Within South Africa's economic landscape several important industries are highly concentrated oligopolies, characterised by few players and limited competition. This is the result of years of policies aimed at creating and protecting state monopolies, which were subsequently part-privatised into unregulated and underdeveloped markets. The situation has been exacerbated by the racially-based exclusion of potential entrants.

South Africa's re-emergence into the international marketplace coincided with globalisation on an unprecedented scale. The liberalisation of local markets coincided with a need to boost domestic firms' ability to compete with international players at home and abroad, which did little to rein in the inherited power of many firms.

Such concentrated market structures provide a fertile breeding ground for cartels, an anti-competitive phenomenon that is at once the biggest threat to consumer welfare as well as being very difficult to police and prosecute.

Although active collusion between competitors on matters such as price, output and customer allocation constitutes cartel behaviour in the classic sense, tacit collusion arising out of concentrated oligopolies can have the same dampening effect on competition. Furthermore, it is a short step from knowing your competitor's every move to agreeing the next one.

After almost a decade of being largely pre-occupied with merger control, the competition authorities in South Africa have begun focusing their attention on anti-competitive practices, with cartels highest on the agenda.

The same shift in emphasis has been evident for some time in other jurisdictions, most notably Europe, where cartel enforcement has become de rigeur, leading to record fines and high-profile 'busts'. In order for South Africa to keep pace, a number of existing mechanisms will need to be geared up, as well as new ones introduced. This year, a thorough competition policy review was initiated by the Department of Trade and Industry (DTI), which is expected to culminate in amendments to the Competition Act, possibly as early as 2008. Among the amendments being mooted is the introduction of new and improved tools for the detection, prosecution and deterrence of cartels. What follows is a brief discussion of what might be in store for cartelists in the near future.

Investigatory powers – search and seizure

The Competition Commission has extensive investigatory powers, which include the right to enter and search the premises of suspected cartelists, without a warrant in certain circumstances.

While so-called 'dawn raids' attract huge publicity in Europe and elsewhere, the Commission in South Africa has been reticent to exploit its powers to the same degree. However, recent times have seen a revival of surprise searches as an important regulatory instrument. While South Africa is still relatively conservative in terms of using the publicity surrounding raids as an additional deterrent, this may change as society becomes more tolerant of regulation aimed at protecting the consumer against big industry.

A further phenomenon to be aware of is the increasing degree to which the South African authorities are likely to cooperate with foreign jurisdictions in bringing international cartels to book.

Corporate leniency

The Commission's corporate leniency programme (CLP) has been in effect since early 2004, and has apparently been instrumental in uncovering a number of cartels. Certainly, the prospect of immunity for whistleblowers can destabilise a cartel from the inside while bringing vital evidence to light in order to prosecute the remaining members. However, uncertainty surrounding the legal status of the CLP as well as the possibility that cartel leaders may not qualify for leniency have watered down its effectiveness. The DTI is therefore seeking to strengthen the status and scope of the CLP in order to encourage more revelations.

However, leniency is only an effective incentive if the prospect of being otherwise found out and prosecuted is a sufficient deterrent. The CLP thus goes hand in hand with more effective investigation as well as increased sanctions against offenders.

Administrative penalties and private litigation

Economic studies have shown that the average cartel is able to overcharge for goods and services by 15%-20%, with some surveys putting the average figure as high as 25%. It stands to reason that for the prospect of a fine to be an adequate restraint, the penalty must render the cartel unprofitable.

In South Africa, the Competition Act allows for a maximum penalty of 10% of total turnover. In practice, the percentages imposed have been a fraction of that and are typically only applied to turnover in the 'affected market' (i.e. where the offence took place).

Studies in the European Union (EU) have shown that applying the 10% rule is grossly insufficient to cover even a robust cost/benefit analysis and the EU regulator has announced its intention to increase the level of fines at least tenfold. The DTI has taken this cue and a significant increase in the level of fines is on the cards.

A further sanction being mooted is to provide for individual liability of directors and other officers of firms that join cartels. In the US, membership of a cartel is a criminal felony for which directors can be jailed. While South Africa is probably not ready for such a dramatic shift in policy, measures are being suggested that would bar a complicit director from serving on any board in the future.

A measure not yet clearly articulated but already being debated in Europe is to amend the legislation to make class action lawsuits easier to litigate. In this way, cartelists would face not only the prospect of an administrative penalty but also the possibility of a flood of damages claims from customers and competitors.

Structural remedies

The ability for cartels to form and be maintained is largely a function of market structure. Through robust merger control, the competition tribunal has become quite adept at taking steps to ensure that anti-competitive market structures are not made worse through ill-advised concentrations.

However, the tribunal has on more than one occasion lamented the fact that merger control is not an effective way to cure a market that is already anti-competitive. In fact, and somewhat paradoxically, the more anti-competitive a market is, the less likely a proposed merger is to 'prevent or lessen' existing levels of (non)competition.

One solution being proposed is to give the authorities express power to investigate specific markets and, if necessary, impose structural remedies aimed at reducing the possibility for collusion.

More than ever, these are becoming dangerous times for cartelists and more generally for market-dominant firms which remain oblivious to the new order that competition regulators the world over are anxious to usher in. In South Africa, the competition authorities have only just begun to flex their muscles but they are now seeking to do so with increased fervour.

The trick, as always, is to balance the interests of a free market which is professedly allergic to regulation with the need to correct market distortions and root out the collaborative conduct that is competition's greatest threat. It seems the best solution is to tread softly but carry a big stick, or, as is likely to be the case in the near future, several of them.

Chris Charter is a director in the competition and regulatory group at Cliffe Dekker in South Africa.