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

The commission, in its referral of the matter, alleged that the 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”.

In particular, the commission alleged that the ASIB and the other firms agreed that the 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”.

Moreover, the commission alleged that, on registering with the ASIB, installers agreed to operate only within designated geographic areas – and agreed to the ASIB’s rules that enabled the installers to divide the market geographically between them by allocating territories through the ASIB.

The commission alleged that the 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.

Jasco Security & Fire Solutions 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 are Belfa Solutions, Bubhesi Fire Projects, Centa KZN Sprinklers, Country Contracts, Cross Fire Management, Fire Check, East Coast Distributors trading as Fire King, Sylvester Fire And Piping Services and Whip Fire Project.

This left the 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.

BACKGROUND
As far back as the 1970s, the short-term fire insurance industry established the 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, the 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 the ASIB conducts.

Given the history of the sector, the 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 – the 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.

Several witnesses confirmed this.

It was common cause that the majority of insurers (and consequently building owners) continue to require the 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 the ASIB at the time they signed up to the ASIB’s rules.

The tribunal found it was common cause that, at the time the firms applied to be listed as approved installers by the ASIB, the 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.

“The 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 points out

The tribunal concluded that the commission had not provided sufficient evidence to show that the ASIB and the other firms were in a horizontal relationship, that is, 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 the 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.

The ASIB, as a provider of inspection services, operated in a vertical relationship with the firms.

The commission alleged that the ASIB acted as the “hub” in a “hub and spoke” cartel arrangement, facilitating a division of geographic markets among the firms.

However, the tribunal found insufficient evidence to support this allegation.

Evidence showed that the installers were permitted by the ASIB to register in multiple provinces and often operated in regions where they were not listed, without sanction from the ASIB or other installers.

During the hearing, the 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 to be 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 is 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 the ASIB and installers is continuing and, on the evidence, it appears that in practice the listing conditions are not adhered to or enforced. To align the conditions with the practice in the market, during the hearing, the 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.

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 the ASIB. The ASIB undertook to clarify this condition of listing.