Levelling The Playing field with Competition Authority

| Wednesday May 22, 2013 00:00

Under Section 29(1) of the Competition Act, any agreement or arrangement between a holding company and its subsidiaries or companies which are vertically integrated is exempt from the provisions of section 25(1), 26(1) and 27, all of which prohibit anti-competitive practices. The rationale behind this provision is that a company and its subsidiaries are deemed to be a single entity and therefore cannot enter into agreements with itself. 

However, Section 29(2) provides that where there is some degree of common ownership and control between different companies, the Competition Authority shall adopt the presumption that any agreements between such companies are subject to the provisions prohibiting restrictive agreements. In other words, it is for the companies with common ownership to prove that they are not engaged in anti-competitive practices. The presumption means that the Competition Authority will automatically investigate them even when common ownership is apparent.

It has become common practice in Botswana for businesspersons to set up a number of companies which engage in similar commercial practice with different directorships, but having a common ownership and control. The directors who are appointed to these companies may not be actively involved in the day-to-day running of these businesses and may have no influential financial or logistical control over them.

To understand this better, take for example a scenario where X is the owner of five companies in the construction industry. He is a managing director in one company and is a nominal shareholder in the other four companies where the directors are either relatives, friends or employees. From the face of it, it may seem that X is not having any form of control or involvement in the other four companies. However in truth, he maintains common ownership and control of all five companies, that is, he controls the running of the businesses and has the final say in each of them.

Many Batswana businesspersons are enticed into engaging into such ownership structures because they are driven by the motive of profit maximisation whereby they wish to eat out of many pots. It could be a strategy to deter others from entering the product or service market they are engaged in, for example using these companies to collusively bid for tenders for parastatals, local and central government works.

Since they all bid for the same tender, the chances of winning are very high. On pape, it may appear to the procurement entity that it is evaluating different competitors whereas in reality the tender process is dealing with one person. Competitors or businesspersons engaged in competition can do anything to benefit from business opportunities. Formation of several companies to benefit from tender opportunities may look like some form of commercial innovation while in reality, it is bad business ethic and very anti-competitive. The negative result of this practice on the economy and the country at large cannot be overemphasised.

It should be understood that engaging in deceptive multi-company formations with a view to gain anti-competitive advantages is a breach of anti-corruption, procurement and competition laws. The anti-competitive effects in particular are that the persons behind such companies derive undue economic benefits at the expense of other innovative entrepreneurs. This provides an uneven playing field as they can easily switch from one modus operandi to another in order to rig a bid. For example, they can easily rotate a bid among themselves, or engage in cover-up bidding without any detection.

While there is nothing legally wrong with multi-company ownership (including multi-directorships) competition issues arise when these companies stage-manage competition in the public eye, when in reality, they have coordinated their market strategies.

Procurement entities in Botswana are advised to seriously scrutinise the ownership and directorship of companies in order to satisfy themselves that they are not at any given time dealing with one person wearing different hats.Once companies or businesspersons are aware that this behaviour is not allowed, they will obviously desist from doing so.

Businesses should be made aware that use of multiple companies under the same ownership structure in a tender is anti-competitive and subject to an investigation (and penalties) under the Competition Act. Duncan Morotsi is  a director  of Legal and Enforcement at the Competition Authority.For further inquiries contact gideon.nkala@competitionauthorityco.bw