23 September 2015
Stephen Timm
SA’s competition law and competition authorities may be in for a shake-up, with the African National Congress (ANC) proposing that rules be strengthened to tackle anti-competitive practices and to ease the barriers of entry for new firms.
The party is also proposing the merging of industry regulators and the competition authorities to increase their capacity and powers — measures that have been previously mooted by the party.
The proposals appear in discussion documents prepared by the ANC ahead of its national general council next month.
The party says "tight-knit insiders" raise barriers to entry for new participants, including black-owned and managed firms, and they lobby to protect their position through rules and regulations that favour incumbents.
The ANC notes that while the competition authorities have identified anti-competitive behaviour such as excessive pricing and cartels, they may not have been equipped with enough powers to remedy such behaviour.
"Regulators need to work much more closely with the competition authorities and consideration should be given to merging these institutions to increase their capacity as well as their powers," the ANC document reads. It also calls for policy levers to deal with excessive pricing by oligopolies supplying key industrial inputs.
The Competition Amendment Act, that provides for the criminalisation of cartels, was signed into law by President Jacob Zuma in 2009. The amendment allows those found to have been involved in a cartel to be fined up to R500,000 or jailed for up to 10 years
However, the only section of the amendment that has come into effect is one which brought into force provisions relating to market enquiries, in terms of which the Competition Commission’s probe into the retail sector, announced in May, is being conducted. Testimonies from those involved in cartels have largely been secured by allowing people who come forward first to be treated with more leniency. Competition authorities fear criminalising cartel involvement would remove incentives to co-operate with it.
The Competition Commission and the Department of Economic Development did not respond to queries about whether the cartel provision would come into effect this year, as the commission stated in Parliament in March.
Werksmans Attorneys director Paul Coetser believes the provision has not yet come into effect because the competition authorities need to liaise with the national director of public prosecutions.
In a review paper, the Centre for Competition, Regulation and Economic Development notes that while competition policy has been successful in some areas, the competition authorities’ record in dealing with entry barriers constructed by incumbent firms to prevent or retard entry has been "mixed at best".
The paper, which notes that there is a "clear link" between barriers to entry and inclusive growth, forms part of a study on barriers to entry funded by the Treasury. It includes studies of the effect of competition and regulation on various sectors.
The centre has released studies on the liquid fuels sector and the beer brewing sector. In the liquid fuels sector the centre found the existence of high barriers of entry in the distribution of fuels because big oil companies control parts of the industry spanning the entire value chain.
The authors — Simon Roberts, Fatsani Banda, Genna Robb and Thando Vilakazi — describe barriers to entry as those costs borne by entrants or potential entrants that are not borne by companies already operating in the sector.
The incumbent companies have a lower cost of production than a new entrant because they have preferential access to raw materials or are able to restrict competitors’ access to inputs or customers.
"If new local businesses cannot access markets or if their costs are raised indirectly by the anti-competitive behaviour of established rivals, these firms will not be profitable," the authors say.
"If these entrants are not profitable then they cannot compete on the basis of innovation, efforts to increase efficiency, achieving economies of scale and scope, or building capabilities through learning-by-doing; and they certainly cannot compete with incumbent firms on pricing and quality."
The authors argue it is critical for regulation to focus on opening up access for entrants to key inputs and facilities that companies need to compete successfully.
They also note that competition authorities’ relationship with other regulatory bodies could be improved. They single out the recent Telkom case, which dragged on for years because of arguments over who had jurisdiction to hear it — the Competition Commission or the Independent Communications Authority of SA.
The Centre for Competition, Regulation and Economic Development also notes that industrial policy support tends to favour certain companies and can therefore entrench incumbents, which may impose barriers to entry.
"To prevent the heavy reliance of industries on government support, it is key to set up instruments and benchmarks that allow for industries to wean themselves off state subsidies," the authors say.
They emphasise regulation and policy will fail if it is not designed to fit specific competitive dynamics in a particular sector, grounded on a sound understanding of aspects that drive private decision-making.
Roberts says there are two schools of thought on promoting competition — one places more value on the process of competition, while the other emphasises prices.
The first group argues competition can be promoted for competition’s sake, and measures implemented that allow for more competitors, especially where there are dominant companies.
Competition can lead to higher costs because of a duplication of services and products or because certain economies of scale achieved when one company dominates a part of the market are impossible.
An example of such a measure is that Chile, Singapore and the European Union’s competition authorities reached agreements with Coca-Cola to offer display space in their refrigerators to other soft drink suppliers.
The second option is where authorities emphasise prices consumers pay for goods, regardless of whether it results in concentrated markets or not.
Roberts says policy makers need to think more about how to ensure that regulation creates more participation in the market. This does not necessary mean more regulation; sometimes regulation favours the large incumbent over smaller rivals.
In a paper written in 2013, Roberts and Gertrude Makhaya argue that, among other things, black economic empowerment (BEE) may have compounded market dominance as it encourages the sale of minority stakes. The new shareholders then have a stake in maintaining the status quo to protect their rents, while the incumbent companies seek politically connected investors to protect their existing positions.
The government has been attempting to deal with this problem. The new, amended BEE codes that came into effect in April incentivise big companies to buy more from small ones.
A proposal to set aside 30% of state procurement for small companies could complement this.