State also guilty of anticompetitive ethos
Will tightening up SA’s competition legislation to give the authorities greater power to go after large, dominant firms and open up markets to new entrants create growth and jobs? Economic Development Minister Ebrahim Patel believes it will. So does the ANC, whose December conference resolutions included one on economic concentration that called for measures to expand the mandate of the competition authorities to “deconcentrate levels of ownership in order to open the market to new, blackowned companies”.
President Cyril Ramaphosa is telling investors that SA is creating more opportunities for market entrants through its competition policies. And the Treasury estimated in its Budget Review that “lowering barriers to entry by addressing anticompetitive practices” could add as much as 0.6 percentage points to the economy’s potential growth rate.
But a new diagnostic report from the World Bank suggests that although SA does have a competition problem, changing the competition legislation won’t solve it, because the barriers to entry are as often about the state itself than they are about private sector firms, however large.
SA does have unusually high levels of concentration, with many markets dominated by just a handful of large players. It also has far too few of the smaller businesses that in other economies are the biggest generators of new jobs.
Patel gazetted a series of farreaching proposed amendments to the competition legislation in December. These give the Competition Commission the power to investigate concentrated markets, even where the firms involved have done no wrong, and to impose stringent remedies on the firms if the markets are found to be anticompetitive. The amendments add a host of controversial new abuse of dominance provisions and sanctions to the legislation, as well as extending the minister’s powers to intervene in mergers in the public interest.
The minister told Parliament in May that his draft Competition Amendment Bill “provides clear and practical mechanisms to address high levels of concentration that excludes small business and black South Africans from the mainstream economy”.
Patel has devoted much time to steering the proposed amendments through various consultative processes, most recently in a couple of intensive engagements with the social partners, particularly with business, in the National Economic Development and Labour Council (Nedlac). His team is understood to be revising the December draft before taking it back to Cabinet, and again to Nedlac, with a view to tabling the legislation in Parliament in July or August.
Chances are its passage will not be smooth given the wide powers it seeks to give the competition authorities. Chances are too that unless Patel can boost the skills and capacity of the commission, its aggressive new powers to intervene could become a regulatory nightmare for big business, albeit one that will provide plenty of new business for lawyers.
But will it enhance competition and open up markets? Probably not, especially not if the government fails to tackle its own dominant role in perpetuating concentrated markets.
The World Bank report, An Incomplete Transition: Overcoming the Legacy of Exclusion in SA, agrees that corporate ownership is concentrated but argues that the concentration of ownership is not necessarily the reason for limited competition in SA. And it points to the fact that the government is the dominant player in a number of industries.
The government’s presence, through the state-owned enterprises that dominate key markets such as electricity, transport and communications, as well as through its role as regulator, affects the ability of private players to invest and compete, says the World Bank.
It found that SA performed no worse than its peers on regulations restricting competition but it performed much worse on state control. It’s not just the presence of the SOEs in network sectors that is anticompetitive but also the governance and regulatory frameworks in sectors such as energy, rail, air transport, telecommunications and postal services that distort the picture.
The World Bank report identifies “low competition and low integration in global and regional value chains” as one of five key constraints to inclusive growth. It points not only to the government’s role in hampering competition in markets dominated by SOEs, but also in protecting former SOEs such as steel maker Arcelor Mittal SA through tariffs, or Sasol through a monopoly gas distribution network.
Crucially, it points to the negative effect Transnet’s port and rail monopolies have on firms’ ability to compete.
There are other intriguing findings about the effect of government regulation in restricting competition: SA’s industrial policy incentives are so complicated and so lacking in transparency they tend to advantage larger firms, says the report. The government’s procurement policies raise the cost of competing for some firms, particularly foreign firms, so may keep new foreign competitors out of markets.
Most intriguing, though, is the comparison the report draws between high-growth South Korea and low-growth SA. The World Bank says South Korea’s experience suggests that “as long as large firms are deterred from abusing their size for anticompetitive practices, they are an asset that can be … leveraged for growth and job creation, including in SMMEs [small, medium and microsized enterprises]”.
The implication for SA is that far from making it easier for smaller firms to enter the market, eroding the position of larger firms could even make it more difficult.
AS LONG AS LARGE FIRMS ARE DETERRED FROM ABUSING THEIR SIZE FOR ANTICOMPETITIVE PRACTICES, THEY ARE AN ASSET World Bank report