MARKET COLLUSION
A surprise raid on five liquid petroleum gas companies ignores stark reality
THE RECENT heavy-handed raid by the Competition Commission on five liquid petroleum gas (LPG) companies has not, surprisingly, caused alarm. A swarm of commission staff, backed by a posse of armed police, descended on company premises like avenging angels, and then proceeded to seize anything and everything that might contain evidence of collusive behaviour. Along with a team of computer geeks, they seized cellphones, computers, memory sticks and diaries.
It was a demonstration of raw bureaucratic power that few realise the Competition Commission has. The truth is, it can act like this on the smallest suspicion of collusion. All it needs to do is present its suspicions in an affidavit to a judge and ask for a search-and-seizure warrant. It is rarely refused.
Of course, collusion on prices is a crime. Consumers must be protected from such rigging. Even the US, home and champion of private enterprise, has draconian laws against it. Our own version is almost identical to the British law and all three laws bestow the power to levy massive fines on those found guilty.
In the US, depending on the offence and the act used, collusion can result in a fine of as much as $100 million (R1.37 billion) for corporations, and as much as $1m or three years in jail for individuals. Companies found guilty in South Africa can be fined 10 percent of their annual turnover.
It was an allegation of collusion by the five companies in raising the deposit on gas cylinders to reflect their true cost that sparked the commission’s muscle flexing.
One LPG company raised questions that led the commission to conclude that other gas marketers may have contravened the Competition Act. The company raising the matter happens to be asking the commission to approve its own recent merger. So, armed with legal sanction, the Competition Commission revved up its bureaucratic juggernaut and drove it into action.
Suppositions
The commission’s affidavit asking for a search-and-seizure warrant contains phases such as “may”, “reason to believe”, and (the commission) “understands that”. It is a list of suspicions, allegations and suppositions.
But this is the commission doing its duty according to the law. The police presence and large numbers of commissioners are needed to prevent the hiding or destroying of evidence. They can even carry out body searches in their quest for something to back up an allegation of collusion.
Curiously, on this occasion the LPG Safety Association was also raided, although the word “safety” was omitted in the warrant (the association co-ordinates customer safety programmes). The omission may or may not turn out to be relevant.
These search and seizure raids are legal since the Competition Act empowers the commission to assume guilt on receiving a complaint, and then hunt for evidence. It looks like a slap in the face of the basic legal principle – assume innocence until proven guilty. But there you are.
It gets worse. Sending dozens of investigators from Pretoria to Cape Town and Johannesburg costs a lot of (taxpayers’) money, let alone police manpower, but the commission went ahead anyway.
In its haste to catch capitalists, the Competition Commission was seemingly unaware that it is not the sole judge of competition matters in the oil and gas industry. Indeed, in its ignorance, rather than promoting or protecting competition within the LPG industry, its actions may well have the opposite effect, making an anti-competition situation worse.
The LPG industry is in bad shape generally, struggling to expand and in some cases even to survive. There are regular LPG shortages. LPG import facilities are woefully inadequate. New import terminals take eight or more years to get through a regulatory maze that makes it not worth investing.
Added to all this is the controlled price of LPG at the gates of local refineries that makes it highly risky to import LPG.
Any doubters of this analysis should take note that most major oil companies have sold their LPG businesses (Shell, BP, and Engen).
True costs
Consulting the Ministry of Energy might have made the commission hold its horses. It might then have concluded that raising deposits on LPG bottles to reflect their true cost, was a desperate attempt by gas companies at self-regulation, an attempt to survive (and preserve jobs), not evidence of secretive collusion.
In fact, there is plenty of evidence of appeals made to the Department of Energy (DOE) for regulatory approval for an increase on gas bottle deposits, stuck as they are at five-year-old levels, hopelessly behind today’s replacement costs.
Had it done its homework before charging in, the commission might have seen that the sluggardly way the DOE failed to react, was not in the interests of gas consumers, nor did it allow new entrants to compete fairly. In fact, new entrants to the gas industry – ironically, black owned – have been forced to sell, unable to sink their scarce capital in new bottles to expand their customer base.
And it is not as if the DOE is not aware of the problems. Officials reporting to the minister have acknowledged to LPG marketers that holding to outdated deposit levels makes no economic or pro-competitive sense, and creates near-insurmountable barriers to entry.
Serious barrier
If LPG marketers must bear the full cost of new cylinders while their new customers can “buy” them at less than half their cost, it invites illegal cross filling, and the export of cylinders to neighbouring countries. This is a serious barrier to expanding the market for domestic use of LPG.
Worse than this is that millions of poor people who could benefit from using LPG for cooking and heating (instead of unhealthy wood, coal and paraffin) cannot do so because of the scarcity of cylinders – unless they buy them at prices more than double the new cylinder deposit rates that gave rise to the commission’s excitable raids.
Is it not a key economic development objective to broaden access to an affordable cooking and heating energy source?
Would this laudable aim not be hastened by creating incentives for marketers of LPG to invest in new cylinders?
All LPG companies are in the same boat. And it appears to be leaking pretty badly. The only LPG company listed on the stock exchange reported a R24m loss last year. The others are private, but to judge by the recent mergers that have seen smaller companies taken over, the others are in trouble as well.
Is it any wonder that all LPG companies raised the level of their cylinder deposits to meet the prices they pay for them? And not agreeing to do so in secret meetings but in writing, for the entire world (including the commission) to see?
Is that collusion in any real sense? Time and the courts will tell.
LPG import facilities are woefully inadequate. New import terminals take eight or more years to get through a regulatory maze.