About SAFLII
Databases
Search
Terms of Use
RSS Feeds
South Africa: Competition Appeal Court
SAFLII
>>
Databases
>>
South Africa: Competition Appeal Court
>>
2012
>>
[2012] ZACAC 6
|
|
Minister of Economic Development and Others v Competition Tribunal and Others, South African Commercial, Catering and Allied Workers Union (SACCAWU) v Wal-Mart Stores Inc (110/CAC/Jun11, 111/CAC/Jul11) [2012] ZACAC 6; [2013] 1 CPLR 37 (CAC) (9 October 2012)
REPUBLIC
OF SOUTH AFRICA
IN THE COMPETITION
APPEAL COURT OF SOUTH AFRICA
HELD IN CAPE TOWN
CASE NO.
110/CAC/Jun11
111/CAC/Jul11
THE
MINISTER OF ECONOMIC DEVELOPMENT
First
Applicant
THE
MINISTER OF TRADE & INDUSTRY
Second
Applicant
THE
MINISTER OF AGRICULTURE, FORESTRY & FISHERIES
Third
Applicant
and
THE
COMPETITION TRIBUNAL
First
Respondent
THE
COMPETITION COMMISSION
Second
Respondent
WAL-MART
STORES INC.
Third
Respondent
MASSMART
HOLDINGS LTD
Fourth
Respondent
SACCAWU
& OTHERS
Fifth
Respondent
SACTWU
Sixth
Respondent
SASMMEF
Seventh
Respondent
And
in the matter between:
SACCAWU
Applicant
and
MASSMART
HOLDINGS LIMITED
Target
Firm
JUDGMENT:
09 October 2012
THE COURT
Introduction
[1] Pursuant to an order
of 09 March 2012, this Court ordered that third and fourth respondent
(‘the merged entity’)commission
a study “
to
determine the most appropriate means together with a mechanism by
which local South African suppliers may be empowered to respond
to
the challenges posed by the merger and thus benefit thereby
.
In particular
,
the study
shall canvass the best means by which South African small and medium
size suppliers can participate in the Wal-Mart’s
global value
chain training programmes that might be established to train local
South African suppliers on how to conduct business
with the merged
entity and Wal-Mart and the costs which would reasonably be incurred
insofar as the development of such a programme
is concerned.”
[2] The Courtrequired the
study to be compiled by three experts. Each of the parties
,
being the first second and third applicants (‘the ministers’),
the fifth respondent (‘the union’) and the
merged entity
was empowered to appoint one expert to the panel. These individuals
would then act as independent experts
,
accountable to the Court. The mergedentity appointed Professor Mike
Morris, the ministers
,
Professor Joseph Stiglitz and the union
,
Mr James Hodge who constituted the expert panel. On 09 June 2012
,
two expert reports were filed, one by Professor Morris and the other
authored jointly by Professor Stiglitz and Mr Hodge.
[3] The Court also
ordered “
the report shall then be made available to the
merging and intervening parties who should have a further month after
submission
thereof, to submit any affidavit evidence which they wish
to place before this Court, on which account must be taken in the
formulation
of the conditions as to the programme to be established
for the development of local South African suppliers
.”
Pursuant thereto
,
the two
reports were made available to the merged entity
,
the ministers and the union. Comprehensive affidavits have now been
filed by all three parties in response to these reports.In
addition
, the Ministers filed reports from Dr Ha Joon Chang and Prof James
Heintz. The court is indebted to the experts and
the parties for the
assistance in formulating the outstanding condition.
The purpose of the
report
[4] At the hearing before
the Competition Tribunal, (‘the Tribunal’) the merged
entity proposed what was referred to
by the Tribunal as ‘an
investment remedy’. In terms thereof
,
the merged entity committed itself to spending R 100 million over
three years through the establishment of a programme aimed at
the
development of local suppliers, including small, micro and medium
sized enterprises (SMME’s). The programme, although
it would
be administered by the merged entity
,
would be advised by a committee comprising representatives of the
trade unions and business including SMME’s. The government
would also be invited to serve on this committee.
[5] Without any apparent
interrogation of the nature, scope or implications of this
proposal,the Tribunal incorporated it into its
order. As a result
of the Tribunal’s failure to so engage, the Court felt itself
compelled to issue an order which directed
the commission of a
report. The purpose of the report and hence the order became the
subject of a difference of opinion between
Morris and Stiglitz and
Hodge. Morris contended that the intention of the Court and, hence
the scope of the report, was to restrict
the application of any
conditions to be imposed to benefit local small and medium sized
suppliers and toentrance their effective
participation in the merged
entity’s global and domestic value chains. In his view, large
South African owned enterprises
stood to be excluded from
consideration. Further, the programme could not be expected to
encompass all of the merged entity’s
small and medium sized
suppliers, as this would be extremely expensive, both in terms of
financial and managerial resources and
hence would constitute the
imposition of an unreasonable set of conditions.
[6] By contrast,Stiglitz
and Hodge contend, in the light of their reading of the Tribunal and
this Court’s rulings, that the
object of the fund is to respond
to the threats of the loss of employment and sales by local suppliers
including SMME’s
,
through their potential displacement by way of imported goods.
Stiglitz and Hodge argue that
,
from a public policy perspective
,
it is important to minimise “
the downside risk of loss
of employment, from domestic producers facing new competition from
Wal-Mart’s global supply chain
and seizing fully the upside
potential from full integration of local producers into Wal-Mart’s
global supply chain
.
