Lifting competition barriers will help the economy grow

13 July 2016

Simon Roberts and Thando Vilakazi

THE structure of SA’s economy welcomes few entrants. It is highly concentrated with insiders firmly entrenched. Widening access to the economy, according to the results of a set of studies released this week, will require a concerted and collaborative effort by the government to alter the economic landscape, remove barriers to entry, enhance competition and foster inclusive growth.

The Centre for Competition, Regulation and Economic Development (CCRED), in research funded by the Treasury, has uncovered the range of often mutually reinforcing factors that stack up to block greater participation in the economy by entrepreneurs or producers.

These include the difficulties of accessing routes to market to reach consumers; overcoming consumer inertia and switching costs; achieving sufficient scale to enjoy efficiencies and lower costs; having patient capital to ride out the time it takes entrepreneurs to learn and build a business; and the reliance on vertically integrated rivals for key inputs and/or markets.

Finance is often cited as the determining factor in new business success, but the research suggests providing development finance without tackling other barriers to entry is likely to be a waste of money.

CCRED examined practical experiences including the entry of Capitec, Fruit & Veg City, Soweto Gold and low-cost airlines, and undertook sector studies of the barriers in telecoms, agro-processing, liquid fuels and mobile money. Among the findings:

• Capitec, as an effective rival, saved consumers close to R20bn annually from 2010 and stimulated the extension of services to the previously unbanked;

• The reduction in cellphone call termination rates, which enabled Cell C and Telkom Mobile to become more effective competitors, induced the two lead operators to also reduce rates, saving consumers about R47bn since 2010;

• The entry and growth of low-cost airlines cut prices by around 30% and extended services to smaller cities and towns;

• Rivalry in retail including the growth of Fruit & Veg City, brought a wider range of offerings to consumers and provided an alternative route to market for producers;

• Soweto Gold, a black industrialist producing beer in Soweto, struggles to get product to consumers due to measures that exclude it from outlets for draft beer and raises its costs to supply;

• Smaller competitors in agro-processing such as poultry and maize meal brought lower food prices, but there are challenges in sustaining competitive businesses in the face of vertically integrated incumbents.

Evidence shows that with no threat of competition, incumbent market players are less likely to invest, innovate or increase productivity. Instead, insiders tend to abuse market power to marginalise rivals and maximise profits. SA has an extensive history of cartel behaviour that means entrants can be locked out of markets.

Apart from piecemeal, isolated (and largely ineffective) interventions to open the market, policy decisions have too often supported the interests of large incumbent companies, or "national champions", protecting them in exchange for a black economic empowerment quid pro quo of more black shareholders. This serves to entrench the dominant companies’ power rather than encouraging rivals to challenge it.

Without material changes to market access, black industrialists cannot be competitive, but remain partners and essentially subordinate to incumbents. And the economy will continue to stagnate.