When a competitive bid is not enough December 2017

By NEIL MCKENZIE, Published in Competition Law

One might think that competition law would applaud a firm that submits an independent and competitive bid in response to a tender aimed at lowering prices. Recent experience suggests that this is not always the case.

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In October 2017, the South African Competition Commission announced that it has initiated, and is investigating, a complaint of abuse of dominance by Vodacom, the country's largest cellular network services provider. The subject of the complaint is a four year exclusive contract in terms of which Vodacom will supply mobile telecommunications services to 20 government departments.

Although Vodacom bid for the contract in a competitive tender process, the Commission is of the view that the contract will:

  1. further entrench Vodacom's dominant position in the relevant market;
  2. raise barriers to entry and expansion in the relevant market;
  3. distort competition in the market; and
  4. result in a loss of market share for other network operators.

We have not commented on whether the complaint has merit or not. It is very difficult to do so without being apprised of the facts regarding the contract, the tender process and the relevant market.

Leaving aside the merits of the complaint, the announcement is interesting and controversial for a number of reasons. In particular, it raises important questions about the Commission's advocacy strategy, and about the obligations on business when participating in significant tenders.

Publication at the commencement of an investigation

The first interesting issue raised by the announcement is its timing. The Commission has, over the last period, adopted a very active approach to engagement with the media, promoting transparency of its work and pub- lic awareness of competition law enforcement activities. This approach has been largely successful, and our impression is that competition law has enjoyed unprecedented media attention and high profile in public discourse.

However, it could be argued that at the stage of initiation of an investiga- tion, public announcement may be premature and inappropriate. This is par- ticularly so when the announcement contains relatively declarative state- ments such as "the Commission is of the view that the contract will...".

One outcome can be undue, and unfair pre-judgment by members of the public and the media about the likely outcome of the investigation. It was reported that Vodacom's share price fell by 8% on the day of the Commission's announcement. This is remarkable given that at the com- mencement of an investigation no proper investigation has yet taken place, no findings have been made, no legal analysis of the facts has been conducted, and the respondent firm has not yet had any opportunity to explain its side of the story.

A further risk is that in the event that the investigation does not reveal a contravention, and is not referred to the Competition Tribunal for adjudication, the public may perceive the Commission to have been unsuccessful in its enforcement action and to have "lost the case". This may damage the Commission's credibility in the public's view.

An example of this is the announcement on 13 June of an investiga- tion into the pricing of certain cancer medicines, which included state- ments that the prices charged were "exorbitant" and that the matter was of "grave national concern". This complaint was dropped by the Commission against two of the respondent firms less than three months later, on 4 October, due to insufficient evidence of a contravention by those two firms.

The question that then arises is whether it would be preferable to restrict public announcements to the stage of a decision to refer a com- plaint for adjudication by the Competition Tribunal, following the Commission's investigation. At the very least it should be ensured that respondent firms are engaged prior to the public announcement of the investigation, so that they have the opportunity to understand the basis of the complaint, express any initial views to the Commission, and plan appropriate communications to relevant stakeholders.

Considering compliance of long term exclusive contracts

In the circumstances described by the Commission in its announcement and subsequent media reports on the matter, it would appear that there is little that Vodacom could have done to avoid this investigation. It appears to have simply responded, successfully, on a good faith and competitive basis, to a tender issued by the government. It has been suggested that the purpose of the tender was to lower the cost of telecommunications services supplied to government by consolidating multiple disparate supply con- tracts into a single one. The possibility of anti-competitive effects seems counter-intuitive at face value, and the parties might have been excused for failing to consider the risk of an investigation of this nature.

However, the takeaway message from this case is that it would be naïve to assume that because a contract arises from a competitive bidding process, it is automatically compliant with competition law, and is beyond scrutiny by the Commission. Firms with a significant market share should carefully evaluate the likely competitive effect of exclusive contracts with significant duration, regardless of their context. It is the effect of such a contract on competition in the relevant market, and potentially also in related markets, which is relevant to determining compliance.

Firms should also recognise that even if an exclusive contract is entirely defensible under competition law, exclusivity combined with a significant duration may at least create a perception of potential anti-competitive effects. If firms consider such a contract to be compliant, they should be prepared to defend that position in complaint proceedings by the Commission, and also in the media.

As it happens, government apparently did engage with the Commission prior to concluding the contract in order to evaluate the contract's compliance with competition law. The fact of the investigation suggests, however, that these engagements did not result in clear guidance on how to proceed in a compliant manner.

McKenzie is a Director of Fasken Martineau (South Africa).

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