Other public interest factors to consider

The South African Competition Commission's Draft Public Interest Guidelines (Draft Guidelines) provide insights into the Commission's likely approach when performing its evaluation of each public interest factor listed in the Competition Act during merger proceedings. 

We have previously explored the Commission's positions relating to employment considerations and the spread of beneficial and participatory ownership imperative, as well as procedural questions.

In part IV, the last of our article series, we evaluate the potential impact of the Draft Guidelines on the remaining public interest factors, which include the effect of a merger on:

• a particular industrial sector or region [section 12A(3)(a)];
• the ability of small and medium businesses (SMEs), or firms controlled or owned by historically disadvantaged persons (HDPs), to effectively enter into, participate in, or expand within the market [section 12A(3)(c)]; and
• the ability of national industries to compete in international markets [section 12A(3)(d)].

These factors are a consistent feature of the Commission's public interest assessment and frequently attract the imposition of conditions. The Draft Guidelines provide valuable insights into how they will be examined and applied moving forward. 

The effect on a particular sector or region

The competition authorities have acknowledged the significant impact that mergers can have on sectors and industries. The Draft Guidelines aim to ensure that mergers will not negatively impact direct stakeholders such as employees, suppliers and consumers, while simultaneously seeking to protect the broader ecosystem within which the parties operate (including the communities impacted by their operations).

In assessing the likely effect of a merger on a particular industrial sector or region, the Commission will consider the effect of the merger on development, environmental sustainability and employment within the affected industrial sector or region. This entails an examination of various elements including:

(i)  the applicable industrial and environmental policy objectives or best practices;

(ii) the local economic conditions;

(iii) the impact on local production, manufacturing or deindustrialisation;

(iv) the environment;

(v) the impact on social projects and upliftment programmes;

(vi) local resources or inputs;

(vii) the contribution of the merger parties to local government revenue, and/or 

(viii) commitments made in terms of sector or industry-specific legislation or license conditions.

Sustainability is an essential element of this evaluation. The effect will likely be significant in instances where the relevant products in a sector or region are important to that sector or region, and that sector or region is, in turn, material to the broader South African economy. It is also important to consider whether the firms involved have social and upliftment programmes which are of significance to the sector, region or community. 

According to the Draft Guidelines, this assessment involves elements of constitutionality, public policy and economic development imperatives. In terms of constitutionality, the Commission will consider whether the sector influences any constitutionally entrenched rights. This accords with recent decisions of the Constitutional Court, for example, Competition Commission of South Africa v Mediclinic Southern Africa (Pty) Ltd, where the Competition Tribunal's decision to prohibit the proposed merger was upheld on the basis that it would have a significant adverse effect on healthcare costs of both insured and uninsured patients living in the rural Potchefstroom and Klerksdorp region. The case highlighted the healthcare services sector as an essential public good, constitutionally protected under section 27 of the Constitution. 

Where a substantial adverse effect arises, the Commission will consider remedies that promote local investment and localisation such as capital expenditure within the affected sector or region, value chain, increased localisation, and local supply and procurement commitments. 

The effect on SMES or HDP-owned firms to participate/expand in the market

Section 2(e) of the Competition Act reflects that one of its objectives is to ensure that small and medium-sized enterprises have an equitable opportunity to participate in the South African economy. To facilitate the entry into, participation and expansion in South African markets by SMEs or HDPs, the Commission will assess whether the merger affects:

(i)  the barriers to entry or expansion in a market;

(ii)  access to key inputs, services, pricing and the effect on supply conditions;

(iii)  whether the merger parties will continue to purchase from SMEs or HDP-owned firms;

(iv)  training, skills upliftment and development in the industry; and 

(v)   access to funding for business development and growth.

If a merger adversely impacts one of the public interest factors relating to SME and/or HDP participation, the Draft Guidelines provide that the Commission will consider remedies such as the establishment of a supplier development fund for technical, financial or other assistance to SMEs and firms owned or controlled by HDPs, continued or increased SME procurement, skills development and training programmes. 

The effect on the ability of national industries to compete in international markets

The Tribunal has previously intervened to assist local players competing in international markets. For instance, in Cape Karoo (Pty) Ltd (Previously Ostrich Skins (Pty) Ltd) And Klein Karoo International (Pty) Ltd; Mosstrich (Pty) Ltd (IM238Jan19) (Karoo/Mosstrich), the Tribunal conditionally approved what amounted to the establishment of a near-monopoly in order to protect and stabilise the local ostrich industry which was struggling to compete in the international market. 

While Karoo/Mosstrich dealt with an industry under significant distress, the Draft Guidelines provide more general considerations that can be applied to any merger to assess its effect on the ability of national industries to compete in international markets. These considerations include:

(i)  the nature/structure of the industry (locally and globally);

(ii)  the nature of competition and the firm's domestic market position;

(iii)  whether a change in the firm's productive capacity would allow it to compete globally;

(iv)  the policy considerations applicable to a relevant sector;

(v)   the strategy of the merger parties regarding international competition, and

(vi)  the impact on local consumers in terms of intermediate and final products.

In determining substantiality, the Commission will consider, amongst other factors, the importance of the national industry in the South African and international markets, and the structure and size of the national industry or sector relevant to international standards.

The Draft Guidelines provide a framework for addressing competition concerns through remedies such as job creation obligations, the introduction of new products and technology, committing to training and skill upliftment programmes, and committing to increase exports.

Written by Mark Garden, Partner; Lebohang Makhubedu, Senior Associate; & Marvin Jonkers, Candidate Attorney at Webber Wentzel