SA must support rivals to big business

17 July 2016

Dewald Van Rensburg

Researchers say competition laws must be amended to fund risky businesses and support rivalry

South Africa has to start promoting high-risk, likely-to-fail new challengers to dominant companies and so-called “national champions”.

To do this, the Competition Act has to be amended to undo a compromise reached with big business in the 1990s.

Funds need to be made available to companies that will fail three times out of four – but that will fundamentally change their sectors when they do succeed.

Sectors such as telecommunications and banking have to be regulated specifically to let these players in.

These are the main recommendations from a research project undertaken by the University of Johannesburg’s Centre for Competition, Regulation and Economic Development (CCRED), funded by National Treasury.

The unit studied the rare appearances of new disruptive entrants in South Africa’s infamously tightknit corporate world and found that we need more of them. Lots more.

Case studies presented at a conference this week show how Capitec’s success from 2008 onwards forced down banking costs at all of the “big four” banks, delivering huge benefits to all banked South Africans (see graphic).

Likewise, regulatory decisions made since 2010 in favour of new mobile operators Cell C and Telkom Mobile led to a massive drop in telephony costs – saving MTN and Vodacom customers alone about R47 billion on average over the past five years.

According to Simon Roberts, head of the university’s research unit, these success stories are really the opposite. The consumer windfall that occurred from dropping cellphone costs after 2010 shows how bad things were beforehand, he said.

“Capitec is a success story, but it is also a regulatory failure,” said Roberts.

“South Africa is a very particular economy. All the studies that have been done have continued to point to the highly concentrated nature of the market and the low levels of dynamism, of productivity and of building capability.”

When the Competition Act was originally negotiated in the 1990s, there were trade-offs, Roberts told City Press.

“We are putting our faith in the large incumbents and not rattling the cage too much, but going after cartels very hard.

“While South Africa’s competition authorities have been very successful at breaking up cartels, competition law simply does not allow for proactive interventions,” he said.

“We need new competitors, not just for the existing competitors to behave better after a cartel is uncovered.”

The CCRED is advocating for the Competition Act to change how it treats abuse of dominance.

Currently, a complainant has to somehow prove that being blocked from an industry has a substantial effect on consumers. That makes it impossible for a new or small competitor to challenge a big, entrenched one. Its effect on the market is hypothetical and cannot be proven.

“It is a policy choice. We made that choice. It is time to go back and maybe go the route that most countries in the world have chosen,” said Roberts.

“The European Union, for instance, says that if you have superdominance, once you are a monopoly you have to self-monitor,” he said.

“It is a question about value systems. Do we put our faith in the incumbents and national champions? Or do we say: ‘No, our bias is going to be to challenge them all the time.’”

South Africa’s fixation on a handful of economic “silver bullets” is misguided and ignores how markets work in real life, he said. This includes the notion that the only factor missing in enabling new small companies to thrive is access to finance.

“If you are lending money to someone who cannot access the market – even if they have the capability and a great product – they are being set up to fail and the money will be lost,” said Roberts.

“Opening routes to markets is critical.”

For consumer goods, the market is – more often than not – literally a supermarket.

The Competition Commission’s current inquiry into the grocery retail sector covers many competition issues concerning supermarkets, but may be placing too little emphasis on buying power, said Roberts.

Retailers’ fees and standards can literally keep you off the shelf.

“Supermarkets are a cultural thing. Some countries value the bakeries and butcheries. We say that if there is enough rivalry between supermarkets, then who cares about the bakeries and the butcheries,” said Roberts.

Tamara Paremoer, a CCRED researcher who was previously the lead economist for the Competition Commission’s market inquiry into healthcare, noted that new entrants can also have negligible effects on markets.

“Between 60% to 80% of people growing chickens are now black farmers. Does this matter – are these rivals effective? There, I have to be a little less positive.

“Those very farmers depend on vertically integrated competitors. So, I depend on them to give me the feed that I must give to the day-old chicks. I also depend on them for the day-old chicks. Then, once I have grown the chicken, I depend on them for the abattoirs.

“So I am in the middle of this value chain and I am depending on these people who I should be competing with.

“How effective can this ever be? Just growing chickens will never be enough. We have to take a value chain approach,” she said.

This article was published in the City Press.