” In
their view
,
this objective
could be achieved by (a) empowering existing local suppliers to
Massmart to meet this challenge; and (b) identifying
opportunities
for local firms to expand sales and employment through integration
into Wal-Mart’s global supply chain. Accordingly,
recipients
from the fund should be both existing and potential Massmart
suppliers.
[7] They contend further
that recipientsof the fund should not be limited to SMME’s or
businesses owned by historically
disadvantaged persons, although a
focus upon such business may be given greater emphasis by the fund.
Recipients should be producers
of traded goods, being goods that
might reasonably not be procured locally out of necessity or which
could be supplied into the
merged entity’s global supply chain.
Further, recipients should be producers of products that are
primarily of South African
origin or, alternatively, are fabricated
from a manufacturing process that takes place primarily in South
African with substantial
South African “value add”.
[8] Stiglitz and Hodge
recommended that the fund should be centred around doing what the
merged entity would not, on its own, have
an incentive to so do (‘the
additionality principle’). Hence,recipients should, in no
manner, be restricted from
supplying retailers other than the merged
entity, whether locally or globally. Mr Mowzer, the acting
Director General of the
first applicant , in support of
theStiglitz/Hodge report contends in his affidavit on behalf of
the Ministers, that the
public interest inquiry could not be
restricted to SMME’s in that employment was a self
standing consideration
as provided in s12A(3) .Echoing the
Stiglitz/Hodge report , he avers that a critical concern must be
the minimisation
of the downside risk of loss of employment from
domestic producers facing the challenges posed by the Walmart
global value
chain .
[9] The debate about the
purpose and scope of the fund thus became a source for the key
disagreements between the experts, which
will be canvassed presently.
The public interest
enquiry
[10] In order to resolve
the debate about the purpose and scope of this enquiry, it is
necessary to return to the architecture of
the Competition Act 89 of
1998 (‘the Act’) and, in particular, to s 12 A (3), which
sets out the public interest grounds
relevant to a consideration of a
merger such as the present transaction.
[11] This section
provides as follows:
“
(3) When
determining whether a merger can or cannot be justified on public
interest grounds, the Competition Commission or the Competition
Tribunal must consider the effect that the merger will have on –
(a) a particular
industrial sector or region;
(b) employment;
(c) the ability of
small businesses, or firms controlled or owned by historically
disadvantaged persons, to become competitive;
and
(d) the ability of
national industries to compete in international markets
.”
[12] The introduction of
a public interest provision raises the question of the relationship
between industrial policy and competition
law. Although this
relationship informs much of the present dispute, it is a debate
which is not restricted to South Africa, in
that, in many
jurisdictions, a perceived failure of free markets and a
reconsideration of government intervention into the economy
has,
within this specific context, among others, highlighted a ‘great
ideological divide’ within the competition regulatory
community. See Damien Geradin and IanisGirgenson‘
Industrial
Policy and European Merger Control – A Reassessment
’
2011
International Anti-Trust Law and Policy
353.
[13] Industrial policy is
considered to hold both horizontal and vertical implications.
According to Geradin and Girgenson at
354 – 355:
“
Industrial policies can be
“horizontal” (general) or “vertical”
(selective). Horizontal policies are devised
to influence the
entire economy, e.g. to promote innovation on knowledge sharing.
There is usually a strong relationship between
the State’s
horizontal industrial policy and its macroeconomic agenda (i.e.,
monetary, fiscal and exchange rate policies).
Vertical policies aim
to support specific sectors, industries or companies. Given their
selectivity, they often distort competition
and discriminate between
market operators by “picking winners and saving losers.”
Critics of industrial policy usually
attack vertical measures.
Industrial policy instruments can be
split into two broad categories: structural and monetary. Monetary
measures involve a transfer
of funds from the government to companies
and include various forms of subsidies (direct payments, bail-outs,
loans at reduced
interest rates, tax breaks, debt write-offs, etc.).
Structural measures do not involve a transfer of funds; they include
tariff
and non-tariff barriers to trade, regulatory measures and
government policies promoting “national champions
.”
Even this brief detour
into the terrain of industrial policy should prompt caution in
respect of competition law being employed
as a surrogate for a
coherentindustrial policy which by its very nature involves a series
of polycentric decisions ill suitedto
judicial
interventions.Similarly, the challenges posed to the South African
economy by globalisation as highlighted by the implications
of this
transaction, namely an adequate response to the consequences for
South African suppliers of the impact of global value
chains, cannot
be addressed comprehensively through the Act in general or s 12 A (3)
in particular.
[14] In his report,
Morris highlights the implications of global value chains thus:
“
This deepening of
globalisationis not unique to South Africa, or indeed to its retail
sector. It is a process which many other
economies have gone
through over the past four decades, resulting in a variety of
outcomes. In some countries, deepening globalisation
has had
negative impacts on domestic producers who are unable to compete with
imports and either experience a loss of markets or
are forced into
competitive low technology / low wage niches in their value chains in
order to compete. This is the downside of
globalisation. In other
cases – and China, Korea, Taiwan and Singapore are notable
examples – globalisation has helped
to underwrite very rapid
growth, not just in output but also in employment. This is the
upside of globalisation.
