved in this tender-rigging include Soccer City, Greenpoint Stadium in Cape Town and the Gautrain. Some of the executives involved could end up in prison once the investigation, which involves the Hawks and National Prosecuting Authority, is completed.

So, yes, we can expect a miraculous cooling in price increases across all sorts of industries as a result of the Commission’s new powers. But it would be far more productive if the Commission directed its energies at state-regulated industries such as Eskom, Telkom, broadcasting and gambling. 

But perhaps we ask for too much. The Competition Commission cannot solve inflation on its own, since state monopolies are allowed all sorts of exemptions from competition law.

Commission delivers results

In an article for the World Bank entitled Development, politics, competition and bread: Lessons from South Africa, Andrew Myburgh argues that a crucial ingredient to the success of the competition authorities has been their “strategic use of convening power to rally stakeholders, focus public discussion, and deliver tangible results.”

The bread and construction industries were hammered in the court of public opinion, and few of the offending executives are still around. In an economic climate such as this, expect no mercy for those charged of bilking consumers to fatten their bottom lines. “The involvement of civil society was a testament to the careful work of the authorities’ advocacy teams to educate and empower these groups to become effective champions of competition law and policy,” writes Myburgh. “This engagement was only possible because hearings were open to the public. This gave the media and the society a window through which they could see the conduct that firms were engaging in, while the hearings themselves gave civil society groups a point around which they could rally their efforts.”

Another example of the Competition Commission’s effectiveness is the 2006 inquiry into retail banking and the national payments system. This included public hearings that resulted in a set of recommendations aimed at increasing competition and strengthening consumer protections. The objectives of these recommendations included protecting consumers from punitive fees, making it easier for customers to move their accounts between banks, and facilitating access to the payment system for non-bank financial institutions. They were not binding and so would only be implemented if other agencies were persuaded of the need for reform. At first it appeared that on this measure the hearings had failed. None of the panel’s recommendations were immediately implemented amidst resistance from established interest groups. 

“However, all was not lost,” writes Myburgh. “The open hearings had led to a dramatic increase in the public’s awareness of competition issues in the sector. In the years since, this has led to ongoing pressure from the media and civil society for reform. The Competition Authorities themselves have continued to promote the enquiry’s findings in their meetings with government agencies involved in the sector.”

However, there is an argument that some form of information exchange between competitors is healthy and can actually work to the benefit of consumers. Ahmore Burger-Smidt, a director at Werksmans Attorneys, says companies require certain types of information to compete effectively and win market share while operating within the parameters of competition law. “For instance it is vital to understand your competitors pricing strategy and how this could impact on your business. However, companies cannot share pricing strategy information amongst themselves and they must rather reply on generally available market intelligence to find out what such strategies are.”

Companies can still exchange certain information

Burger-Smidt points out that a number of benefits can be derived from legitimate information exchange. It keeps companies up to date on changing market conditions and it improves organisational learning. For example, companies can improve their strategies around future development if capacity shortages in the market are understood.

“Red light” areas in which information should not be shared include sales and production targets, pricing, costs, investments, business strategy, rebates, discounts, bidding and tender procedures, customer information, confidential information and information that creates a competitive advantage, current information and individual company data.

However “neutral” information can be shared. This includes: process type information that will result in industry efficiencies, public domain information and historic information. A typical example of lawful information exchange would be the sharing of non-competitive information relating to health and safety issues in the mining or construction industries. 

“But when companies create an environment in which they can influence pricing and coordinate their behaviour to the detriment of consumers, information exchange becomes a major problem. This can occur through the sharing of information on individual strategies, market share, sales and forecast information for instance, so that company A is able to determine with a reasonable degree of certainty what company B will be doing in the marketplace and indirectly adjust its conduct and business decisions. Information exchange can serve as a mechanism to monitor whether cartel members are keeping to the cartel agreement,” explains Burger-Smidt.


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