The cartel that controls eSwatini’s egg prices

The country’s Competition Commission, armed with weak enabling legislation, is often found toothless when it comes time to dealing with industry big fish, like the egg cartel and more.

In 2007, the Swaziland Competition Commission (now Eswatini Competition Commission) was established under section 6 of the Swaziland Competition Act. It sought to provide for the encouragement of competition in eSwatini’s economy by controlling anti-competitive trade practices, mergers and acquisitions. This would in turn protect consumer welfare and provide for an institutional mechanism for implementing these objectives.

As a regulatory body and a creature of statute, the Commission had to flex its muscles and announce its presence in order to justify the taxpayer funds it receives. Examples of low-hanging fruits the Commission had to deal with initially were mergers, and the question of the legality and enforcement of exclusionary clauses in contracts. These clauses are most prevalent in contracts for lease on property seeking to establish large shopping malls.

The contract between Pick 'n Pay and The Gables in Ezulwini is, for instance, a good example.

The two entities reached an agreement that the landlord would not allow another retail outlet to operate at its premises. This, the Commission found, was an anti-competition move and at odds with provisions in the Competition Act. It then intervened, making it possible for Shoprite to get retail space at The Gables. A victory for the Commission is in effect a victory for ordinary consumers. More competition means a wider choice.

Facing the bigger fish

With this success in mind, the Competition Commission wanted to confront the bigger fish in the sea. In eSwatini, these bigger fish are typically the bread and egg industries.

When the Premier Group acquired controlling shares in Swaziland United Bakeries (SUB) and Mister Bread in a merger transaction, this raised the Commission’s eyebrows.

Competition authorities globally are generally more suspicious of horizontal mergers than they are of non-horizontal mergers. A Horizontal merger is a merger between firms that produce and sell the same products. Basically, it is a merger between competing firms. A vertical merger joins two companies that may not compete with each other, but exist in the same supply chain. One example of a vertical merger in eSwatini is the one involving Shiselweni Forestry and Peak Timbers - there is a vertical inclination on the basis of the mill. Peak Timbers had the mill and Shiselweni Forestry had the forests which is the input that gets processed in the mill. Unlike horizontal mergers, vertical or conglomerate mergers do not entail the loss of direct competition between the merging firms in the same relevant market.

The SUB and Mister Bread merger involved two leading competitors, and the Commission was correct in viewing it with suspicion because it was a horizontal merger. Worse still, the milling company which produced flour in the country was in their control now. It is, however, still a mystery as to why the Commission allowed this merger to go ahead. A competition law and policy expert who spoke to The Bridge on condition of anonymity holds the view that the merger was not supposed to be allowed. “My brother, I can tell you that was a big blunder by the Competition Commission; that merger has adverse effects on competition. As a result, some small bakeries had to close down because of the effects of this merger,” she said.

The egg cartel

Then came the biggest headache of the Commission thus far: the Egg Cartel.

Two of the largest producers of eggs in the country – Usuthu Poultry and Eagles Nest – entered into an anti-competitive agreement which was in clear violation of Section 30 of the Competition Act. The Commission felt that these companies had a case to answer since their agreement was against fair competition in the market. The two companies had a collusive agreement through which they agreed on setting prices, distribution and allocation of markets.

For the uninitiated, price fixing is an agreement between participants on the same side in a market to buy or sell a product, service, or commodity at a fixed price, or maintain the market conditions such that the price is maintained at a given level, by controlling supply and demand. Consumers then have no choice because the price is the same wherever they go. Price fixing disrupts the normal laws of demand and supply. It gives monopolies an edge over competitors and is not in the best interests of the consumer. They impose higher prices on customers, reduce incentives to innovate, and raise barriers to entry.

It is the same with geographic allocation. An example would be when competitors agree to sell only to customers in certain geographic areas and refuse to sell to, or quote intentionally high prices to, customers in geographic areas allocated to conspirator companies. That is exactly what Usuthu Poultry and Eagles Nest did. What these two companies did is considered one of the most serious cases in Competition Law. These prohibitions are called per se prohibitions, meaning that the acts are inherently illegal and there is no need to prove anything or to have any form of evidence. The agreement alone is enough evidence.

Per se prohibitions are anti-competitive in their nature. Subsection one of section 30 of the Act reads:

“Any category of agreements, decisions or concerted practices which have, as their object or effect, the prevention, restriction or distortion of competition to an appreciable extent in the country or in any substantial part of it are prohibited.”

These include agreements to fix prices, collusive tendering and bid-rigging, market or customer allocation agreements and, subject to any law to the contrary, allocation by quota as to sales or production; or collective action to enforce arrangements. A competition policy expert who spoke to The Bridge said:

“I want to make things easier for you so that you understand how difficult it is to deal with per se prohibitions, compared to a number of other criminal cases. For instance, in a rape case you may need to work extra hard to get evidence to ascertain the offense but with per se prohibition you have the evidence already – the agreement. With these prohibitions, you do not even look into their effects – their effects are secondary; what is more important is just the agreement itself.”

That is the agreement that led into what later came to be known as the “Egg Cartel” in the country. Usuthu Poultry and Eagles Nest were at loggerheads with the Competition regulator. So serious were the effects of these agreements that, it is believed, small egg producers were pushed out of the market because of predatory pricing ---whereby producers, for example, can charge half the normal price or even go below production cost so that the other suppliers can be pushed out of the market.

Once you are out of the market they can do whatever they like with the price and sustain it for years because they will be without competitors. This leads to ridiculously high prices of certain products because, for instance, you would go to a supermarket and find one supplier of eggs. It gets worse when the producer of the chicken feed is part of the cartel as was the case with a company called Crane Feeds in this particular case. This means the supplier of the animal feed can sell at lower prices for her cartel siblings and charge exorbitant prices for other companies so that they are pushed out of the market. At the end of the day, the effects are suffered by the unsuspecting consumer who has no choice but to buy from one source of supply at excessively high prices.

That is why competition commissions are needed in any country, to promote fair competition and protect the consumer. That is why the Swaziland Competition Commission stepped in.

A toothless commission exposed

Seeing the seriousness of the case, the two companies (Eagles Nest and Usuthu Poultry) solicited services of a reputable South African competition lawyer, Advocate David Unterhalter. The Commission was represented by Advocate K.J Kemp. It became a battle of two legal giants. With a weak piece of legislation that does not give the Commission much powers, as well as a novice and relatively inexperienced Commission, Advocate Unterhalter gave a detailed lecture during the case and exposed the limitations of Swaziland’s Competition Act.

For instance, while Competition Acts in other jurisdictions allow competition authorities to charge companies as high as 10% of their annual turnover, eSwatini’s Competition Act only talks about 10 years in jail or a E250 000 fine or both. Clearly, the Commission did not have the technical capacity to handle the matter and the legislation did not help.

Renowned competition expert, who was the Competition Commission Board Chairperson at the time, Nkonzo Hlatshwayo, advised the Commission to drop the case and push for the amendment of the Act. He had given prior advice to that effect but it fell on deaf ears since the then CEO of the Commission, one Thabisile Langa, could not be easily advised. That is how the case fell off and the cartel got away with it.

Now the Competition Commission has to push for the legislation to be amended to give it more powers to fine companies. This process is moving at a snail pace and there is no hope that it will be completed anytime soon. But, the big question is: what about the cartel and its effects on the price of eggs in eSwatini?

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