The potential gains from globalisation
result in changes in economic specialisation. Whilst some suppliers
who had hitherto operated
in a relatively protected national market
will suffer from a loss of demand as imports eat into their markets,
other suppliers
who are able to reorient their operations to feed
into much larger global markets are potentially able to see a major
growth in
output and employment. One of the key problems this raises
for economic management is that this adjustment in specialisation may
not always be achieved by all the existing firms in the supply chain
but instead be reaped by new suppliers able to access global
value
chains.
It is thus abundantly clear that
globalisation represents both a threat and opportunity. The task of
all stakeholders with an interest
in local growth and development is
to ensure that the “wins” exceed the losses. In the
context of an economy with
high levels of exclusion and unemployment,
there is an added task of ensuring that these “wins’
percolate widely through
the economy. Consequently in this current
era, the issue that all countries face is not whether to participate
in the global economy,
but how to do so in a way which maximises the
growth and development gains. In turn, converting the whether into
the how is a
reflection of the scale, institutional capacity,
resource allocation, and nature of responses of key stakeholders,
particularly
those in the corporate and the state sectors, and in
respect of maintaining social pressure, broad coalitions and civil
society.”
Stiglitz and Hodge
summarize this problem as follows:
“
From a public policy
perspective, what is important is minimising the downside risk of
loss of employment from domestic producers
facing new competition for
Wal-Mart’s global supply chain, and seizing fully the upside
potential from full integration of
local producers into Wal-Mart’s
global supply chain
.”
In our view, s 12 A (3)
should not be seen as a substitute for or evena significant component
of a comprehensive policy designed
by the State to deal with the
challenges which globalisation in general and global value chains in
particular pose for the domestic
economy. The public interest
factors in s 12 A (3) are intended, in this case, to deal with the
direct and specific risks posed
by the present merger to local
producers and employment, as a result of the introduction of
Wal-Mart’s global supply chain
into the South African economy.
That both the Ministers and the union have raised many legitimate
concerns of a fundamental and
systematic nature cannot be gainsaid.
But competition law is not the mechanism to respond comprehensively
thereto, save where
s 12 A(3) so provides. While employment is
expressly articulated in the Act as a separate public interest
concern , it
cannot , in our view, be used to argue in favour
of this Court developing a comprehensive industrial policy to
respond
to the legitimate concerns posed by global value
chains , highlighted so luminously by this merger.
[15] This excursus into
industrial policy and the role of s 12 A (3) can now be applied to
the present dispute. To recapitulate:
this Court found that, on
the available evidence, the merged entity will reduce prices in the
relevant market and that, further,
there was no evidential basis to
refuse the merger. It accepted, given the likelihood of an increase
in cheaper imports,that there
would be some displacement of local
producers and a consequent detrimental effect on this sector and on
employment. But essential
to the finding of the Court was the
holding that the ‘harm’ was less than the ‘gain’.
Expressed differently,the
greater the imports and hence the greater
the gain in lower prices, the more the potential for harm in terms of
the consequences
on local producers. The condition relating to the
fund is imposed to minimise the ‘harm’ so as to ensure,
even after
a finding of a net gain, that this harm could be further
reduced.
[16] Hence the debate
concerning a condition turns on a reduction of harm or risk thereof
so to achieve a maximisation of welfare
caused by the merger.
Thatbecomes the role of s 12 A (3), once the merger cannot be
prohibited but the Court considers that potential
for harm remains
alegitimate concern. For this reason, having already accepted that
there was no basis to find against the merger,
the legitimate
concerns raised by the intervening parties must be assessed in terms
of risks to employment and the potential compromise
of the ability of
small businesses or firms controlled or owned by historically
disadvantaged persons.That the South African
economy needs to
rise to the challenges posed by globalisation which, in this
context , are prompted particularly by
the vertical
disintegration of multinational corporations and the concomitant
increase in industrial manufacturing and
service capacity in
many parts of the developing world is confirmed clearly in
both reports . To the extent , that
policy is required to deal
with these challenges , s12A(3) can assist to deal with
downside risks and seek to exploit
the possibilities posed by
upside risks created by the merger but the broader problems
set out in the Stiglitz/Hodge
report must wait far more
comprehensive policy initiatives.
[17] It therefore follows
that the purpose of the commission of this report was not to ensure
that the entire merger be reconsidered
by this court but rather that,
within these relatively narrow confines of s 12 A (3), the court was
to be guided towards the imposition
of a condition which would
maximise the promotion of the objectives of the legislation; hence
the scope of the enquiry is circumscribed.
From its wording , it is
clear that section 12 A (3) is fundamentally concerned, within this
context, with small businesses or
those controlled or owned by
historically disadvantaged persons and the desire that they become
competitive. To the extent that
there is any doubt, recourse to s 2
of the Act, the purpose provision,provides an illumination. It
states, inter alia, that the
purpose of this Act is to promote and
maintain competition in the Republic in order (e) to ensure that
small and medium size enterprises
have an equitable opportunity to
participate in the economy; and (f) to promote a greater spread of
ownership, in particular to
increase the ownership stakes of
historically disadvantaged persons.
[18] Implicit in the
Stiglitz / Hodge report is the argument that questions of employment
and the promotion thereof should not only
be restricted to small
business but also to the promotion or protection of large business
which may be under threat as a consequence
of the present merger.
However, within the context of the present dispute, the focus
throughout the proceedings has been on the
most appropriate
institutional intervention to develop the capabilities of local,
small and medium sized suppliers to enable the
latter to take maximum
advantage of opportunities to participate in the global value chain
of the merged entity. In this way,
the protection and promotion of
these businessesmay be enhanced together witha minimisation of risks
to employment. In part, this
Court had already taken heed of the
express public interest consideration with regard to employment, when
it ordered the reinstatement
of more than 500 employees.
