As in the criminal justice system, compliance with competition law is largely driven by the deterrent mechanism of monetary penalties levied upon those who violate it. South African competition regulators are empowered by the terms of the Competition Act to impose large fines (up to “10% of the firm’s annual turnover in the Republic and its exports from the Republic during the firm’s preceding financial year”) upon entities found to have contravened the Act.

One of the issues still vexing our developing jurisprudence is the question of what constitutes an appropriate penalty. A continuing criticism of the calculation of penalties by the competition authorities has been a lack of set standards and formal procedures to ensure a consistency in penalties imposed.

Two issues in particular have arisen regarding the computation of penalties, namely, the turnover to be used in the determination of an appropriate penalty and the meaning of the term “preceding financial year”.

Regarding the first issue, the Competition Tribunal has historically typically calculated penalties on the basis of “affected turnover”, that is the portion of the turnover of the contravening firm derived from its activities in the market/s in which it is found to have contravened the Act. Insofar as the second issue is concerned, the Tribunal has tended to utilise the financial year of the respondent which immediately precedes the Commission’s (or third party’s) referral of complaint to the Tribunal.

In the recent case of Southern Pipeline Contractors, the above two issues were dealt with by the Tribunal.

The case involved the determination of penalties to be paid by Southern Pipeline Contractors (SPC) and Conrite Walls (Proprietary) Limited (Conrite), two members of one of the most enduring and comprehensive cartels in the construction industry in South Africa. The cartel, which operated between about 1973 and 2007, existed in the market for the manufacturing of pre-caste concrete products such as concrete pipes, culverts, pre-cast manholes and concrete sleepers at both national and regional levels. SPC and Conrite admitted participation in the cartel, but could not come to terms with the Commission regarding the appropriate quantum of penalty to be paid.

The Tribunal rejected an argument from each of SPC and Conrite that “affected turnover” (howsoever defined) was an appropriate basis for the penalty calculation in the circumstances of the pre-caste concrete cartel.

In reaching this view, the Tribunal assessed the basis for penalty computation in various international jurisdictions. Vitally, many such jurisdictions (notably the EU and UK) calculate penalties for cartel contraventions as follows: “{Base Fine percentage} x {the Commission’s determination of affected turnover} x {number of years for which the respondent participated in the cartel}”.

Therefore, while turnover is restricted to that designated by the respective agencies as comprising “affected turnover”, the penalty amount is multiplied by the number of years for which the contravention continued.

South African law does not permit such multiplication.

Hence, applying a designated percentage to only affected turnover would, the Tribunal determined, result in a far lower penalty than would result in Europe and the UK. That lower penalty would lack the desired deterrent effect arising from headline grabbing penalty amounts.

The Tribunal in the Southern Pipelines case declined to calculate the penalties to be imposed upon SPC and Conrite on an arithmetic basis. Instead, the Tribunal utilised what it called a “broad brush approach”. In the assessment of the factors for consideration in section 59(3) of the Competition Act, the Tribunal found that this was a case of “great aggravation and no mitigation” because, amongst other reasons, the cartel preceded and succeeded the commencement of the Competition Act; both SPC and Conrite participated therein for many years; virtually no activity of the cartel members was left to competitive forces; and although not previously convicted of offences under the Act, this was hardly a factor for consideration, given participation in a cartel that was “highly secretive, very stable and which no member was incentivised to blow the whistle”.

On the basis of the “broad brush” or policy (as opposed to arithmetic) basis for calculation of penalties, the Tribunal fined SPC 10% of its total turnover of R168 825 969, and Conrite 8% of its total turnover of R 77 405 710.

In a cross check of these penalties with the outcome that would have resulted in the arithmetic based EU and UK jurisdictions, the Tribunal found that both approaches resulted in penalties of a similar magnitude.

It is apparent from the judgement in this matter that, due to the gravity of the conduct concerned, the Tribunal departed from general South African (and international) practice by determining penalties using total turnover (and not affected turnover) as a base.

The discretionary approach undertaken by the Tribunal introces great uncertainty because, depending upon the Tribunal’s attitude to the severity of the contravention, the turnover used to compute a penalty will be either affected turnover or total turnover, as opposed to one constant turnover value being used.

In addition, the Tribunal was silent as to the meaning of the term “preceding financial year”, noting that the Commission and the parties concerned in this matter had all agreed on the relevant year from which the turnover amount would be derived.

Firms therefore need to be mindful of the fluid, discretionary approach taken by the Tribunal, which may amount to extremely high or extremely low penalties, depending on the approach taken by the Tribunal to the contraventions in each case.