COMBATING CARTELS: WHAT ARE THE REAL BENEFITS TO THE END CONSUMER?

Tuesday, February 19, 2008
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The surge of activity in combating cartels in the airline, motor vehicle, milk, bread, milling and most recently the pharmaceutical industry suggests that the desired goals of the Competition Act particularly through the introduction of the Corporate Leniency Policy or CLP, are being met – but is this really a win for the end consumer?
 
The central questions to this evaluation are the following:  What is cartel activity?  Why do competitors engage in such conduct?  How does this practice affect consumers?  How does the Competition Commission aim to eradicate such activity, and finally, what is the real benefit for the individual end consumer?
 
A cartel involves an agreement or concerted practice between two or more competitors to engage in fixing of prices or trading conditions, dividing markets or collusive tendering.  In simple terms cartel activity occurs when people of the same trade or competitors decide to co-operate rather than to compete.
 
The tendency for competitors to collude is driven by the increased profits that follow collusion.  Posing as competitors, cartel members destroy competition and cause serious harm to economies and consumers.  Collusion enables competitors to charge monopoly prices and make monopoly profits.  Studies suggest that cartel activities can lead to an average increase of 10 percent of the selling price, with a corresponding reduction in output of 20 percent.  In real terms, this could see South Africans paying 10 percent more for individual products or services.
 
As a result of the serious consequences of cartel activity, particularly for the consumer, the South African Competition Commission, like most international competition authorities, has prioritized the eradication of cartels as being one of the most serious contraventions of the Competition Act.
 
In accordance with this objective the Commission in 2004 issued the CLP.  The CLP serves as an incentive for cartel members to “whistle-blow” on other members of a cartel in exchange for immunity from prosecution.  The CLP is only available in respect of cartels.  The cartel activities need not have been entered into in South Africa; they need only have an effect in South Africa.  The CLP outlines a process through which the Commission in its discretion can grant a self-confessing cartel member, who is first to approach the Commission, immunity or indemnity for its participation in cartel activity upon fulfilling specific requirements and conditions.  In short, the participant in the cartel activity, if successful, will not need to appear before the Competition Tribunal or be liable to pay a fine, which can amount to up to 10 percent of company turnover.  As such, the whistle-blower escapes the civil penalty and there is no criminal sanction imposed for cartel activity on any of the players.
 
Much of the recent success in combating cartel activity has emerged consequent to a whistle-blower providing the Commission with information, otherwise not easily obtainable, relating to cartel activities within various industries.  Although the Commission is given wide powers of search and seizure in terms of the Competition Act in order to facilitate independent investigations into such activities, the secretive nature of cartel activities makes this type of information very difficult to obtain.  Much of this difficulty is alleviated through the CLP which effectively incentivizes parties to the clandestine activities to provide the information themselves.
 
The success of the CLP within South Africa and similar successes abroad has lead to a desire to entrench the application of the CLP and, to some degree broaden its ambit.  This can be seen through the proposed amendments drafted in late 2007, still not published in the Government Gazette.
 
On the face of it, the CLP seems to be an effective means to facilitate prosecution for cartel activity, but what does this mean for the end consumer who has been paying the inflated price?  What is the real effect on the consumer pocket?
 
The money obtained by the Commission, through the imposition of the fine, is placed in the coffers of the National Revenue Fund.  Notionally, the public at large should benefit from the proceeds of the Commission’s collections through government spending on basic infrastructure and the like.  The consumer might also expect prices to decrease after a finding of collusion in the industry.  This kind of consumer relief is in no way guaranteed, as prices were increased in the wake of the Commission’s finding of collusion in the bread industry.
 
If government spends monies from the National Revenue Fund efficiently or consumers receive futuristic reprieve, this could be considered a satisfactory result for consumers at large.  In essence, however, none of these outcomes goes any way to placing the cash back in the pocket of the individual consumer.
 
Within the legislative framework regulating competition law, there is nothing which precludes a consumer from applying individually or collectively for damages from a civil court for contraventions of the Competition Act.  This issue was to be addressed in the High Court’s ruling in the Nationwide / SAA case heard on 13 February 2008, but the matter was settled out of court prior to judgment being handed down.  However, regardless of any outcome reached by a court, such civil action may not prove useful to individual consumers who will still face the many challenges that emerge from this type of litigation, including the difficulties associated with litigating against large corporate entities and the potential difficulties of trying to calculate what the price would have been absent the collusion and the precise extent of the consumer’s harm.
 
The end result of this might be that end consumers may have to remain satisfied with the trickle down benefits associated with curbing cartels.  The next question is whether the Commission or consumers’ sense of justice could result in the legislature imposing criminal sanctions for contraventions of the Competition Act as is the case in other jurisdictions, including the United States, where individuals and corporations are subject to criminal prosecution?
 
Paula Youens is an associate at Bowman Gilfillan