Break­ing up South Africa’s car­tels

The pres­i­dent made ref­er­ence to ‘de-con­cen­trat­ing’ own­er­ship and con­trol in sec­tors of the econ­omy in his State of the Na­tion Ad­dress. But what does this mean?

Finweek English Edition - - OPINION - Ed­i­to­rial@fin­week.co.za Andile Ntingi is CEO and co-founder of GetBiz, an e-pro­cure­ment and ten­der no­ti­fi­ca­tion ser­vice.

wient t largely un­no­ticed, but Pres­i­dent Ja­cob Zuma made one of his most sig­nif­i­cant pol­icy pro­nounce­ments yet on economic re­dress in his re­cent State of the Na­tion Ad­dress.

Zuma re­vealed that the de­part­ment of economic devel­op­ment will this year present an amend­ment to the Com­pe­ti­tion Act that seeks to dis­man­tle car­tels and mo­nop­o­lies in cer­tain sec­tors of the econ­omy as part of his ad­min­is­tra­tion’s “rad­i­cal economic trans­for­ma­tion” agenda.

“It will among oth­ers ad­dress the need to have a more in­clu­sive econ­omy and to de-con­cen­trate the high lev­els of own­er­ship and con­trol we see in many sec­tors,” Zuma said.

The im­pend­ing amend­ment caught my at­ten­tion be­cause it sug­gests dras­tic or rad­i­cal pol­icy ac­tion. It also raises two crit­i­cal ques­tions per­tain­ing to the fu­ture man­date of the Com­pe­ti­tion Com­mis­sion:

Will black own­er­ship, rather than com­pe­ti­tion, be the over­rid­ing con­sid­er­a­tion when the Com­pe­ti­tion Com­mis­sion ap­proves or blocks merg­ers and ac­qui­si­tions?

Does “de-con­cen­tra­tion” mean that com­pe­ti­tion au­thor­i­ties will be em­pow­ered to break up mo­nop­o­lies and oli­gop­ol­ies to al­ter the struc­ture of in­dus­tries?

The first ques­tion is straight­for­ward and goes to the heart of what the gov­ern­ment is try­ing to re­solve: low lev­els of black economic par­tic­i­pa­tion. As far as I know, the Com­pe­ti­tion Com­mis­sion has never blocked an ac­qui­si­tion or merger on the grounds that it will hin­der black economic em­pow­er­ment (BEE). The com­mis­sion ap­proves or blocks trans­ac­tions on the ba­sis of its im­pact on mar­ket com­pe­ti­tion and con­sumers.

In other words, the Com­pe­ti­tion Com­mis­sion has al­ways pros­e­cuted or pun­ished anti-com­pet­i­tive be­hav­iour in­stead of tam­per­ing with mar­ket struc­tures by break­ing up com­pa­nies that weaken com­pe­ti­tion or abuse their mar­ket power. BEE may in fu­ture come into play when ap­prov­ing or block­ing merg­ers and ac­qui­si­tions.

The sec­ond ques­tion de­serves more at­ten­tion than the first be­cause it im­plies that gov­ern­ment in­tends to in­ter­fere with mar­ket struc­tures to en­able more black peo­ple to own and con­trol a big­ger stake of the econ­omy. It is not un­rea­son­able to con­clude that we could see a sit­u­a­tion where gov­ern­ment de­lib­er­ately breaks up mo­nop­o­lies and oli­gop­ol­ies to cre­ate space for black-owned com­pa­nies to en­ter in­dus­tries that they have pre­vi­ously failed to break into.

The fresh push in leg­isla­tive re­forms to boost BEE is born out of the fact that the econ­omy is dom­i­nated by white-owned lo­cal firms and for­eign multi­na­tional com­pa­nies, some of which have in the past been pe­nalised for mar­ket col­lu­sion or ac­cused of op­er­at­ing like car­tels. This does not only lead to preda­tory pric­ing, where con­sumers are fleeced by the car­tels, but also erects bar­ri­ers to en­try Stansted Air­port in the UK is si­t­u­ated about 60km north­east of Lon­don. that keep po­ten­tial com­peti­tors out of the mar­ket.

Presently, the com­pe­ti­tion au­thor­i­ties do not have in­stru­ments in their pol­icy arse­nal that are de­signed to break up oli­gop­ol­ies. How­ever, there are in­ter­na­tional pol­icy ex­am­ples we can copy and im­ple­ment.

Per­haps a less dras­tic way of break­ing the strong­hold of a few dom­i­nant play­ers would be to in­tro­duce new com­peti­tors in these mar­kets to chal­lenge the sta­tus quo. This is eas­ier said than done, since this strat­egy has not re­ally worked in SA. I sus­pect that com­pe­ti­tion au­thor­i­ties will have to go to ex­treme lengths to end oli­gop­ol­ies and mo­nop­o­lies if black­owned firms are to en­ter key in­dus­tries of our econ­omy.

One ex­treme op­tion is to amend the Com­pe­ti­tion Com­mis­sion to is­sue di­vesti­ture or­ders to dis­man­tle com­pa­nies that sti­fle com­pe­ti­tion and sell bro­ken-up parts to new own­ers to in­crease com­pe­ti­tion. Divesti­tures have been used in the US and UK as a rem­edy for mo­nop­o­lis­tic and oligopolis­tic mar­kets. Com­pe­ti­tion watch­dogs in the EU and Canada are also em­pow­ered to is­sue divesti­tures, al­though they have not been used in re­cent times.

In the US, the split­ting up of Stan­dard Oil more than a cen­tury ago stands out to this day as a model for di­vesti­ture reme­dies. In 1911, the US Supreme Court ruled that Stan­dard Oil, which con­trolled 60% of US oil pro­duc­tion at the time, had abused its dom­i­nant po­si­tion in oil re­fin­ing. The com­pany was bro­ken up into 34 oil com­pa­nies that com­peted di­rectly, lead­ing to the birth of US oil gi­ants such as Exxon, Mo­bil, and Chevron.

A more re­cent ex­am­ple was the US Jus­tice De­part­ment’s de­ci­sion last year to per­mit beer maker Anheuser-Busch InBev (AB InBev) to ac­quire SABMiller, pro­vided that SABMiller di­vested its in­ter­est in US beer pro­ducer MillerCoors. As part of ap­prov­ing the trans­ac­tion, AB InBev was also pro­hib­ited from im­ple­ment­ing schemes that could po­ten­tially limit the abil­ity of in­de­pen­dent beer dis­trib­u­tors to sell the prod­ucts of AB InBev’s ri­vals.

In the UK, air­ports op­er­a­tor BAA Air­ports was or­dered by com­pe­ti­tion regulators be­tween 2007 and 2009 to sell Gatwick, Ed­in­burgh and Stansted air­ports in or­der to pro­mote com­pe­ti­tion. If the South African gov­ern­ment is com­mit­ted to re­struc­tur­ing our econ­omy, there is a like­li­hood that divesti­tures will form part of the com­pe­ti­tion pol­icy arse­nal. Since divesti­tures are a pow­er­ful pol­icy tool, I also sus­pect they will be used spar­ingly and where ap­pro­pri­ate, given that they could po­ten­tially do more harm than good by dis­rupt­ing in­dus­tries and hurt­ing the econ­omy.

It im­plies that gov­ern­ment in­tends to in­ter­fere with mar­ket struc­tures to en­able more black peo­ple to own and con­trol a big­ger stake of the econ­omy.

Pres­i­dent Ja­cob Zuma

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