The Competition Tribunal (Tribunal) has dismissed a complaint of alleged market division brought by the Competition Commission (Commission) against the Automatic Sprinkler Inspection Bureau (Pty) Ltd (ASIB) and six other firms in the fire protection industry, namely: National Security & Fire (Pty) Ltd; Fireco (Pty) Ltd; IBR Fire Protection CC; Multi-Net Solutions (Pty) Ltd; Specifire (Pty) Ltd; and Tshwane Fire Sprinklers CC.

Context

The Commission, in its referral of the matter, alleged that ASIB and 17 other firms “entered into an agreement, or engaged in a concerted practice, to divide markets by allocating specific types of services and geographic territories in contravention of section 4(1)(b)(ii) of the Competition Act (Act)”.

In particular, the Commission alleged that ASIB and the other firms agreed that ASIB would exclusively provide fire sprinkler inspection services while the firms would only provide fire sprinkler installations and not do inspections. This was referred to as the “services market complaint”.

In addition, the Commission alleged that on registering with ASIB, installers agreed to operate only within designated geographic areas - and agreed to ASIB’s rules that enabled the installers to divide the market geographically between them by allocating territories via ASIB. The Commission alleged that ASIB's geographic listing of installers in provinces was a so-called “hub and spoke” cartel arrangement, discouraging the firms providing installation services from operating in multiple provinces. This was referred to as "the geographic market complaint".

Before the Tribunal hearing, the Commission withdrew its case against TFMC (Pty) Ltd. Jasco Security & Fire Solutions (Pty) Ltd entered into a consent agreement which was confirmed by the Tribunal. At the start of the hearing, nine more firms settled with the Commission and their settlement agreements were confirmed as orders by the Tribunal. These firms were: Belfa Solutions (Pty) Ltd; Bubhesi Fire Projects (Pty) Ltd; Centa KZN Sprinklers CC; Country Contracts CC; Cross Fire Management (Pty) Ltd; Fire Check CC; East Coast Distributors CC t/a Fire King; Sylvester Fire And Piping Services (Pty) Ltd; and Whip Fire Projects (Pty) Ltd.

This left ASIB and the abovementioned six firms against whom the Commission sought relief. The Commission led three factual witnesses and the respondents each called one factual witness.

Tribunal’s Findings

Background

As far back as the 1970’s the short-term fire insurance industry established ASIB to develop a standard for the certification of fire sprinkler installations, in the absence of a government standard regulating the fire protection industry. Since then, ASIB has filled this regulatory gap.

It maintains a voluntary listing of installers who meet its standards for advising, designing and installing sprinkler systems. Once listed as an installer, the installer cannot conduct inspection services which only ASIB conducts.

Given the history of the sector, ASIB currently enjoys a position of pre-eminence in the fire sprinkler inspection segment, where the evidence suggests that it dominates the inspection services segment - ASIB conducts the majority of inspections in the South African fire protection services market.

Witnesses consistently submitted that it is either the insurance companies, customers issuing tenders or engineers who require adherence to the ASIB standards. This was confirmed by several witnesses. It was common cause that the majority of insurers (and consequently building owners) continue to require ASIB inspections as a prerequisite for their provision of insurance.

Services market complaint

The key issue in the ‘services market’ complaint was for the Tribunal to determine whether the firms were actual or potential competitors of ASIB at the time they signed up to ASIB’s rules.

The Tribunal found it was common cause that, at the time the firms applied to be listed as approved installers by ASIB, ASIB was not active in the installation market and none of the other firms were active in the compliance inspection market.

In its assessment of potential competition, the Tribunal considered arguments around barriers to entry including potential conflicts of interest: “ASIB and the other respondents argue that if installers performed sprinkler inspection services, this would involve a conflict of interest. For example, there is a risk that installers within the industry would not be sufficiently or overly rigorous in their evaluations of other installers' work. An installer may be too lenient in inspecting another installer's work, understanding that this may act as a quid pro quo when the roles are reversed…

… This concern is all the more pronounced if installers inspect their own installations and, in so doing, effectively "mark their own homework." Conversely, there is a real risk that competitors could be overly harsh in their evaluation of competitors' installation, in order to win customers away from their competitors. This conflict of interest was raised by several of the installer witnesses.”

The Tribunal concluded that the Commission had not provided sufficient evidence to show that ASIB and the other firms were in a horizontal relationship i.e. that they were potential competitors of each other in either the compliance inspection market or the sprinkler installation market.  

Importantly, the Tribunal noted that installers remain free to source inspection services from competing firms and that ASIB indicated a willingness to clarify its conditions of listing in this regard. Should any installer wish to enter the market for the provision of inspection services, it should be able to pursue that regardless of any ASIB rule. Installers may also consider sourcing inspection services from any service provider, provided it is commercially feasible and viable to do so.

Geographic market complaint

It was common cause that at least some of the firms were actual or potential competitors when they applied to be ASIB-approved installers and were therefore in a horizontal relationship as providers of fire sprinkler installation services. ASIB, as a provider of inspection services, operated in a vertical relationship with the firms.

The Commission alleged that ASIB acted as the “hub” in a “hub and spoke” cartel arrangement, facilitating a division of geographic markets among the firms (the “spokes”). However, the Tribunal found insufficient evidence to support this allegation. Evidence showed that the installers were permitted by ASIB to register in multiple provinces and often operated in regions where they were not listed, without sanction from ASIB or other installers.

During the hearing, ASIB insisted its listing conditions on the geographic market are recommended and that it does not penalise installers who operate outside their listed areas. The Tribunal noted therefore that the installers operating in this sector in South Africa should not, because of any ASIB rule, consider themselves being precluded from operating in any geographic region of the country.

Advocacy

The Tribunal observed, based on the evidence, that there was a regulatory lacuna in the fire protection industry. It emphasised the gravity of this gap, noting: “Fires threaten lives and property. Statistics show that thousands of homes and businesses are affected yearly, resulting in loss of life, property damage and financial burdens.”

While the Tribunal found no compelling evidence of market division as alleged by the Commission, it recommended that the Commission play a greater advocacy role in this sector: “… it appears in the circumstances that an appropriate intervention is an advocacy role for the Commission in this sector given the importance of fire safety. As we have indicated, fires threaten lives and property. … Advocacy by the Commission to improve regulation of the industry could include, but not limited to, engaging with the relevant body or bodies responsible for the issuing of safety standards in the fire protection industry to, inter alia, expedite the issue of the relevant updated standard.”

The relationship between ASIB and installers is continuing and, on the evidence, it appears that in practice the listing conditions are not adhered to/enforced. To align the conditions with the practice in the market, during the hearing, ASIB undertook to clarify its listing conditions in two respects:

  • The first was to clarify that by choosing a geographic area in which an installer intends to operate on listing, the installer is not precluded from performing work in another area where they are not listed; and
  • The second is in relation to inspection services where the listing is clear that installers are restricted from providing inspection services. The listing restriction remains the case to avoid a conflict of interest. Certain installer Respondents indicated that this did not preclude the client – be they engineers, insurance companies or parastatals choosing a different inspectorate body to ASIB. ASIB undertook to clarify this condition of listing.

The Tribunal’s order and reasons can be accessed at: www.comptrib.co.za