For some reason, I always find myself writing on competition law issues that have connections with the transportation sector. I did this in my previous posts here and here. Yet again, an issue that has caught my attention recently is the launch of a state-owned or state-partnered ride-hailing service, Lag Ride, launched by the Lagos State government designed to compete with Uber, Bolt, and other ride-hailing services in Lagos. Whilst this perhaps is a good initiative to further improve transportation accessibility in Lagos (although I believe the plan should be to get more cars off the road and not add new ones) the new enterprise may distort competition in the ride-hailing market.
The ride-hailing service initiative fits neatly into a state-owned enterprise (SOE) category. Due to their advantaged position, SOEs may negatively affect competition and for this reason, it is pertinent that SOEs are subject to similar competition regulations as private enterprises. According to the World Bank, SOEs are “government-owned or government-controlled economic entities that generate the bulk of their revenues from selling goods and services.”1 Consequently, SOEs are established to make a profit however, due to their natural interrelationship with the state, SOEs are driven by political and ideological reasons which give rise to a public interest economic benefit alongside its profit-making objectives. For Lag Ride, the government has explained that the purpose is to empower Lagosians, improve transport accessibility for commuters, and improve the standard of living. Typically, governments use SOEs to guarantee employment, offer better working conditions to the labour force, and improve industrial relations.2
Competition law alone is not sufficient in ensuring a level playing field for SOEs and private enterprises. Governments may create an uneven playing field in markets where an SOE competes with private firms, as they have a vested interest in ensuring that state-owned firms succeed. Accordingly, despite its role as regulator, the government may, in fact, restrict competition by granting SOEs various benefits not offered to private firms. While in some areas this preferential treatment will be direct and obvious, there may also be indirect preferential treatment through other means. The consequence of this type of behaviour will drive out existing market players, hence tipping the market in favour of the SOE. The market thrives where the market is not concentrated, and there are options and alternatives for consumers. A situation where an SOE can leverage its connection with the state to unfairly out-compete, other market players, will create a disadvantage for market consumers.
Whilst the full anticompetitive agenda of the Lag Ride initiative is yet to be fully manifested, this will perhaps be a potential watch area for anticompetitive investigation by the Nigerian Competition Authority, which could lead to a dispute that will grow antitrust jurisprudence in Nigeria.
Prospects for predatory pricing?
There is the potential for SOEs to charge below the average variable cost for the relevant market, which results in predatory pricing. This will typically occur when a dominant undertaking charges unreasonably low prices for a service, resulting in competitors being unable to match or keep up with such prices, and eventually leads to the competitor exiting the market.
When private enterprises engage in predatory pricing, this is usually unsustainable for a long period of time and because the prices charged during the predatory period are so unreasonably low that it results in losses for the enterprise, there usually needs to be a post-predatory recoupment period to allow the undertaking recover the losses. However, in the case of government enterprises, government support of SOEs allows SOEs to carry losses for extended periods and more importantly via direct support from public resources. Consequently, such predatory behaviour is sustainable enough to chase out competitors without the need for a recoupment period as the losses may be cross subsidised by another government entity.3
When predatory practices win, this affects customer welfare as the market becomes concentrated in the hands of the predatory firm, leaving consumers with no actual choice, and eventually leading to service inefficiency. The only way private enterprises outshine SOEs, like Lag Ride, is through innovation and fresh service offerings in the market. For example, when Uber and Bolt arrived in the Nigerian market, they significantly distorted the competition in relation to the yellow and black taxis (which are essentially SOEs) snatching the market away almost completely. Now that the government has decided to match the competitive leverage of private enterprises through technology, both institutions should compete fairly, and one does not leverage its state-backed power over the other.
In competition law, for a firm to be found liable for predatory pricing, that firm must be in a dominant position. However, to my mind, I believe it will be an interesting point before the courts to explore situations when SOEs may be liable for predatory pricing due to the extent of government-backed leverage when entering the market against private entities. Notwithstanding, in a market like Nigeria when consumers are constantly exploring the most affordable option, it won’t take long before an SOE offering the cheapest transport option enters into market dominance.
So what happens when such anticompetitive behaviour is backed by the law?
Many activities of state-owned enterprises are established by law or find their justification in public policies, and this will also include anti-competitive behaviours. Public entities may give SOEs the power to set prices or other terms and conditions in their commercial activities.
The question is whether such activities, which can entail serious price abuses and other anti-competitive behaviours, should be subject to antitrust scrutiny although authorised by law. There is the concept of state action defence in the EU which implies that there is no competition liability if the challenged business conduct (by both privately owned and state-owned firms) is determined by lawful public measures, (although there are conditions to be met in this regard).
There is currently no state action defence regime in Nigerian competition law hence we will not delve too much into this area. However, what is available under Nigerian competition law, which is also existent under South African competition law is a regime of competitive neutrality.
