Sasol gets an enema

Bruce Whitfield | Fri, 05 Jun 2009 16:37
[miningmx.com] -- SASOL has no idea just how deep-rooted the problem of collusion is within the company. To date it's paid two substantial fines amounting to more than R4bn to competition authorities in Europe and South Africa. The nature of collusive behaviour means it can't tell whether that bill is going to rise.

Despite that, CEO Pat Davies has committed Sasol to exposing even the most sordid truth about possible underhand business practices in the company he's run since 2005. Davies, an executive director at Sasol since 1997 and a senior manager of numerous business units throughout the group for more than two decades, also faces personal scrutiny to establish whether he or any other senior managers were aware of illegal activity.

It wasn't a decision taken lightly - but Davies has no choice. Competition authorities in territories where Sasol operates have made it clear that unless there's full co-operation, the consequences of insufficient or non-disclosure could be considerably worse than they have been to date.

Davies made the public commitment to greater transparency after a finding last year by competition authorities in Europe that Sasol Wax had been engaged in price fixing. Two directors of the unit were fired. Sasol paid a fine of around R4bn - against which it's currently appealing - and embarked on a clean-up campaign that's steadily gathered momentum.

Central to the internal process - which is being carried out by a number of the country's top law firms under the watch of the group's non-executive directors - is to uncover not only why collusion occurred, but to find out whether it was ever encouraged, tolerated or simply went undetected. Crucially, Sasol also wants to identify individual culprits to illustrate its claim that the problem isn't endemic but rather as a result of the actions of a handful of individuals.

Davies hopes the process will give the company - listed on the JSE and on the New York Stock Exchange - a clean bill of health. It's aimed at restoring the reputation of a firm that has a shadowy past, in that it was formed as a sanctions-busting mechanism under the apartheid government to defy the then oil ban.

Coming clean carries the risk that even more dirty laundry could be washed in public. Executives simply don't know if the investigators hired by Sasol will find that collusive behaviour spread beyond more than just its Sasol Wax and Sasol Nitro business units.

While the Sasol Nitro case has been settled, there's still an abuse of dominance issue that must also be addressed, which carries the potential of further sanction.

SA's Competition Commission is already investigating other divisions, either directly or as part of broader industry probes outside the internal study being undertaken by Sasol. In the Sasol Gas business it's filed two leniency applications related to the relationship between it and two companies it helped create.

In the case of its 49% joint venture with empowerment grouping Spring Lights Gas, Sasol treated the firm like a subsidiary when in fact it should have operated as a competitor. Spring Lights and Egoli Gas form part of a broader investigation into SA's piped gas industry.

Sasol has also filed leniency applications in its petroleum business, where its review programme has picked up possible contraventions of competition law. But those are fairly recent and the firm is reticent to provide further details while an investigation by the Competition Commission continues. Plus there's an ongoing investigation into the polymer industry in which Sasol is the most significant producer - implying its role in that sector will also be investigated.

The Competition Commission has been tough on Sasol, despite its public commitment to transparency. That was illustrated last month when, after reaching an agreement on a R188m fine against its Nitro business, the amount was raised to R250m when it emerged information at a divisional level had been withheld. Sasol suspended three senior staff members and agreed to the higher fine. As for the Competition Commission, it sent a clear signal that only full disclosure is good enough for it.

Despite two large fines it's so far, so good for the process. Shareholders appear comfortable with Davies's strategy. However, it's a painful procedure for the R180bn company and its shareholders footing the bill.

But analysts caution investors shouldn't become too emotional about the penalties levied against the group. "Of course nobody is happy about the fines, but the investment case for Sasol depends more on the rand oil price and the company's ability to keep a lid on its costs," says analyst Stephen Brown at RMB Asset Management.

While analysts maintain that their long-term view of Sasol remains intact, the review is unsettling and calls into question historical governance standards and raises questions about the way the group carried out its business.

Key questions that the review hopes to answer include: What factors caused senior individuals within the group to meet competitors in secret off-site meetings? Did incentive structures encourage underhand behaviour? Was there a tacit tolerance of market players dividing up industry segments for their own benefit? Just how deep-seated are the roots of the problem? And, most importantly, did executives know or even actively encourage that behaviour?

There's no knowing what might emerge from the audit of all 12 of Sasol's main divisions. "We can't rule out getting another Nitro," says Norbert Behrens, Sasol GM of strategy and planning. "We can't rule it out."

Collusive behaviour in industries can have a serious knock-on effect within economies. Thus there's a drive by SA's competition authorities to push for directors involved in collusive activity to be held personally liable. SA's Competition Amendment Bill makes provision for criminal liability on the part of a director who can be shown to have been involved in price fixing.

However, the amendment has been referred back to the Presidency to assess whether or not it's constitutional: but the direction of legislation is clear. Such an amendment would be popular with a range of consumer and pressure groups.