Competition Tribunal & ITAC 2017/18 Annual Reports; with AGSA input

Meeting report

Opening remarks

The Chairperson said that there were a lot of improvements and consistencies in the Competition Tribunal’s report, and congratulated it on its clean audit without findings. She praised it for heeding the Committee’s advice and recommendations, because this had resulted in improvements.

Mr Norman Manoim, Chairperson of the Tribunal, announced that Ms Lerato Motaung, who occupied the position of Head of Registry, was resigning from the Tribunal. He expressed gratitude for her service at the Tribunal and said he hoped she would excel in her future endeavours.

The Chairperson also expressed her appreciation to Ms Motaung for her service, and wished her well for the future.

Competition Tribunal: 2017/18 Annual Report

Ms Motaung took the Members through the presentation, and said that there was a decrease in efficiency in the Tribunal mainly due to the increase in the investigation period. This increase resulted from the increase in the number of extensions, and delays that the Tribunal could not do anything about.

Mr Manoim spoke about the prohibited practices, and said 31 prohibited practice orders were issued in the current year. Total penalties imposed amounted to R354 495 260, 70.3% of which were imposed on the manufacturing sector. The highest penalty was against Autoliv, for collusion, amounting to R149.96 million. The world’s largest automotive safety supplier admitted to dividing the market and bid rigging on tender for occupational safety systems for BMW and VW vehicles.

Challenges faced by the Tribunal included an increase in case load and complexity of matters, as well as the availability of part-time members to attend hearings. In that same light, the Tribunal obtained a clean audit.

Discussion
 
Mr P Atkinson (DA) wanted to know whether all permanent positions had been filled, and what the requirements for interns were.

Dr M Cardo (DA) referred to the Standard Bank dispute around access to the records of the investigation on the bank’s collusion case. The court had not determined whether Standard Bank should be given access to those records by the time the Tribunal put together its annual report, but the Tribunal along with the Commission had decided that it would not hand over the records. This was subsequently taken on appeal by Standard Bank and it had won the case with costs twice, so could the Tribunal explain why it had taken the decision it did.

Secondly, he wanted to know whether the Tribunal/Commission had a tendency of going after small firms, as this was public perception and critique of the Tribunal. Was this a trend that the Tribunal had in fact identified in itself? Was it a valid criticism? What proportion of firms accused of catalytic behavior ended up settling? A case was mentioned involving a media company that paid an amount to a development fund – what was that fund, who administered it, and how much money sat in it?

Finally, in relation to the Competition Commission Bill, he wanted to know how the process envisaged for mergers involving national security consideration would affect the Tribunal specifically and its time management when it came to considering such matters.

Mr I Pikinini (ANC) asked about the impact of the delays in mergers. Secondly, he wanted to know whether statutory time frames were aligned with the standard practices.

Ms A Mfulo (ANC) asked the Tribunal about whether it absorbed interns when they finished their internship or vocational jobs. What measures had been put in place to cope with the workload, and did the lack of capacity stem from part-time members?

Mr M Cele (ANC) asked why were there only African and white interns taken on by the Tribunal – were Indian and coloured interns not considered?

The Chairperson asked how the new legislation would benefit the Tribunal in its work. Of the 37 mergers approved with conditions, who oversees those companies to ensure that the conditions were implemented and adhered to? How did the lack of capacity impact on the mergers? Where were the workshops taking place, and which group of people were targeted.

Tribunal’s response

Mr Manoim responded that Tribunal members were appointed by the President, and there was one member who had not been available for the past 18 months due to personal issues. However, from tomorrow onwards that member would be available and the Tribunal would enjoy the full complement of its members.

Ms Janeen de Klerk, Chief Operating Officer: Competition Tribunal, responded to the question of vacancies, and said that all those that were funded had been filled. The Tribunal would like to change its structure or capacity but it was unable to do so due to the lack of funding, and because of that it would focus on addressing the issue of incapacity.