[19] To argue however
that any private entity, no matter its size, should be the target of
a conditionwhich amounts to a comprehensive
response to the
challenges of globalisation in the context of global value chains
amounts to an expansion of the scope of the public
interest enquiry
beyond that which must have been intended. In our view, it is
impermissible to employ a concern about employment,
as Stiglitz and
Hodge do so expansively, to promote the interests of large South
African enterprises. This extends the public
interest enquiry
beyond that which is justifiable ad indeed feasible,once the Act is
read as a whole.It must also be remembered
that the merged entity is
not dominant in the relevant markets and that its competitors are
large, extremely well resourced firms
with global chain footprints of
their own.
[20] To summarise: the
purpose of a condition is to ensure that a programme may be
developed and adequately funded to empower localSMME’s
which
may be effected by this merger to take advantage of the global chain
of the merged entity, thereby promoting the purpose
of s 12 A (3).
That this merger has shone a light upon the perils and challenges
posed to a developing country by global value
chains should serve to
promote a comprehensive national response to both the risks and
opportunities.By contrast, the powers of
this Courtare far more
modest. They involve a consideration of the effects of the merger
uponlocalproviders and consequentlyemploymentwithin
the broader
finding that this merger cannot be prohibited. To repeat, the
purpose is to minimise risks that flow directly from
the transaction
and not to replace government’s prerogative of formulating and
developing comprehensive economic policies.
[21] From this approach,
it follows that, were this court to impose conditions which would
obligate the merged entity to promote
the interests of competitors or
to assistin the subsidisation of large, financially viable South
African entities, not only would
this be an act of discrimination
against the merged entitybut it would representthe imposition of an
obligation in favour of its
own key competitors, large entities which
are financially capable of developing their own initiatives to
promote micro, small and
medium sized local suppliers. In the
affidavits of the intervening parties, plausible arguments are raised
concerning an extension
of the fund to firms that may not qualify as
micro, small or medium sized enterprises but ‘who could hardly
be considered
large’ and which remain vulnerable to the
possibility of import substitution by the merged entity. To the
extent, that
these arguments must be weighed against the approach
adopted to s 12 A (3), there is the added argument of a need to
ensure that
the fund achieves the best possible result to enhance
welfare. Hence , in the context of the limited scope of s 12 A
(3), the
Court considers that the focus should be on the most
vulnerable enterprises, particularly those referred to specifically
in s 12
A(3).
[22] It is within this
framework that we propose to analyse the two reports and the
parties’ responses thereto. In this
connection, it is helpful
to commence with an examination of the areas of consensus and
disagreement between the experts, as usefully
provided by Stiglitz
and Hodge in their report.
The measures of
agreement and disagreement between the experts
The objective of the
fund
[23] The two reports
concurred about the basic objective of the proposed fund which they
saw as designed to ensure sustainable supply
development, which, in
turn, would incentivise Massmart to internalise its supply
development by changing its procurement behaviour
to focus on local
products. The programme would enhance the ability of suppliers to
participate within the merged entity’s
global supply chain and
would not result in a squeeze uponwages or employment at supplier
firms.
[24] To the extent that
there were disagreements about the scope of the fund, as noted above,
these followed from the approach to
the scope of the court order. In
the light of our approach to the nature of the s 12 A (3) enquiry,
we find that the object
of the fund should be to promote SMME’s
within the context of the global value chain of the merged entity.
In the result,
it follows that the fund, given that it is to be
financed by a private entity, notwithstanding its size, should be
both targeted
and limited.
[25] In assessing the
targets of the fund, it is important to emphasise that the success of
supply chain development cannot equate
to persuading the merged
entity to be charitable to local suppliers nor to compel it to
purchase from local suppliers, even where
the latter transactions
make no commercial or financial sense. The purpose of the fund is to
ensure that targeted suppliers can
be joined successfully to
Walmart’s global value chain. This can only occur if it can be
demonstrated that there is a commercial
advantage to local sourcing;
hence if the fund can assist Massmart’s organisation to
understand the importance of the identification
and construction of
links to competent local suppliers and also the creation of
additional incentives for buyers, purchasers, managers
and
plannerswithin the merged entity to assess their own success, the
imposition of conditions will be more likely to promote the
public
interest concerns set out in s 12 A (3).
[26] In this regard, we
consider thatMorris’ proposal that the fund concentrate on
three separate clusters is helpful in carving
out a viable, yet
sensibly circumscribed response. Thus, the condition could be
targeted at the existing body of supplierswithin
Massmart’s
supply chain, with the focus on the upgrading of capabilities and
access to markets, and on existing as well as
potential suppliers
which may fall outside the existing priority supply chain development
sectors of Massmart. Finallythe fund
should focus on the creation
and facilitation of highly focussed clusters of micro enterprises
which would be sourced overwhelmingly
from disadvantaged communities
and which , if Morris’ proposal was followed , may provide
Massmart with specific products
in certain niche areas, such as
horticulture, fresh and perishable foods and any other set of
products which may be so identified,
subject to an observation about
tradables which we make later in this paragraph.In this case the
objective is to:
(a) upgrade opportunities
for innovative Massmart suppliers who fall outside of the priority
sectors, and
(b) create a window for
suppliers which are not yet in Massmart’s supply chains seeking
access to Wal-Mart’s global
supply chains and export
opportunities in Africa; and
(c) ensure an opportunity
for those local suppliers who find themselves delisted from
Wal-Mart/Massmart’s supply chains because
of a shift towards to
an imported product to understand their competitive deficiencies
through a diagnostic, and thereby give them
an opportunity to address
their problems.
