Tembinkosi Bonakele is leaving the stage as SA’s competition tsar, but that doesn’t mean his faith in the doctrine burns any less bright. His eyes light up when he gets going about the proposed deregulation of fuel, which will allow petrol stations to set their own prices.
“It will absolutely bring down the petrol price,” he tells the FM in an interview in Rosebank. “I always believed it should be deregulated. Interestingly, the industry itself doesn’t want deregulation, and normally it’s the other way around. But what you will have is competition.”
In April, the government said it wanted to cap the price of 93 octane fuel, even though the Fuel Retailers Association says shrinking profit margins could put many of the 60,000 jobs of forecourt attendants at risk.
Bonakele says this doesn’t necessarily have to happen. “Those jobs are kept there almost artificially, but I think you can still carve out a space for them on the forecourts. But the point of competition is, how efficiently can you operate? How much margin are you willing to forgo to win market share?”
Inevitably, some fuel stations may close, but Bonakele says this can’t be an argument against deregulation. “Ultimately, this is better for consumers. So if inefficient operators have to exit, well that’s what will have to happen.”
It’s an unsentimental assessment for a man who will finally leave the commission after nine years in charge and 18 years at the institution. But it’s in character for someone who, as much as his critics often accuse him of overreaching — intervening to stem rising airline prices, for example, or the price of Covid tests — is adamant that he has only ever been led by the economics.
“We respect the economics. Our own motivations are constrained by the economic analysis — it has to be scientific. We don’t intervene just because there’s a 10% increase in prices, because sometimes that is justified by the supply and demand,” he says.
It’s an argument that Bonakele has been making a lot lately, as criticism mounts over increasingly interventionist decisions by the commission. For the first time since it opened its doors in 1999, it has begun demanding far more “public interest” concessions from companies that approach it for permission to merge with others.
“They don’t apply policy consistently,” says Daryl Dingley, who began his career as an economist working at the commission and now works for law firm Webber Wentzel.
“Some transactions are approved with no problem, but others are held up by long debates over employee share schemes, employment or other factors. It seems to outsiders that they pick and choose where they’ll get involved, and that creates uncertainty,” he says.
As a result, says Dingley, some foreign companies he has spoken to have opted not to invest. “If I were a foreign investor, and I couldn’t get absolute certainty from my advisers about the costs to me, I may want to take my capital elsewhere,” he says.
It’s a common view.
Tamara Dini, co-head of competition at law firm Bowmans, says it is only from this year that the commission has taken a more heavy-handed approach, demanding that companies explain how every deal will promote a “greater spread of ownership”.
“This presents challenges, since most transactions notified are not ones that are necessarily appropriate for empowerment or employee share ownership schemes,” she says.
For example, large international deals may require a green light from the competition authorities in SA, even though the SA arm may be a small component of the business.
Says Dini: “For a party to be going into a commercial deal uncertain of whether they’ll be asked to include a BEE transaction, or establish an employee share scheme, or offer other commitments, presents variables that many investors consider uninviting.”
Lerisha Naidu, a partner at law firm Baker McKenzie, says there’s a plausible risk that SA may be sending a message to foreign investors that “doing business in SA requires onerous concessions” that undermine the country’s attractiveness.
“The commission often seeks to impose conditions on parties that skirt precariously close to undermining the viability of the deal. And without clear precedent, merging parties are faced with a fairly binary decision: accept the conditions ... imposed by the commission or walk away from the deal.”
Naidu says that while the public interest mandate is often laudable, the commission needs to consider the impact this can have on the commercial viability of a deal.
“If there is any consistent approach the commission should be taking, it ought to be a holistic one, taking the impact on public interest as a whole into account, rather than approaching public interest factors singularly.”
Patel plans new ‘guidelines’
But it’s not just the commission. To many, the problem is also trade, industry & competition minister Ebrahim Patel, under whose department the commission sits, who is also intervening to an unprecedented extent in mergers.
