Tribunal slaps Telkom with R449m penalty
Telecommunications provider ‘took the law into its own hands and sought to extract monopoly rents and extend the ambit of its exclusivity’
THE Competition Tribunal recently issued its decision and reasons in the much awaited abuse of dominance case against Telkom. The Tribunal imposed a penalty of R449m against Telkom for abusing its dominance in the telecommunications market.
The penalty was levied in respect of conduct that took place between 1999 and 2004, a period during which Telkom was a monopoly provider of telecommunications services. The Tribunal found that Telkom had refused to supply essential services to independent value added network services (VANS) providers and induced customers of such VANS providers to not deal with them in contravention of sections 8(b) and 8(d)(i) of the Competition Act No 89 of 1998 (as amended).
The Tribunal found that Telkom’s requirements that its competitors accede to its conditions of supply, which were not contained in legislation or regulations, and its strategy of freezing its competitors’ networks (which Telkom engaged in when its competitors did not comply with its conditions) had adversely impacted on their businesses and amounted to a constructive refusal to supply in contravention of section 8(b).
In addition, Telkom’s insistence that (in respect of the leased line services provided to VANS), the leased lines be registered in the names of the end users and that the VANS providers could only obtain these from Telkom through agency agreements, was found to cause delay, increased costs and administration and resulted in a substantial lessening or prevention of competition in contravention of section 8(d)(i) of the Competition Act.
In consequence of such conduct, the Tribunal imposed a penalty of R449m, which constitutes 2% of Telkom’s turnover for its 2010-11 financial year. The penalty constitutes a fraction of the maximum R3.2bn penalty (equating to 10% of Telkom’s total turnover) sought by the Competition Commission in prosecuting the matter, which begs the question as to how the penalty ultimately levied by the Tribunal was arrived at.
According to the judgment, in calculating the penalty the Tribunal had referred to the penalty calculation guidelines articulated by the Competition Appeal Court (CAC) in the Southern Pipeline Contractors case and by the Tribunal in the Aveng case. The factors that were considered included, inter alia, the determination of the affected turnover in the relevant year of assessment, the duration of the contravention and a consideration of the factors that may mitigate or aggravate the quantum of the penalty.
In determining the “base amount” of the administrative penalty, the Tribunal had regard to the nature of the contravention (i.e. that it was an abuse of dominance and not a cartel contravention, the latter being considered the most egregious of competition law contraventions) and the duration of the conduct, being a period of four years.
The Tribunal took cognisance of the fact that Telkom had contravened two sections of the Competition Act involving conduct that affected a critical sector of the economy. However, in the Tribunal’s view, the single most significant factor in
The conduct also took place in an environment in which legislation and regulations lagged technological advances
mitigation of the administrative penalty was the regulatory environment in which the contravention took place. The transition to independent regulation was difficult for the telecommunications industry, the regulator, the ministry and Telkom, which until then had effectively played both regulator and provider. The environment was ripe for ineffective regulation and abusive practices.
At the same time, the difficulty of balancing conflicting policy objectives for Telkom’s shareholder, the minister of communications, played some role in this. The Tribunal also had regard to the fact that Telkom’s monopoly rights were granted by statute and the regulatory framework did not provide guidance on the manner in which to deal with the newly emerging VANS providers.
Telkom’s conduct also took place in an environment in which legislation and regulations lagged behind technological advances. Other factors in mitigation included Telkom’s debt burden at the time of its partial privatisation and that it had, until now, not previously been found to have contravened the Competition Act.
The aforementioned factors in mitigation were juxtaposed against the extent of the harm caused by Telkom, the impact of Telkom’s conduct on the business of the VANS providers, a number of which exited the market while others struggled to grow their businesses.
While not an exact science, the calculation of an administrative penalty requiring a detailed consideration of the particular facts and circumstances of a matter, the above factors were (among others) considered in the Tribunal’s calculation of the penalty. As a result, the Tribunal discounted the “base amount” penalty by 30% to arrive at a value of R449m.
Adding salt to Telkom’s wounds, the Tribunal stated that Telkom’s conduct might have been viewed in a more sympathetic light but for the fact that it enforced its alleged exclusivity with cynicism and a touch of hypocrisy. Despite enjoying a statutory monopoly, the Tribunal stated that Telkom, by taking the law into its own hands, had sought to extract monopoly rents and extend the ambit of its exclusivity through its conduct.
According to the Tribunal, had Telkom’s actions not been tainted in this way the Tribunal would have increased the level of the discount by a further 20%. Telkom’s behaviour in this respect was an aggravating factor leading to the reduction in the discount that might otherwise have been granted.
The penalty imposed on Telkom appears reasonable against the backdrop of a seemingly fair and measured judgment. What is less clear is whether Telkom will choose to appeal the Tribunal’s decision to the Competition Appeal Court, well within its entitlement, or whether it will take the penalty and run. At the time of writing this article, Telkom had indicated that it was still reviewing the judgment and that it was taking advice on its options.
In deciding whether or not to appeal the matter, Telkom will no doubt have regard to whether it is likely to fair better before the CAC. Other factors that it may throw into the decision-making pot are the consequences of the Tribunal’s decision on: i) opening the floodgate to a series of civil damages claims or to a class action suit by aggrieved VANS operators; and ii) another looming abuse of dominance complaint against Telkom scheduled to be heard by the Tribunal sometime next year.
Lee Mendelsohn is a director, Derushka Chetty is a director and Aidan Scallan is an associate in ENS’s competition law department.