As for interns, there were different kinds of interns taken on board by the Tribunal with both law and economics qualifications, and when and if they performed they would be absorbed by the Tribunal, although others had branched out to be successful case managers or assistants in law firms. Administration and human resources interns generally landed permanent jobs at the Tribunal, and it was currently doing an evaluation on its interns both past and present, and a commentary or analysis would be written up on that which could be furnished to the Committee.

Mr Manoim said that the Tribunal would prefer operating with full time members, and the current amendments to the Bill would capacitate the Tribunal on this, which thrilled him. The benefits of the Bill for the Tribunal were around addressing excessive pricing and mergers, and clarity was provided on some definitions, although in some areas some things would be protested by different stakeholders but there will be some good along with that. He said that non-collusive oligopolistic behaviour was missing in the legislation, and it had been proven to work in some countries in Europe.

The delays at the Tribunal would not necessarily impact directly on the Tribunal itself, but firms would feel the weight of the impact more. The workshops were designated for case managers, Tribunal members and related stakeholders, for internal capacity.

Dr Cardo asked the Tribunal to provide the rationale behind Game’s matter regarding its inability to sell fresh produce in its stores, and what had happened to the case. It had also been mentioned that prosecuting these types of cases was rare and difficult. He wanted to know whether there was anything in the amendment bill that would make it easier to prosecute these cases.

Mr Manoim said that Game was a subsidiary of the Massmart Group, and had said that in a number of supermarkets in which it was present it was unable to sell fresh produce due to the agreements between the landlords and other supermarkets in the same place. It was a case that was quite difficult to get a handle on -- in some areas there was no prohibition against it or it was not exercised against it at all. They wanted to operate in all areas e without prohibition, but it was a slightly over-ambitious case. Secondly, there was competition between other big players within the same market, so it was not clear whether a number three coming into the market would have an effect on competition, and the case was not sufficiently made out. They had not strengthened their case, and the Commission did not take it up because it was currently running a market inquiry in the retail sector and was looking at these leases before it took up the case. Where it fitted in the amendment bill was a good area for the inquiry, because making that case did not fit into any of the existing provisions of the Act. They may now well be able to look at the conduct of restrictive leases in supermarkets and make a binding agreement under the Competition Act.

The Chairperson wanted to know why only one person would handle cases in some instances, as opposed to a full panel of three people.

Mr Manoim responded that it was at the discretion of the chairperson of the Tribunal to decide whether one person or a full panel should deal with a case, and this depended on the complexity of the cases.   

The Chairperson thanked the Tribunal for its efforts and the work done over the past five years.

International Trade Administration Commission (ITAC): 2017/18 annual report

Mr Meluleki Nzimande, Chief Commissioner: ITAC, reported that during 2017/2018 import permits issued amounted to 20 192, against a target of 16 000. Export permits issued in 2017/2018 amounted to 13 411, where the target had been 12 000.

Following the proactive investigation initiated by ITAC in order to assist the downstream steel industry, tariff support was afforded on welded link chains, forged grinding balls, gabions of wire netting and prefabricated steel buildings. To date, 186 jobs had been created as follows at Maccaferri (Pty) Ltd and Gabion Baskets SA (Pty) Ltd - gabions of wire netting (13 jobs), and Kwikspace Modular Buildings (Pty) Ltd - prefabricated buildings (173) jobs.

ITAC had created rebate provisions for ordinary customs and safeguard duties applicable to certain primary steel products not manufactured locally in order to reduce manufacturing costs to the downstream steel industry. It had also contributed to arts and tourism industry development by recommending the creation of a rebate of customs on vintage and/or internationally collectable motor vehicles which are used for display in museums and exhibition shows.

ITAC had achieved a net asset position of R919 429. Previously, this amount had been higher, as ITAC had enjoyed a substantial surplus. The reduced funding in the past Medium Term Expenditure Framework (MTEF) period had resulted in a reduction in ITAC’s net asset position. For the period under review, total assets amounted to R15 814 625, with total liabilities of R14 895 196.

ITAC’s total revenue amounted to R101 724 637. Expenditure had amounted to R109 215 850. The deficit for the year had been R7 491 213, which was funded from accumulated surpluses. The deficit was as a result of increases in its operating lease expenditure, legal fees, and travel and subsistence costs.