As another competition lawyer tells the FM: “If you want to do a deal, you have to sit around with Patel’s advisers and try to thrash out a ‘public interest’ deal, which often has nothing to do with the actual transaction. They’ll try to wring out concessions around localisation of products, or the amounts the buyer will spend in the local economy.”
This adviser, who wants to remain anonymous for fear of his clients being “targeted”, says it creates a huge amount of uncertainty around deals. “You can never advise a client about the odds of success, because you don’t know what conditions they’ll want,” he says.
Dingley echoes this, saying Patel’s demands are “unpredictable”.
“Patel’s view is that people should know this is the cost of doing business in SA, and that they should account for this. But the problem is that this cost varies from deal to deal. And often it descends into terrible horse trading, around how much is set aside for procurement, commitments around what is produced locally, or anything really,” he says.
In an interview with the FM this week, Patel accepts that there should be more “certainty” about what is required by the competition authorities around mergers.
“There is definitely a valid case to be made for greater codification of these things, to give more certainty to the market,” he says. “And it’s also a good time to do it, because we’ve now had such a range of different mergers, which has built up great institutional knowledge.”
Patel says perhaps the best way to do this is to publish “guidelines” — “these wouldn’t be legally binding, but they’d give a better sense to the market of the thinking of the authorities on, say, issues such as how to deal with employment issues in mergers”.
This would be a welcome concession — even if it doesn’t necessarily deal with the allegation that Patel is using competition policy as a blunt weapon to justify an increasingly interventionist stance towards the economy.
On this point, though, he is unapologetic.
“In the case of SA, given our twin challenges to increase the rate of growth and to make that growth more inclusive, it’s unavoidable that competition will grapple with more than just the traditional concerns around transactions,” he says.
While the “public interest clause” wasn’t really used in SA until 2011, when Japanese paint company Kansai bought Plascon, it was part of the 1998 Competition Act.
It isn’t just SA that has this provision: many of the 38 countries in the Organisation for Economic Co-operation & Development (OECD) “allow public policy objectives to be taken into account in merger assessment ... which extend beyond the core economic goals of competition law”.
However, as a June 2016 OECD round-table on competition law made clear, this public interest intervention “rarely occurs in practice” in many of those countries.
This was pretty much how it worked in SA too — until Patel got involved.
In 2011, US retailer Walmart sauntered into SA and tabled a R16.5bn bid to buy Massmart, which owns Game, Makro and Builders Warehouse. And Walmart must have thought it had the deal in the bag, once the Competition Commission gave it the green light.
But then Patel appealed against that decision at the Competition Tribunal, demanding several concessions, including that Walmart agree not to axe any workers for two years, and that it set up a R100m “development programme” for local suppliers.
This rattled analysts, who were used to takeover deals like this sailing through. As political analyst Nic Borain said at the time: “It is not the job of the Competition Commission to act as a vetting agency for the total social good of particular inward investments.”
But a template had been set.
For any large deal after that — including AB InBev’s $104bn takeover of SA Breweries in 2016, and PepsiCo’s $1.7bn purchase of Pioneer Foods in 2020 — the overseas buyer realised they needed to spend months schmoozing Patel’s officials, which they duly did.
The unnamed competition lawyer says the buyers often now see it as more vital to strike a one-on-one deal with Patel’s officials than deal with legitimate competition issues.
“A couple of large deals haven’t seen the light of day because of this,” he says. “The irony is that Patel is trying to boost the local economy, but the unpredictable nature of his demands means foreign buyers are now reluctant to even start the process.”
But Patel’s concession to introduce clear guidelines of what would be required should go some way to short-circuit this concern.
Speaking to the FM, Patel concedes that at the time of the Walmart deal, transactions were often flagged in an arbitrary way.
“In the early days, when we first began looking at public interest issues, we only really scrutinised very large public mergers, where our desktop research flagged potentially significant problems. But the number of companies now filing applications addressing public interest issues has grown quite significantly since then,” he says.
It has also become much smoother — good news for Dutch brewer Heineken, which launched a R38.5bn takeover bid for Stellenbosch-based drinks company Distell in November.
