THE Competition Tribunal's recent finding that Sasol Chemical Industries (SCI) had charged excessive prices to domestic customers has brought the issue into focus for South African corporations struggling with competitiveness and compliance.
In June the tribunal found the Sasol subsidiary was in contravention of the Competition Act for charging domestic customers excessive prices for purified propylene and polypropylene between 2004 and 2007 and imposed a R534 million fine. (The offence attracts a penalty up to 10% of the annual turnover for a first-time contravention.)
Webber Wentzel professional support lawyer, Paula Youens says, "The tribunal found, on the facts, that a mark-up as low as 20% may not be reasonable if so determined on a case-to-case basis. It leaves dominant companies that have particular cost-advantages not based on innovation, risk-taking and investment - and especially those receiving government support - in a difficult position in complying with the Act.”
There is hope that the application for leave to appeal that has been filed with the Competition Appeal Court (CAC) in the SCI matter will offer some clarity and certainty as to what the actual test for excessive pricing should be. “Optimism aside,” says Youens, “how dominant companies should be advised to structure their pricing within this interim period is as clear as mud”. Competition laws internationally are controversial with many countries disagreeing that competition authorities should regulate high prices. One argument is that the free market will correct high prices, undermining the need for regulation.
However, the Act prohibits excessive pricing by stating that companies with the market power to control prices and exclude competition cannot charge prices detrimental to consumers.
"Excessive pricing occurs where the price for a good or service bears no reasonable relation to its economic value, but the law does not define 'economic value', 'reasonable' or 'consumers' - and this leaves the bulk of interpretation with the competition authorities," Youens says.
She says the SCI case follows a decade-old one between ArcelorMittal SA and Harmony Gold Mining. In that case the CAC provided a four-stage enquiry for excessive pricing which involved determining the actual price of the product allegedly subject to being excessively priced; calculating the economic value of that pricing; judging if the difference between the economic value and the market-related price was unreasonable; and finally determining if consumers were prejudiced by the pricing.
Youens says the SCI issue has highlighted that the economic value of goods or services is not objective, but includes cost-advantages obtained due to "past exclusive or special rights", especially those acquired or inherited through significant government subsidies.
"As a result SCI's cost advantages were reduced below the competitive norm, boosting the finding that the economic value was lower than the actual price charged. The implication of this is that other companies with these cost advantages will be strongly prejudiced when their prices are analysed for being excessive," she says.
She adds these companies - ones that benefited from cost factors due to historic reasons - will have to prove their pricing was reasonable, which will be particularly difficult as the ruling does not provide guidance on what percentage mark-up was considered "reasonable".