Discussion
 
Mr Atkinson said that the financial sustainability of ITAC had been flagged, and asked whether it was looking to reduce its personnel in order to reduce costs. Were there any other efforts to raise funding besides asking the Department?

Dr Cardo asked what measures were being put in place to address import leakages at ports of entry. When were the Price Preference System (PPS) regulations and guidelines for scrap metal exports submitted to the Department? Was ITAC able to provide the Committee with an insight regarding what the recommendations said in particular around the gazetted proposal about having Port Elizabeth as the sole port of these exports?

Previous annual reports had not been completed due to the resignation of the chief economist, so he wanted to know whether the chief economist had been replaced and when the report would be completed. What had ITAC heard regarding threats to the African Growth and Opportunity Act (AGOA) following President Trump’s tweets a few weeks ago on the land issue?
Ms Mfulo generally wanted to know more about the conditions for the approval of rebates, particularly how ITAC ensured that there was no double-dipping by companies or industries that were granted rebates. In layman’s terms, how did ITAC ensure that companies granted rebates did not exploit the markets by pricing their products more expensive locally?

Regarding employment, how many people living with disabilities were employed at ITAC? What were the reasons for the vast differences or trends in international travel costs?

The Chairperson asked for more clarity on the clear float glass from Indonesia, and why the duties were maintained. How far had ITAC been able to implement the Minister’s directive on competitiveness?

During the Fourth Parliament, the Committee had undertaken some oversight visits to the Limpopo port of entry, were it had been reported that there was smuggling taking place. Had there been any improvements so far, and who controls the confiscation of goods from the ports?

She asked when the outstanding invoices for legal fees would be paid, and how ITAC reported its interest earned to Treasury, because there were weaknesses in this regard at other entities.

ITAC’s response

Ms Ntsobe Nkoana, Chief Financial Officer: ITAC, responded that the expenditure on personnel was now sitting at 70% of the budget, and it was trickling into the operations budget. After careful evaluation, ITAC had therefore looked at how to move resources from one function to the other to ensure that all resources were optimally utilised. For example, in cases where there were vacant positions and there was personnel to perform those functions within the organisation, they would be utilised as such. Financial constraints were problematic, but ITAC was attempting to persuade the Department to allow it to generate its own revenue and restructure the organisation.

The Chairperson asked whether the structure had not recently been changed, and if so, what the outcome had been.

Mr Philip Semela, General Manager: Corporate Services, ITAC, responded that that had been four years ago, and the submissions made by ITAC to the Department had not been approved.

Mr Nzimande responded on import leakages, and indicated that ITAC was undertaking a risk analysis with import/export units, and it would be reprioritising to utilise resources optimally. Thus, an initiative had been undertaken which involved various other departments, to prevent activities which might undermine the work that needed to be done.

As for Port Elizabeth being the sole port of export or entry, after careful consideration and legal advice, it had been found that the former would not pass legal muster. He was unable to provide a certain response with regard to the PPS regulations, but indicated that a public comments exercise would be undertaken.

The chief economist was not yet replaced, but ITAC was attempting to structure that office in a way that it would not depend on the presence of its head. Ideally, a chief economist was needed, but it would be too costly. ITAC planned to pool its resources, particularly personnel with the relevant credentials, to assist in that office.  It had managed to submit some reports this year, and these had been submitted to the Department and for the Minister’s consideration.

With regard to the Trump tweets threatening AGOA, the AGOA rebate is now threatened by the court action submitted by the Poultry Association. If that succeeded, ITAC suspected that the Trump administration would take that as retaliation. The implication would be that South African goods imported to USA would no longer qualify for preferential treatment, and would be replaced by other suppliers producing similar products.

Rebates were supposed to translate into more competitive prices in relation to products that benefited from them, but unfortunately that did not always happen. One of the initiatives indicated to by the Chairperson was committing people to beneficiaries of reciprocal commitments, to ensure that the benefits given to industries spread out to the entire economy.