To return to the
qualification :ThIS Court accepts the point made by Mr Mgongwe in his
affidavit on behalf of the union
,
that an emphasis should be placed upon tradable goods, as non
tradable goods such as fresh produce and services are less likely
to
be imported. The focus must be to encourage the merged entity to
do that which it may not be incentivized to so do ,
and that is
to use South African products other than fresh produce which, in
any event , it is likely to purchase The
strength of this
observation notwithstanding , we would not wish to exclude from
consideration non tradables sourced from
small and micro
enterprises.
[27] Significantly, even
in a report which argues for a broader constituency of beneficiaries,
Stiglitz and Hodge concede while
“[
g]iven that the
ultimate purpose of the fund is to provide support to current or
potential suppliers to Massmart/Wal-Mart and ensure
that they are
integrated into the supply chain, Massmart will need to play the
central role in project identification and implementation
.”
The two experts go on to observe that it is likely that the buyers
within the Massmart/Wal-Mart group will be “
in the best
position to identify areas of threat or opportunity for domestic
suppliers
” and further “
the buyers
themselves are also central to key decision points around supplier
selection and contracting
.”
[28] It follows from
these observations that the real success of this fund, in promoting
the objectives of s 12 A (3), as we have
outlined them, will depend
on the understanding and acceptance by key executives within the
merged entity of the clear commercial
advantages which flow from the
objectives of the fund in order to ensure that the latter maximises
its objectives. The three
defined targeted areas fall within the
scope of the merged entity’s business; hence its defined nature
will be more likely
to contribute to the necessary ‘buy in’
by the key executives within the merged entity.
The mechanism of the
fund
[29] There is agreement
between the experts that there should be a high level of public
oversight and accountability, that oversight
should not only be
confined to financial reporting but there must be reports that
analyse the impact and outcome of the fund,further
that there must
be a role for external advisors within the process and that there
must be regular reporting to the relevant competition
authorities.
[30] Morris contends that
the critical issue of supply chain management and development process
should solely fall within the merged
entity’s organisational
remit. Thus, commercial decisions, many of which would be clearly
confidential because they relate
to operational supply chain decision
making, the selection of appropriate suppliers,the designation of
competent specialist service
providers, should be decisions taken
solely by the merged entity. However,Morris accepts that the broader
public aims of the fund
must be met and to this end proposes three
levels of external reporting. Firstly, the appointment of external
auditors will
ensure that financial probity is satisfied, an expert
reference group of external independent experts, appointed by
Massmart, willplaya
dual role of oversight to ensure that the
detailed supply chains accorded with the architecture of the fund and
possess the mandate
of reporting on agreed outcomes. Finally, a
general oversight will operate through the Competition
authorities,which must receive
regular reports from the independent
expert reference group.
[31] Stiglitz and Hodge
argue in favour of three levels of responsibility. Firstly
,
the identification and implementation of projects to assist and
integrate suppliers will be the primary responsibility of Massmart.
A fund administrator
,
including the managementand the disbursement of funds together with
the controls of monitoring and reporting
,
should constitute the primary responsibility of an independent
administrator. To this end, they recommend that the Industrial
Development Corporation (‘IDC’) would “
be
the natural Fund administrator given it already has in place the
appropriate systems to undertake these roles and may also be
in a
useful position to direct Massmart supplies to other government
funded programmes to supplement any initiatives
”.
However, in the final analysis, they contend that the appointment of
the administrator should be in the discretionof an
independent board
which isto be constituted. Theboard becomes a third level of
accountability. The board must report back to
the Competition
Commission and is to be accountable to the Commission for the
fulfilment of the objectivesof the fund. In this
design
,
the boardis a central component of the architecture of the fund
,
both with regard to decision making and the provision of oversight.
[32] Stiglitz and Hodge
recommended that the composition of the board should be broad based,
with representatives drawn fromlabour,
government and industry.
Decisions of the board should be taken by majority vote and, whatever
its recommendations, the merged
entity must only enjoy a minority
stake on the board. Accordingly, they recommend that a seven person
board should consist of
two representatives of labour, two from
government, one from Wal-Mart, one from South African supplies and an
independent expert,
charged explicitly with focussing on the concerns
of those not represented within government structures and with
broader national
interests.
[33] In our view, the
organisational mechanisms should be made as simple and inexpensive as
possible, without compromising the clear
objective of the fund,namely
the promotion of the purposes of s 12 A (3). Any debate about
appropriate mechanisms for accountabilitymust
take account of the
provision that a conditional approval of a merger always remains
subject to the continuingscrutiny, of the
Competition Commission.
Further, we have taken account of the organisational structure that
the merged entity proposed to the Tribunal
and which was, in turn,
accepted by the latter in the formulation of its proposed condition.
[34] Of critical
importance is that, if conditions are set for the approval of this
merger,including the creation of a fund to promote
public interest
considerations, the Competition Commission would be empowered to
receive regular reports about the progress of
the fund and make a
determination as to whether the manner in which the fund has operated
complies with the condition imposed by
this Court. That enquiry, in
turn,may trigger the consequences set out in sections 15 to 17 of
the Act regarding the revocation
of a merger approval. For this
reason, there is no need to develop further intricate governance
structures,as the Act has created
a mechanism for accountability
which is far more powerful than that envisaged in the proposal placed
before this Court by Stiglitz
and Hodge.