Sources close to the deal say agreement was reached “relatively easily” between Heineken and Patel’s department over the public interest element of the deal. “We found each other quickly,” says the source.
Still, this intervention isn’t uncontroversial. Many believe competition policy should remain just that, rather than be used as a pretext to effect social change.
The Free Market Foundation’s Zakhele Mthembu says SA’s competition regime “began with a very narrow scope of enhancing competition — but this has crept up to the extent that it is now being used to socially engineer all kinds of things, like transformation.
“We now have a competition authority that is seeking to do far more than it was meant to, and far more than other authorities do overseas”.
But to lawyers such as Dingley, it’s entirely appropriate to intervene considering SA’s young economy, which needs all the help it can get to protect jobs and narrow inequality. His only caveat is that it must be predictable.
“There’s definitely an overlap between industrial policy, social welfare policies, and competition policy. Certainly, there are ways to navigate this to achieve a positive outcome. But the most critical issue is that the requirements must be clearly articulated,” he says.
The Burger King BEE fiasco
It’s not just “public interest considerations” causing ructions around competition policy; it’s the tougher demands around BEE too.
Last year, the Competition Commission ruffled feathers by initially prohibiting the sale of SA’s Burger King franchise, owned by Grand Parade Investments, to private equity group ECP Africa on the grounds that “black ownership” would drop from 68% to zero.
This was the first time any sale had been prohibited on “public interest grounds” — and it sparked an outcry.
As Grand Parade CEO Mohsin Tajbhai previously told the FM: “If you are limited to selling only to other black investors, then it effectively reduces the value of black-owned businesses.”
In the end, the commission dropped its opposition, and the deal went ahead. But this was only after ECP Africa agreed to invest more than R500m, increase staff and salary packages by R120m, commit to local suppliers, and create an employee share scheme.
Given that there were no competition concerns in this case, isn’t this a classic case of bureaucratic overreach?
Bonakele doesn’t think so. He says a general principle applicable to all takeovers is that they ought not to lead to a fall in black empowerment.
“If a black investor buys into a company, I don’t think it’s unfair for a company to say to that investor: ‘We want to keep our BEE status, so if you sell, you must sell to people who qualify.’ If you were picked to be a BEE investor, and you benefited, surely you then have a responsibility, and can’t complain about being singled out,” he says.
But doesn’t this risk trapping black investors in positions they can never exit? Wouldn’t it place an inherent discount over any stake bought by a black-owned shareholder, as the risk of them being able to sell it freely diminishes?
Fred Robertson, chair of empowerment company Brimstone, tells the FM that the requirement that black-owned companies will necessarily have to sell to other black-owned companies will only create a “false market”.
“It can trap black shareholders in companies for a long time, so it does need to be addressed,” he says.
Bonakele believes this is an “unintended consequence”.
“Look, there are genuine instances where maybe there isn’t enough capital among qualified groups, and this creates a discount. But then we don’t apply the rule in a rigid manner. We realise we need to be flexible, and that’s what happened at Grand Parade — we didn’t insist that they must be locked in,” he says.
Perhaps, but any imposition of other conditions in exchange for approving the deal with “lower empowerment” would also diminish the attractiveness, and ability to trade, that asset.
On this point, Bonakele says deal advisers need to become more creative.
“When we impose a BEE condition, the advisers tell us they just can’t find blacks to buy the business. But you can’t just try to sell to the same three black people. It’s about getting in entrepreneurs to raise capital. If this is just a game of simply passing shares to someone with a big name, that’s highly problematic,” he says.
But he does admit that guidelines to make the “public interest” clause more predictable, including the sale of black empowerment stakes, are needed.
“I’ve met with a number of groups, including private equity firms, which say they want a constructive discussion about how this can be done. So I do think we need guidelines and a practice standard,” he says.
As much as Robertson believes a solution must be found, he has no issue with the commission wielding competition policy to transform the wider economy. “Certainly when it comes to procurement, or ensuring worker participation in deals, I don’t have a problem with it. Otherwise you’ll continue to have a situation where companies buy only from their old-boy networks,” he says.
