Download Editor`s Note - South African Regulators Forum

Editor’s Note
In this edition the Competition Commission tackles the thorny issue of competition in the taxi industry,
while there is more to read on SABS’s evaluation of the beleaguered Gazelle vehicles that were the focus
of so much media hype in the recent past, while also exhibiting renewed effort in their regulatory function
in dealing with the motorcycle industry.
With the hype around the banking enquiry still going on, the Competition Commission released its
programme of action as well as the guidelines on submission to the enquiry.
We also release the food price trends as compiled by NAMC for this quarter; while there’s more to read
about why the high court granted FSB’s application to place an assets management company on
curatorship.
There’s more to read, enjoy the edition.
Best wishes
Editor
Evaluation
vehicles
of
Gazelle
The problems that are being experienced by the owners of the GAZelle vehicle should not be placed at the
door of the SABS homologation (evaluation) process. Government Gazette No 27947 Notice 855 02 Sept
2005, outlines the minimum requirements a vehicle of this type needs to comply with. Components deemed
to be safety-critical are evaluated against specified national and international standards. These
components/systems include, but are not limited to lights, glass, brakes, seat and seat anchorages.
SABS may only “approve” vehicles through the homologation process with regard to these standards as
specified in legislation. The homologation process does not evaluate the overall suitability of the vehicle
for use in the South African environment, only its safety. The durability and suitability of a vehicle is the
responsibility of the vehicle manufacturer and/or importer. SABS can and does perform a great number of
other tests on vehicles at the request of manufacturers and importers. SABS has over the years attracted
international manufacturers to do their prototype testing and evaluation in our unique operating
environment. The high speed, high load, high altitude, high temperature application of vehicles are unique
to South Africa. However these aspects are not regulated and remain the responsibility of the supplier.
SABS is currently investigating the concerns raised in the media over the weekend. Should our
investigation highlight any non-compliance of the GAZelle vehicle model to the requirements of the
vehicle compulsory specifications and/or the National Road Traffic act and Regulations, appropriate action
will be taken against the local supplier.
Contributed by: South African Bureau of Standards
Competition in the
Taxi Industry
The purpose of the Competition Act 89 of 1998 (“the Act”) as amended is to promote and maintain
competition in South Africa. The purpose is so that consumers can be provided with product choice and
competitive prices.
The Act applies to all economic activity within or having an effect within South Africa. In a newspaper
report, transport is described as being at the heart of our society’s economic and social well being.
The general structure of the taxi industry is that most or all the players in the industry belong to an
organised structure (“taxi associations”) that looks after the interests of all its members. These organised
structures then compete with each other.
The general practice within the taxi industry is such that the industry as a whole will negotiate and decide
what prices their members are going to charge as taxi fairs to the consumers.
A further industry practice is that of “ownership” of particular routes by a particular association. The
benefit of being a member of a particular association comes with the right to make use of that route owned
by that particular association and the corresponding obligation is to refrain from using a route belonging to
another association. Most South Africans are well aware of the bitter feuds witnessed in the recent past of
different taxi associations fighting over and protecting their respective routes.
What does this practice mean for Competition law practitioners and the Competition Commission (“the
Commission”). Is the Commission turning a blind eye to the likely contraventions by the taxi industry of
the Competition Act because of the risks inherent in challenging the status quo. That is still to be seen as
the Commission is undergoing a drive to scrutinise and probe sector practices. Would the ongoing taxi
recapitalisation process be in a position to help in addressing any or all of the likely contraventions which
currently exists.
These questions are some of the questions that may go through the mind of any
competition practitioner or stakeholder.
Section 4(1)(b) of the Act restricts decisions by an association of firms who are in a horizontal relationship
from (i) agreeing on practices that directly or indirectly involves the fixing of purchase or selling price or
any trading conditions and (ii) from dividing markets by allocating customers, suppliers or territories.
These provisions of the Act are known as per se which means they do not afford the contravening parties
the opportunity to justify their action. The contravening parties are at this stage expected to do away with
the action contravening the Act or apply for an exemption, in terms of section 10, in the event that the
requirements for the exemption application are complied with in full.
Section 4 of the Act applies to horizontal competitors. A horizontal relationship is defined as a relationship
between competitors. Taxi operators fall squarely within the definition of the Act as being in a horizontal
relationship. There is no requirement in terms of the Act that firms must have been prior competitors for
them to transgress section 4(1)(b).
It is important to consider the entire market at which the taxi industry operates, which can be broadly
described as the public passenger transport market, by including the public passenger rail service and the
bus service as competitors in the industry. In the case of the rail service it is unlikely that the Commission
would have any jurisdiction since it’s an agency that is regulated by legislation. The same would be the
case with bus services owned and subsidised by municipalities. This leaves the taxi industry to have to be
considered on its own as an open market player without the other players that have a share of the public
transport market.