As for motor vehicles imported for exhibitions, no investigations or follow ups had been done yet. However, under the Automotive Production and Development Programme (APDP), ITAC had a full-on unit that conducted verifications. As for the pricing issues, he did not have an answer, but ITAC could go on and investigate and it would be in bad spirit for the industry to price gauge in an industry that was supported by government.

The organisation had not done very well with the employment of people living with disabilities. Staff turnover had been really low, but there were people living with disabilities who had resigned.

Ms Mfulo lamented that gender was said to be 50/50 in the organization, but there should be a consideration to ensure that people living with disabilities were employed. She asked why the organisation was not complying. It did not look as if there was a plan for this.

Ms Nkoane referred to the traveling cost trends, and said that it was linked to investigations that were linked to trade remedies, and that was where a lot of international travel stemmed from. In the 2017/18 financial year, there were not many investigations conducted on trade remedies, so international travel costs had been very low.

The Chief Commissioner referred to the glass from Indonesia, and said while they were a big player in the international market, the South African market was not threatened. ITAC was more concerned about unfair practices, so it ensures that it protected local suppliers from such practices.

Auditor-General South Africa: Financial health of Commission
 
Ms Ilze Slabbert, Senior Manager: Auditor General of South Africa (AGSA), took the Members through the presentation and indicated that on the financial health of the institutions, material uncertainty existed whether the Commission could continue to operate in the future.

The key concerns identified at the Commission involved asset management. It was reported that in the prior year there was a significant increase in the deficit from 2016, which was mirrored by a decrease in the net current asset position and a decrease in cash on hand at the year end, and that if the trend continued, the Commission could run into problems with the solvency of the business and in meeting its payment obligations. In the current year, this situation had materialized and the Commission had incurred a further deficit, even after management took extraordinary measures to limit it. Another key concern was cash management -- there has been a large decrease in cash on hand from the prior year, as well as a negative cash flow from operating activities. Overall, AGSA had concluded that there now was material uncertainty regarding the financial sustainability of the entity.

Irregular expenditure had increased from R2 million to R126 million. R40 million (32%) of the irregular expenditure had been payments incurred in previous years, but uncovered and disclosed for the first time only in 2017/18. This was due to the regression in supply chain management compliance.

Discussion
 
Ms Mfulo wanted to know why the irregular expenditure in previous years had been uncovered and disclosed for the first time only in 2017/18. Whose fault was this -- should it be AGSA, the Department or the Commission, because all of them had failed to pick it up?

Dr Cardo asked whether the AG had an insight on the experts who were paid the expenses deemed irregular. Allied with that, management would be required to follow up on the irregular expenditure, as surely that could not be left up to the Commission. Why did the AG not perform that action, because it would seem more sensible and independent?

The Chairperson said if it was an oversight, and only detected now, who was to be blamed? What was the role of the accounting officer and executive authority? She asked whether the chairperson of the Commission had been aware of this irregular expenditure, and what steps had then been taken to deal with it. She had been told that this was due to the supply chain management (SCM) challenges, but if SCM had been in accordance with the Public Finance Management Act (PFMA) processes, then things would not be as they were now.

AGSA’s response

Ms Slabbert said jokingly that she did not know whether the AG could accept blame for irregular expenditure. There had been extensive interactions up to Chief Commissioner level, and the executive authority. The Commission had eventually accepted that supply chain management had not been followed, and it was not AGSA that had dictated the amount that should be put in the financial statements. When it raised the audit findings, it informed the Commission that it had noticed the issue and asked it to go back, because it had not been addressed. At some point, the supply chain database had been properly followed, but unfortunately it was not properly updated as time went by because they just added people they deemed to be competent to their database, without following the proper channels. The Commission had therefore gone back and included the amounts that had been presented here, including the prior year, and the narrative.

In most instances, the bidding at the Commission did not follow competitive prices for the vast majority of legal expenses. There were a number of reasons for that, but unfortunately there was no exception for them. There were deviations in certain instances, and those may not necessarily have been justified or approved beforehand, or approval obtained from the National Treasury, where contracts had been extended. The list of the combination of legal experts and other experts would be furnished later in the week.

The meeting was adjourned.