Competition watchdog or price regulator?
The allegation that the commission is overreaching goes further, though. It was more recently cited after the collapse of Comair, when Bonakele called in the remaining airlines to discuss how to keep a lid on rocketing airfares.
In a conventional market, companies ought to go bust, and the surviving firms can adjust their prices as the supply and demand balance resets. If there’s too much of a profit margin, new competitors will come in.
Why mess with that — especially in the relatively elite air travel market?
“It’s not just for the elite,” says Bonakele. “Air travel is becoming a mass market. It’s a good thing for society — it’s a market for transportation, and airline tickets must be able to compete with buses and trains.”
But if you intervene in every market blip, and warn companies against raising prices, wouldn’t this make you more of a price regulator than anything else?
“We don’t do this. We only intervene where the pricing is actually excessive. With Comair now in liquidation, prices have gone up but, for the most part, we haven’t intervened, because we understand that the supply and demand factors exist. We examine the economics, and only intervene if it’s genuinely warranted,” he says.
It’s an approach the commission used during Covid, which saw it become far more proactive in monitoring “price gouging” of masks, sanitiser and personal protective equipment (PPE). And it ended up prosecuting companies for this, and levying large fines.
That led to much criticism, but Bonakele says this is when the commission most proved its worth to society.
“If you’re not responsive to what’s happening around you, you’ll be irrelevant,” he says. “During Covid, you had companies not exercising any pricing restraint in a market with severe shortages. You could have said, ‘this is temporary, it will self correct’ — but people would have been denied access to medical supplies, such as PPE. Other authorities around the world chose not to intervene in situations like this — but I’d find that hard to understand.”
The commission’s annual report reveals that during Covid, it received 2,200 complaints for “excessive pricing” on face masks, sanitiser and food, related to the pandemic.
Significantly, the commission did something it hadn’t done before: it began probing government tenders when it came to “emergency procurement” of medical supplies.
In one case, it fined a company called Tsutsumani R3.4m for overcharging the police for 500,000 face masks — finding it charged nearly double what the masks cost.
A need to investigate public firms
The commission’s success during Covid raises another question. If its first foray into state tenders immediately detected such obvious overcharging, why has it been so coy about probing government contracts?
After all, if there’s one aspect of the economy that has become more inefficient than any other, as well as more corrupt, it is state procurement. Why has the commission trodden softly with state firms, yet wielded a big club against private enterprise?
“Quite clearly, we could have done better in advocating for more competition among state-owned entities [SOEs],” says Bonakele. “Maybe we gave too much space and respect to policymakers, given that SOEs are supposed to act in the national interest. But they haven’t.”
This was nowhere more evident than at SAA, which stomped all over its rivals, but was only marginally held to account by the Competition Commission.
Former Comair CEO Erik Venter tells the FM this week that, unlike in other countries, SA competition law has never protected consumers against the anticompetitive effect of state funding.
“The Competition Commission process is too slow to be of any effect before the plaintiff typically goes bankrupt; the rulings are too specific to address the broad underlying illegal conduct; the commission does not have the resources to take on cases unless they are in the ‘broad public interest’; and achieving financial restitution is close to impossible,” he says.
In the case of SAA, two private airlines, Nationwide and Comair, complained to the commission as long ago as 2000 about how SAA was paying “incentives” to so-called independent travel agents to get them to push SAA tickets.
The tribunal ruled on the case only in 2010, and SAA was fined only R45m — but Venter says SAA simply “changed the agreements” with the agents and continued doing it.
“Each time, the commission took the easy way out and just ruled against one specific incentive calculation formula, which SAA would then just change,” he says.
But Comair kept pushing. It took that 2010 ruling to the Competition Appeal Court where, in 2017, Comair was awarded R1.1bn in damages. SAA tried to appeal but finally in 2019, after 16 years, it had to pay up.