The issue of price fixing is a contentious one, as there is a clear problem in that the issue that the parties
collectively decide price to the contravention of the Act. The question is why can’t the operators compete
on this issue like it is expected of all other organised professions. This issue was dealt with at length within
the Medical industry and Legal associations, these industries worked on set tariffs that all members adhered
to, also with the estate agents who were compelled to charge a standardised commission. The affected
associations found themselves on the wrong side of the law, in that they were found to be in contravention
of the Act. Is this situation in the taxi industry not similar, the answer to that is that it is in exactly the same
situation that is considered anticompetitive. Interestingly enough somehow this particular market has never
been considered by the authorities, the truth is the taxi industry is a multimillion rand industry and has an
effect on a large part of our population. The opposite side is also true, not having a price cap agreed to by
all players can raise prices, but consumers should then be able to decide not to use the services of expensive
players. That way expensive players will gradually be driven out of the market.
On the issue of “owning” routes, does this not amount to the allocation of markets and agreeing on trading
conditions? The answer again is in the affirmative. The players are ensuring that their existence is not
threatened by ensuring that they protect themselves by allocating markets to themselves. The effect of this
is that ineffective players are protected from fierce competition, this results in the quality of service to
remain stagnant. Improvements that could be achieved by the entire industry are unlikely to be achieved.
Irrelevant or ineffective players should be driven out of a market by market forces. This kind of agreement
does not afford the consumer an opportunity to have a say in the matter by exercising a choice. This is
exactly the reason why this kind of conduct is prohibited, market players must not justify themselves and
force themselves on consumers. The market must be open to anyone without any boundaries or limitations.
The ideal economic practice which the Commission would like to achieve is the one where players in a
particular market compete with each other with price and all other offerings that the industry can provide.
This would have the inevitable effect of improving the economy because players are forced by market
conditions to be continually innovative in improving their service standards and offerings and in that way
the consumers would have the power to choose with their purchasing pattern. Players who relax on their
offerings would be automatically removed from the market leaving the market with efficient players. Our
economic system, with the help of competition, will reach a point where the consumer welfare is achieved
and the consumer is in a dominant position of choosing the service providers they prefer and be able to pay
a price they consider reasonable. When this ideal economic state is achieved, the purpose of the Act would
have been achieved.
Contributed by: Mthunzi Mashaba, Competition Commission
Motorcycle industry urged
to submit helmets for testing
In a joint media statement issued in Pretoria today (15 September 2006), the South African Bureau of
Standards (SABS) and the Association of Motorcycle Importers and Distributors (AMID), have urged the
manufacturers and importers of motorcycle helmets to heed the legal requirement to submit helmets for
homologation before importation or distribution. On-site inspection in the last month has revealed that a
number of importers have not submitted samples of helmets for homologation before the cut-off date of 1
July 2006.
Importers have been slow in submitting the required communication documents and test reports before the
due date. This could be owing to a lack of understanding of the necessary documents that need to be
submitted. In all cases the following documents should be submitted for the purpose of homologation:
(a) a copy of a valid test report and extensions demonstrating compliance with the applicable requirements
of the compulsory specifications for safety helmets – VC 8016 or ECE R 22;
(b) copies of valid communication documents (e.g. approval E-certificates) and any applicable extensions;
and
(c) completed application forms for all commodities, including motorcycle helmets, falling within the scope
of compulsory specifications.
A Letter of Authority (LOA) will be issued in the name of the importer or manufacturer once the relevant
documentation has been received and processed to the satisfaction of SABS Regulatory. The LOA will
only be issued after payment of the relevant fees has been made to SABS.
It should also be noted that the DOT marked helmet without other supportive testing is not acceptable in
South Africa. If the inspections conducted at manufacturers, importers and bike retailers reveal
noncompliant products, SABS inspectors will issue inspection notices to the owners advising them to cease
selling items that do not comply with the compulsory specification. A legal process will then be initiated to
correct the situation and/or remove non-compliant products from the market.
Any queries regarding the management of inspection notices should be directed to:
Kenny Seraamang
Tel: 012- 428 6757 or e-mail: [email protected]
or to
Renee Day
Tel: 012 – 428 6516 or e-mail: [email protected]
Contact Andrè van Rooyen of AMID
Tel: 011-954 4916 or e-mail: [email protected]
Contributed by: South African Bureau of Standards
Food price trends:
July 2005 to July 2006
Food plays an important part in the daily life of every South African. As a result, few are immune to the
effects of food price inflation. The affordability of food to the population at large is important, however it is
of particular importance to the poorer segments of the population and those affected by HIV/AIDS as it
directly impacts their ability to survive.