[35] As already noted,
the success of this fund will depend on the promotion of a ‘buy
in’from the merged entity.After
taking careful of all these
considerations, the structure which we propose will ensure that the
merged entity, which ultimately
funds this proposal, continues to own
the supply chain management and development process,is enabled to
promote its own commercial
interests,at the same time as it
contributes to the integration of South African SMME’s
enterprises into its global supply
chain as part of its broader
business interests. By allowing the executives of the merged entity
to manage the fund, the integrity
of the supply chain relationship
between the merged entity and its suppliers is retained, information
thereby procured will remain
confidential and its business
interestswill be protected.
[36] Given the public
interest considerations as articulated in both reports, which must be
promoted by the fund,and even taking
account of the important
question of confidentiality, there must be a considerable element of
transparency and accountability in
the scheme. Accordingly, external
auditors must be appointed to ensure regular and meticulous financial
compliance by the fund.
Secondly,and following the merged party’s
own proposal to the Tribunal, an advisory group of experts should be
appointed
to fulfil two primary functions. In the first place, the
advisory group should meet on a regular basis (a quarterly meeting
appears
to be appropriate although more regular meetings might be
required as thefund begins to expand its activities) so that the
experts
can consult with executives of the merged entity to maximise
the objectives of the fund. Furthermore, the advisory group must
compile semi-annual reports to be made available to the Competition
Commission, in order for the latter body to have the benefit
of an
independent assessment of the fund’s operation and compliance
with its objectives. In our view, the advisory body
should be
independent of the merged entity and should not be controlled by it.
To this end, the advisory body should be constituted
of five
experts, from which the merged entity shall be entitled to appoint
two members and the South African government, through
first to third
applicants, the union(SACCAWU) and the seventh respondent (SASMMEF)
each being entitled to appoint one member.
Each appointee must be
chosen for his/her expertise in the area of global value chains
and/or retailing, small business development
or any other field
ancillary to these areas. In the final result, the Commission, as
recipient of regular reports, will have
an important role to play.
To the extent that the intervening parties contend that from the
commencement of the fund, a report
should specify current procurement
activities of the merged entity and the steps taken to ensure access
to Wal-Mart’s sourcing
network, we would prefer, subject to the
framework as provided in the order, to leave it to the Commission to
fashion adequate
benchmarks to determine whether the merged entity
has promoted the core objectives of the fund,being that South African
SMME’s
benefit from integration into the merged entity’s
supply chain,thereby ensuring that this sector remains competitive
and
hence viable, which, in turn,may enhance employment.
Funding
[37] Both reports
conceded that the estimation of a monetary value for the fund was an
extremely difficult exercise and that the
amount required depended on
the objectives to be promoted by the fund. There was an agreement
that Massmart’s internal
expenses,in adapting its supply chain
structure to ‘incorporate better South African producers’
should not be similarlyincluded.
The costs associated with Massmart’s
independent implementation of the promotion of the objectives of
SMME’s should
also not be included.
[38] We were advised
that, after delivery by the Tribunal of its judgment, the merged
entity appointed a senior executive as its
Group SupplierDevelopment
Executive and tasked him to ‘design, build and administer the
Massmart supply development fund’.
Within a period of six
months, this fund initiated four substantial projects and two small
training and auditing projects around
simplifying and meeting
standards for small suppliers”. We were advised further that
the predominant focus of this initiative
was on the facilitation and
support for small enterprises from disadvantaged communities and that
the total amount, committed but
not yet disbursed, was R 40.4
million. While this is a commendable initiative, it is one that the
merged entity has taken outside
of the framework of the imposition of
this condition. Further, if account was taken thereof, it could
result in inadequate funding
for the proposed fund. Accordingly,
this initiative, which we trust we be continued ,should not be taken
into account in the formulation
of the condition,notwithstanding the
considerable amount of money spent thereon.
[39] Stiglitz and Hodge
submit that R 100 million ‘is plainly too little’. They
refer to the amount committed already
by Massmart (R 40. 4 million),
that Technoserve which has advised Massmartin its direct farm
initiative estimated the costs of
the programme would be in the order
of R 240 – R 440 million over a period of six years for it to
be successful and this
was merely for the development of fresh
produce. The IDC estimated that the costs for jobs which have been
created by it is in
therange of R 38 000 per job, in a few
particularly labour intensive sectors, to a figure of R 178 000
per job among
the broader set of economic sectors. The two experts
thus consider that a far more substantial amount of money is
required.
Without any further apparent justification they conclude:
“
On the evidence we have it
would seem that the fund would need to be many multiples of the
proposed R 100 million, probably in the
range of R 500 million to R2
billion over a period of five to ten years if it were to materially
address the concerns of the Court
and provides sufficient incentives
to Massmart to implement a serious programme to empower local
suppliers
.”
With respect to this
conclusion, it appears to beno more than a ‘guesstimate’,
without any clear justification, albeit
that this Court appreciates
the difficulty encountered in advising on a more specific and exact
amount.