Competition should be neutral
Competitive neutrality can be understood as a regulatory framework, within which (i) public and private enterprises face the same set of rules; and where (ii) no contact with the state brings a competitive advantage to any market participant. In other words, competitive neutrality aims to promote efficient competition by minimising competitive advantages government business activities may enjoy over their private sector competitors simply because they are government owned.4
In identifying the scope of application of the Nigerian competition Act to determine competitive neutrality, Section 2 stipulates that the Act applies to all undertakings and all commercial activities within, or having effect within Nigeria, and also applies to and is binding upon - (a) a body corporate or agency of the Government of the Federation or a body corporate or agency of a subdivision of the Federation, if the body corporate or agency engages in commercial activities; (b) a body corporate in which a Government of the Federation or government of a State or a body corporate or agency of Government of the Federation or any State or Local Government has a controlling interest “where such a body corporate engages in economic activities.”
On this basis, the scope of the Act and competitive restraints apply equally to both private and public undertakings, thus creating a neutral environment for competition enforcement.
However, a point of distinction is when SOEs argue that such anticompetitive conduct has an overriding public service advantage,5 in line with a government policy or agenda and consequently, not liable for a competition law infringement notwithstanding the anticompetitive effect on the market. This will indeed be an interesting point for debate before the courts particularly, on what is the extent of harm to competition that should be justified based on economic benefit or progress. This will even be more interesting in a jurisdiction like Nigeria with an emerging antitrust jurisprudence. This point is made further exciting by the fact that the Nigerian competition Act does not have any provisions creating an obligation on state agencies to refrain from enacting policies which contradict the competition act or policies.
In the EU, Article 106(1) of the EC Treaty states: In the case of public undertakings and undertakings to which Member States grant special or exclusive rights, Member States shall neither enact nor maintain in force any measure contrary to the rules contained in the Treaties in particular to those rules provided for in Article 18 and Articles 101 (prohibition of anticompetitive behaviour) to 109. This provision enhances the competitive neutrality in the EU between private and public undertakings by prohibiting state agencies from enacting measures that contradict competition rules.
To the extent the scope for competitive neutrality in Nigeria is yet to be tested, it will be interesting to see how this will play out before the courts should the Nigerian competition authority ever get the boldness to challenge an initiative by its government which may be anticompetitive. Or in the alternative, just maybe, another ride-hailing service takes this on.
(I know, it seems as if I am more excited about the potential anticompetitive effect of Lag Ride than the actual initiative).
Before you go…
…here are some recent developments in the world of competition law:
No more exclusivity: The African National Congress (ANC), South Africa’s ruling party has released a policy document which calls for an end to DSTV’s exclusive broadcasting rights on national sports events. Sporting bodies will no longer be able to selling broadcasting rights exclusively to DSTV, meaning that other players would have the opportunity to enter the market and purchase broadcasting rights. In particular, the South African Broadcasting Corporation (SABC) will now be able to broadcast these games. According to the ANC, the SABC has a constitutional mandate, in the national interest, to show matches involving national teams to all South Africans, regardless of whether they can afford MultiChoice’s or other packages. While this is welcome from a competition perspective, national sporting bodies have warned that exclusive rights are how they make most of their revenue and undermining this might negatively impact player salaries and investments.
Computicket and Shoprite: Both companies have reached a settlement agreement with the Competition Commission of South Africa to pay an 11 million rand fine for abusing their dominance. Computicket, which distributes tickets for events and is a wholly owned subsidiary of Shoprite, allegedly entered into exclusive agreements with event organisers (theatres, promoters, etc.), which excluded its competitors and deprived consumers of choice. It is the second fine paid by the parties for a similar contravention; the first contravention was been 2005 and 2010, and the second was between 2013 and 2018.
Access Bank expanding: Kenya’s Sidian Bank will be acquired by Access Bank for N15 billion, subject to regulatory approvals in Nigeria and Kenya. The transaction will be Access Bank’s second acquisition of a Kenyan bank, the first being its acquisition of Kenya’s Transnational Bank in February 2020. And it would bake Access Bank Kenya a tier 2 bank in Kenya. Presumably, there would be no competition issues posed by this transaction because Access Bank is still a new entrant into the Kenyan space, but it would be interesting to see how the relevant competition authorities with jurisdiction over the Kenyan market view Access Bank’s conduct as it begins to gain market share.
World Bank, Bureaucrats in Business: The Economics and Politics of Government Ownership, 1995.
OECD Report on Competition and Financial Markets (DAF/COMP(2009)11).
Areeda and Turner, Predatory pricing and Related Practices Under Section II of the Sherman Act, 88 Harvard Law Review, 1975; OECD, Report, Predatory Foreclosure, 2005 [DAF/COMP(2005)14].
OECD Report on Regulating Market Activities by the Public Sector, [DAF/COMP(2004)36] and the Issues Paper prepared by the Secretariat on Corporate Governance and the Principle of Competitive Neutrality for State-Owned Enterprises [DAF/COMP/WP3(2009)3].
Section 72(3a) of the FCCPC Act stipulates that an undertaking will not be liable for abusing a dominant position if it contributes to the improvement of production or distribution of goods or services or the promotion of technological or economic progress, while allowing consumers a fair share of the resulting benefit.