STATS SA reported a CPI of 5% and CPI food of 7.5% for July 2006. In this media release, as in previous
media releases, the year on year price changes as well as January to July price changes are reported. Factors
that contributed to food price inflation will also be highlighted. A detailed discussion on certain products,
and in particular maize meal, can be found in the second section of the document.
Based on the 75 food products monitored by the NAMC at retail level, year on year July 2005-2006 food
price increase averaged 6.03%. Overall prices that increased by more than the inflation target of the
Reserve Bank of 6% were: Plain macaroni (8.02%), super and special maize meal (35.5%), cooking oil
(7.12%), frozen beans (8.78%), potatoes (9.92%), tomatoes (8.54%), lamb chops (26.51%), brisket beef
(27.53%), beef mince(20.95%), stewing beef (30.22%), apples (16.5%), oranges (9.78%), pilchards
(14.7%), king korn (16.77%). Products whose prices decreased year on year by more then 6% include:
frozen peas (-9.91%), frozen corn (-10.15%), pork chop (-23.35%), cheese (-11.87%), skimmed milk
powder (-17.54%), long life milk (-6.25%), strawberry jam (-9.52%), coca cola (- 11.18%).
The tables below report the average price in July 2005, January 2006 and July 2006 together with the
percentage change January 2006 to July 2006 as well as the year on year percentage change July 2005 to
July 2006.
Detailed Discussion
Maize meal
Year on year July 2005-2006 maize meal prices increased on average by 35.50%. This is an extremely large price
increase for a product considered to be a staple food for the majority of the South African population. The graph below
reports the retail price for super and special maize meal for 2004, 2005 and 2006 together with the monthly average
SAFEX spot price of white maize converted in 5kg bag of maize meal (far right panel in the diagram). The price of
maize meal in SAFEX terms was calculated by taking into account an extraction rate of 0.63, which means that from
one ton of maize you get 630kg of maize meal. It should be noted that NO production or transport costs were taken into
consideration and the calculation was done to show the link between the SAFEX price and retail price trends. From this
graph it is clear that the 2005 maize meal price was relatively low compared to the other two years, resulting in the high
year on year price increase. From the graph it is also clear that maize meal prices only began to rise above 2004 price
levels in June and also follow a similar trend to the SAFEX price.
The graph below illustrates the strong relationship between the SAFEX spot price of white maize and the
retail price of maize meal.
In the final report written by the FPMC in December 2003, a large section of the report was dedicated to
the possibility of stabilizing prices through either a strategic grain reserve or a “virtual” grain reserve using
the derivative market. The committee found that the cost and administration requirements of setting up and
maintaining a physical grain reserve were prohibitive due to the purchasing and storing costs. The
alternative to a physical grain reserve would be a “virtual” reserve through the use of SAFEX or
international derivatives that would be triggered in certain circumstances. This would be a much cheaper
option, not with out risks however. Over all the Committee felt that the strategic grain reserves (virtual or
physical) would not be the best route to provide relief for the poorest households. The Committee also
suggests that given the changing nature of the food economy, prices stabilised at commodity level would
not necessarily be passed through to retail level and that more direct measures to ensure affordable food to
communities may be a better option.
Bread
Both white and brown bread prices continue to increase year on year. White bread increased by 2.8% and
brown bread increased by 5.4% year on year July.
Although the bread price increases could be justified by increasing fuel prices, SAFEX prices and others,
the production process and inputs remain the same for white and brown bread. For this reason one would
expect the prices of the two products to change by the same amount. This is however not the case. The
graph above shows how the “gap” between white and brown bread price is getting smaller. In January 2003
the difference between the price of your average loaf of brown and white bread was 14%, increasing to
21% in August 2003. This “gap” has been decreasing ever since, reaching a minimum of 6% in May and
June 2006. This may not seem to be an issue, however, the government, in an effort to reduce the tax
burden on the poor, exempts certain products from VAT, among these is brown bread. This means that the
bread prices collected by the FPMC should show at least a 14% difference between the white and brown
bread price. What this also means is that if VAT were levied on brown bread it would currently be more
expensive than white bread even though it is cheaper to produce because you can produce 2280 loaves of
brown bread from 1 ton of flour and only 2135 loaves of white bread from the same ton of flour. The graph
below illustrates how the difference between white and brown bread prices is decreasing.