The bitter irony is that SAA only ever made the first two payments, of R383m, before being placed in business rescue in December 2019. Comair never got the final R790m — a contributing factor in it, too, tumbling into business rescue.
Says Venter: “Had SAA’s illegal and commercially unviable conduct been stopped earlier, SA would now most likely have a much stronger airline industry.”
Bonakele admits the commission didn’t do as much as it should have. “SAA got bailout after bailout, and that can’t be right from a competition perspective. Even the creation of Mango was unnecessary and behind the scenes we resisted it, but they did it anyway,” he says.
Mango, which was secretly supported with state funding, effectively competed with kulula, 1time, Safair, Nationwide and others over the years.
Bonakele admits to a degree of “self-restraint” when it comes to tackling SOEs. “We couldn’t really say to the National Treasury: ‘You can’t bail out SAA, because it will distort competition.’ Well, we could say it, but we couldn’t enforce our view.”
He says the commission achieved some small victories behind the scenes. “There was a proposal, which we resisted, that all civil servants would be forced to fly on SAA. But we fought against that and it was scrapped.”
Nobody could accuse the commission, under Bonakele, of being as slack as other state entities. An FM analysis of its performance targets in its annual report shows it met or exceeded every one of its 35 performance targets.
For example, its target was to deal with 90% of large mergers within 120 days, yet it did this within 93 days. It aimed to finalise 1,500 Covid investigations in the year, and it finished 1,764. And while it aimed to win 90% of its Covid cases in the courts or tribunal, it actually won 100%.
So if it does set its sights on an inefficient public sector, there may just be progress. And while Bonakele will be gone by the end of the month, he says the organisation will “absolutely” sharpen its focus to include SOEs.
The Competition Commission is drawing increasing criticism for demanding ‘public interest concessions’ from companies seeking mergers. While the sentiment may be laudable, critics say it can make deals commercially unviable, with ultimately negative affect an ultimately negative effect on the public
— What it means:
Tackling your paymasters
It’s a comforting assurance, but even today the commission has yet to haul up delinquent state firms.
It was, for example, dead quiet when the SA Post Office lobbied for a law to ban courier firms — like PostNet — from delivering parcels of less than 1kg. It was a plan designed to protect the Post Office from the consequences of its own incompetence, infringing every aspect of competition law.
Does this mean the commission, though supposedly independent, is too docile to take on state entities for fear of upsetting the politicians?
No, says Bonakele. “Nobody can point to any instance where we don’t make our decisions independently. [Patel] is very clear about his policy objectives, and there are times when industrial policy and competition policy have tensions, but we talk about it,” he says.
Cement is one hard area where the two have disagreed. Patel’s department put in place a special designation that only locally produced cement be used on state projects — which could ultimately inflate the amount spent on government building plans.
Says Bonakele: “We said this is going to distort prices of cement in a market that has a history of cartels, and [Patel] took that on board. So he said to us, fine, tell us how we can find a way to reach agreement on this without distorting competition.”
Patel tells the FM that when there is a disagreement, he doesn’t try to tell the commission what to do. “In the case of Walmart, we took it to the tribunal because we needed to respect the independence of the commission. We didn’t ask the commission to change its views. We went, transparently, to the tribunal,” he says.
Of course, it may be another matter entirely if the commission becomes more proactive in probing anticompetitive conduct in SOEs. But Patel is clear that “our systems will not work well if we don’t give the commission the opportunity to carry out its work independently”.
Bonakele’s successor as commissioner, Doris Tshepe, a former MD of law firm Cheadle Thompson, will take over at a turning point for competition in SA.
And it’s not just fuel prices: Eskom is preparing for competition from renewable companies; a new wave of challenger banks such as Discovery and TymeBank are stomping all over the turf of the incumbents; and Telkom, once the 400-pound gorilla, is being sized up for dinner by its formerly insignificant rivals.
With Bonakele gone, the commission needs to ensure it can navigate this new world — dominated by digital platforms and new technology — with a light touch. And perhaps a greater degree of emotional intelligence too.
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