[40] Morris encountered
similar difficulties in proposing a figure for the funding of this
condition. He contends for the total
allocation of R 46 – R 48
million for the establishment of three highly focussed supply chain
development and capability
building cluster programmes. Further
,
with an allocation of R 18 – R 20 million
,
existing suppliers outside the focus sectors
,
who qualify for assistance
,
could be provided with a diagnosis and further assistance. A further
allocation of between R 28 – R 30 million over three
years
could assist with the micro and small farm / business clusters.
Morris seeks to justify his calculations on the basis of
interviews
which he conducted with a number of specialist service providers
involved in providing upgrade support to firms in horizontal
capability building clusters, supply chain upgrading clusters and
micro enterprise clusters in South Africa. In his view, these
estimates “
are grounded on practical experiences
elsewhere and form a solid basis upon which real decision making
could start in respect of
the development and roll out of the fund
.”
[41] Given that Stiglitz
and Hodge based their guestimates on a design for a far more
extensive ambitious set of proposals, which,
in turn, we consider to
fall outside ofthe parameters of the Act and the objectives of s 12 A
(3), there is no justifiable basis
for ordering a fund of between R
500 million to R 2 billion. Mr Mowzer seeks in his affidavit to
justify the figure of
R500m and certainly provides more financial
information than appears in the Stiglitz/Hodge report .However
most of this
information relates to Walmart’s ability to
pay for a fund of R500m or more rather than why such an amount
will
be required to meet the specific needs of the fund.
[42] It is thusimportant
to emphasise that the object of this fund is to ensure that the
expertise of the merged entityis employed
to ensure that small and
medium sized local suppliersmay benefit from the global value chains
which will become aneven greater
part of South African economic
reality, pursuant to this merger. In examining both reports, it is
clear that much of the activity
of the fund will be concerned with
the impartingof skills as opposed to simple cash hand-outs. That is
not to say that funding
is not important. But as Stiglitz and Hodge
note:
“
Supply-side support measures of
the type envisaged by the court typically take a variety of forms
depending on the nature of the
problems faced by suppliers in
becoming competitive. By way of example only, these may include (but
are not limited to):
1. Support in upgrading quality and
implementing particular standards required by retailers.
2. Product re-design to meet the
demand of consumers (and by implication retailers)
3. Upgrading of equipment to reduce
cost and improve quality
4. Marketing support, including
research into the needs of consumers and retailers
5. Support through an entire cluster
of suppliers, including the suppliers of components or inputs to the
final product supplier
to the retailer.
6. Financing support in the form of
low interest loans, interest rate support or credit.”
Morris’ description
of the role of external specialised service providersalso illustrates
the mix between skills and finance,
which are needed to make a
success of any such fund:
Providing a diagnostic
of each of these suppliers, as well as a benchmark against
comparably competitive firms, with the aim of
identifying weaknesses
in operational performances. This involves providing the firm and
Massmart with a detailed report specifying
the problem areas and
possible solutions. They can then begin to work together on the
problem areas identified and find possible
solutions.
On the basis of
identification of operational weakness, external service providers
are called in to assist the firm fix the identified
problems over a
sustained period to time. Simply diagnosing operational problems in
a supplier is no guarantee that the firm
will take the necessary
steps to remedy them. There need to be incentives that provide the
firm with some form of assurance
that expenditure on upgrading will
be rewarded with sustained transactions in Massmart’s supply
chain. Hence, it requires
a retailer driven process which both
establishes its commitment to rewarding upgrading and the building
of a long term obligational
relationship with the supplier. This is
the ‘nuts of bolts’ of upgrading and building
competitive capabilities within
the supplier firms.
These activities involve
the sharing of skills together with a financial commitment. The
evidence made available to this Court
is indicative of the
managerially intensive nature of supply chain development, which,to
be effective,involves a detailed interaction
between the buyers and
producers, as well as close monitoring, information exchange,planning
and specific interventions to assist
the targeted firms in meeting
the buyers requirements. This is very different, for example, to a
fund primarily or exclusively
focussed on the acquisition of large
scale capital equipment.
[43] This makesthe
quantification of the fund even more difficult. Where this Court
agrees with Stiglitz and Hodge and the intervening
parties is that a
three year level of support may well be insufficient to address, even
the narrowly defined objectives of the
fund as set out, namely of
significantly enhancing supply capacity of small and medium size
enterprises which, to any significant
extent , have never been
required to nor have been integrated into a global value supply
chain. Accordingly,afive year duration
for the fund is justified.
As a result, andworking from Morris’ figures, which appear to
be a reasonably conservative estimate
of what would be required to
ensure progress in the three defined areas of fund activity, we
consider that for a five year period
a maximum amount of R 200
million should suffice. Morris had worked on an estimate of R 100
million for three years. Allowing
for inflation and an extension of
the period by two further years, R 200 million appears to us to be a
figure that is sufficient
to meet the objectives of the fund.
[44] We wish to emphasise
that this is the maximum amount required from the merged entity. It
may well be, given the kind of technical
support and imparting of
skills which is required to ensure the success of the fund,that not
all of this money will be required
over the five year period. With
the assistance of an external auditor, an independent advisory group
and the overall oversight
of the Competition Commission, there will
be sufficient transparency in the process to so determine. Hence,
if the entire amount
is not required to fulfil the clear objectives
of the fund, then that, on its own, may not be fatalto themeeting of
the condition
we intend to impose.
[45] Expressed
differently , the
quantum
is not the sole touchstone;
integration of local SMSE’s into the global value chain of
Walmartis the core objective. However,
the merged entity would
havecommitted itself to R 240 million, inclusive of the amount that
has already been spent, which we consider
to be a considerable
financial obligation in order to ensure the implementation of the
public interest objectives by a private
organisation.