Beef and Poultry products
On average fresh beef products prices increased by 26% year on year at the retail level. The increase in the
price of beef is largely due to the increase in weaner and grain fed carcass prices which increased by 35%
and 26% respectively year on year. This increase in weaner and grain fed carcasses can be attributed to two
dominant factors: the first is a relative shortage of livestock due to decreased imports from Namibia, and
farmers holding back stock to increase herd sizes.
Whole fresh chicken prices increased by 4.48% while frozen chicken prices decreased by 2.43% year on
year July. The increase in fresh chicken prices is likely due to the increased feed cost as maize constitutes
the main component of poultry feeds.
Dairy products
Dairy prices display an interesting set of price changes with fresh milk prices increasing while cheese,
butter, UHT milk and skimmed milk powder all decreasing. It is unclear why fresh milk prices increase
while processed dairy prices follow a decreasing price trend as does the price of raw milk paid to farmers.
Contributed by: National Agricultural Marketing Council.
FSB places common cents
into provisional curatorship
The Cape High Court has appointed former chief executive of the Masterbond curatorship, Horton
Griffiths, as provisional curator of Common Cents Investment Portfolio Strategists (Pty) Ltd.
The application by the Financial Services Board (FSB) to place the asset management company into
provisional curatorship was granted by the Cape High Court on Friday last week. Common Cents was
authorised by the FSB as a financial services provider in terms of the Financial Advisory and Intermediary
Services (FAIS) Act, 2002, to provide certain specified services. However, on 30 August 2006 an auditor’s
report alerted the FSB to a number of irregularities in the company’s dealings.
An investigation by the FSB showed that the company had committed material irregularities by investing
client funds outside the terms of its licence and beyond the scope of the mandate received from clients. The
FSB consequently brought an urgent application in terms of section 5 of the Financial Institutions
(Protection of Funds) Act, 2001, for the appointment of a curator to the business of the company.
Gerry Anderson, the FSB’s deputy executive officer of market conduct and consumer education, said the
FSB’s investigation into the affairs of Common Cents revealed that the company had invested R148 million
on behalf of clients without proper authorisation and outside the terms of its licence conditions.
He also said the auditor’s report had pointed out reconciliation problems in the cash pool portfolios of
Common Cents, which were under the management of the late Mr Angus Cruickshank.
“The purpose of the curatorship is to safeguard the interests of investors, to minimize their losses as far as
possible and to establish where the underlying client moneys have been invested,” Anderson said.
The matter will again come before the Court on 21 November 2006 when the curator’s report will be
considered.
Contributed by: Financial Services Board
Banking Enquiry
The enquiry into competition in certain aspects of banking established by the Competition Commission
continues its work with:
1. The release of the Enquiry’s Programme of Action for the duration of the enquiry.
2. The publication of the Guidelines on Submissions, and
3. The holding of a series of meetings and interchanges with stakeholders.
1. Enquiry Programme and Guidelines
The enquiry’s Programme of Action gives an indication of how the enquiry sees the process unfolding
over the year ahead while the Guidelines provide all stakeholders with directions as to how the panel
requires submissions to be prepared before being lodged with the enquiry.
For full details of the Programme of Action and the Guidelines, please refer to the attached documents
which will be posted on the enquiry’s website www.compcom.co.za/banking
2. Meetings with Stakeholders
The enquiry intends having meetings with the major banks, other banks, regulators, consumer groups
and members of the public.
2.1 Major Banks
Arrangements for the meetings with the senior officials of four of the five major retail banks, namely,
Nedcor, First National Bank, Standard and ABSA have now been finalised. These meetings will be held
separately and have been scheduled for 23rd and 24th August 2006.
2.2 Other Banks and Regulators
The enquiry secretariat is currently engaged in the process of making contact with and arranging similar
meetings and/or briefing meetings with the other banks and the regulatory authorities.
2.3 Consumer Groups and Other Stakeholders
The enquiry will also ensure that consumer groups and all other stakeholders are fully included in the
enquiry process. In this regard, correspondence will be sent to consumer groups and other identified
stakeholders to invite them to participate in the process. Members of the public will also be encouraged to
come forward and make submissions to the panel. If the response justifies it, the panel will arrange further
briefing sessions with such stakeholders.
The enquiry plans to have completed this introductory process by no later than 15th September 2006.
2.4 Technical & Research Teams
As at the beginning of August 2006, the enquiry has appointed a research team with economic, legal and
actuarial expertise to provide technical support to the panel. Further appointments of technical staff can be
expected as the enquiry process gathers momentum.
2.5 Public Hearings
Two sets of public hearings have been scheduled by the enquiry. The first will be held in November 2006
and the second during March and April 2007. Further details of these hearings are contained in the
enquiry’s Programme of Action which is available on the website www.compcom.co.za/banking
Contributed by: Charles Frank, Competition Commission Banking Enquiry