[46] With R 200 million
as the maximum spend over a five year period, it may be that a
maximum of R 40 million per year should be
the mandated spend. We
would however prefer to leave the question of theprecise sum of money
to be spent annually to thedetermination
of the structures that we
recommend. In the imposition of this condition, we have sought to
craft our order to accord with the
objectives of s 12 A (3) as well
as the fact that, even given its huge global presence, Wal-Mart,
through the merged entity,enjoys
no dominant share of the relevant
South African market, and that its well resourced and large South
African competitors are free
to operate, without any such obligations
to the producer community.
[47] We wish to emphasise
that we are not unsympathetic to the overall proposal of Stiglitz and
Hodge. Read together with the
thoughtful and helpful affidavits
deposed to on behalf of the intervening parties, we consider that
these proposals provide a basis
for a comprehensive and sustained
policy in which government and a number of key organisations,
including the merged entity, and
itswell resourced and highly
profitable competitors should play a key role. But that proposal is
far too extensive for the specific
purposes of s 12 A (3) as applied
to this dispute. We have devised our order to provide the clear
framework for the relevant
condition, while affording the necessary
flexibility for the merged entity and the advisory board to develop
the necessary details.
[48] In the result, the
following order is made which sets out the further condition which
must be fulfilled by the merged entity
pursuant to the approval which
has already been granted for the merger in terms of the order of this
Courtof 09 March 2012:
THE ORDER
[49] The merged entity is
ordered to establish a Fund which shall comply with the following
requirements.
The fund
1. Massmart shall within
four monthsof this order establish a supplier-development fund.
Massmart may determine the legal form
of the fund but it must file
the detailed structure that it proposes with the Competition
Commission and deliver copies to the
parties to this appeal within
one month of the establishment of the fund.
The purpose of the
fund
2. The overall purpose of
the fund is to minimize the risks to micro, small and medium sized
producers of South African products
caused or which may be caused by
Massmart’s merger with Wal-Mart. In particular the Fund
should seek to incentivize the
merged entity to purchase products
from South African producers over and above the kinds of products
that would in any event
be so purchased.The fund is thus designed
to assist:
2.1 existing and
potential South African suppliers to Massmart; who fall both within
and outside of Massmart’s priority supply
chain development;
and
2.2 highly focussed
clusters of micro enterprises to be created or which already exist in
order to upgrade their capabilities and
provide them with access to
the merged entity’s supply chain.
The fund board
3. The administration and
management of the fund shall vest in the merged entity, which shall
appoint the necessary administrators
thereof.
Massmart’s
contributions
4. Massmart shall
contribute a maximum amount of R 200 million to the fund over the
duration of the fund which shall be for five
years.
5. After consultation
with the advisory board, Massmart shall determine the amounts to be
expended in each year.
6. The fund shall use its
resources to defray its own expenses and to reimburse Massmart’s
costs incurred in the implementation
ofthe fund project in
accordance with this order.
Advisory Board
7. An advisory board
shall be constituted within four months of this order of;
7.1 two representatives
chosen by the merged entity
7.2 one representative
chosen by the Ministers (first to third applicants)
7.3 one representative
chosen by SACCWU
7.4 one representative
chosen by the SASMMEF.
8. The representatives
must be chosen on the basis of expertise relating to the objective of
the Fund, as set out in the judgment.
9. The advisory board
shall meet as and when it so determines, save that in the first year
of its existence, it must meet at least
on a quarterly basis.
10. The advisory board
shall:
10.1 Consult with
Massmart to determine the details of each designated class of
beneficiaries as envisaged in paragraph 2.
10.2 Advise Massmart as
to the means and mechanisms to fulfil the objects of the fund.
10.3 Produce an annual
report on the activities of the fund and its assessment thereof which
shall be submitted to the Competition
Commission.
Fund Projects
11. Massmart shall design
and propose projects, to the advisory board for its advice and
recommendation. The advisory board may
advise it to consider
particular projects or projects of a particular kind, for design and
proposal to the board.
12. The projects shall be
designed to achieve the purpose of the fund in accordance with this
order. The advisory board may recommend
further project criteria and
guidelines from time to time.
13. The following
considerations shall be taken into account in the design and approval
of projects:
13.1 The producer’s
prospects of remaining or becoming long-term suppliers to Massmart,
Wal-Mart or to both;
13.2 The
labour-intensity of the producer’s South African operations;
13.3 Whether the producer
is a small-, micro- or medium-sized enterprise (SMME); and
13.4 Whether the producer
is owned by historically disadvantaged persons.
14. Massmart shall report
annually to the Competition Commission regarding.
14.1 The number of its
South African suppliers drawn from the three categories set out in
paragraph 2 and the value of its purchases
from them;
14.2 Changes in this
component of its South African supplier base from previous years and
the reasons for those changes, and
14.3 Its mix of suppliers
by product categorywithin the three categories set out in paragraph
2.
14.4 These reports will
be subject to the confidentiality provisions of s 44, 45 and 45 A of
the
Competition Act 89 of 1998
as amended.
15. Massmart, after
consultation with the Advisory Board, shall appoint a firm of
external auditors, which are not the external
auditors of Massmart.
16. The auditors shall
compile annual financial statements of the fund which shall be
submitted to the Advisory Board and the Competition
Commission.
DAVIS JP,
MAILULA JA, ZONDI JA