South Africa's Department of Economic Development plans to amend the Competition Act to give new entrants easier market access. But how exactly will the state do it?
The announcement is contained in a briefing note released on Thursday May 25, by the Economic Development Minister Ebrahim Patel.
In the note Patel says the proposed amendments will seek to incentivise firms to develop relationships and adopt strategies that would "reduce concentrations by encouraging entry of historically disadvantaged South Africans", lower barriers to entry, and expand business ownership to more South Africans.
It follows an announcement by President Jacob Zuma in his State of the Nation Address in February that the economic development department will introduce legislation to amend the Competition Act.
An advisory panel has been established to develop the draft amendments. The panel members are: Advocate Michelle Le Roux, Law partner Doris Tshepe, Competition Commission chief economist Liberty Mncube, Academic Professor Imraan Valodia.
Patel expects the panel will submit a report within the next six weeks to his ministry.
More than 20 years since the end of apartheid, South Africa's economy continues to be dominated by a few, mostly white-owned firms.
In his State of the Nation Address Zuma said only 10% of the top 100 firms on the Johannesburg Stock Exchange (JSE) are owned by black South Africans, directly.
While it’s difficult to get a gauge of real black business ownership, figures from the Finscope 2010 Small Business Survey suggest that while the overwhelming majority of business owners are black (92%), most of these firms are unsophisticated, employ few people and have few assets.
Where almost 14% of businesses owned by white people employ five or more people, just two percent of black-owned firms have five or more employees.
South Africa's competition authorities have been relatively active in prosecuting cartels and other market misdemeanours.
Of late competition authorities have stepped up investigations of alleged cartels in various market sectors. They have also ordered that part of the fines levied on firms found to have been in breach of Competition Act must be used to support the entry of new black firms.
The latest is satellite channel DSTV which must spend R8 million ($600,00) over three years on helping black media firms.
In May last year a measure to criminalise cartels came into force (see this post).
Some argue however that the measure will limit the ability of authorities to investigate market collusion as the competition authorities rely on whistle blowers coming forward. Few will do so if they risk facing criminal prosecution.
In addition a 2003 report by the OECD (at a time when about half a dozen countries had criminal penalties against individuals) said there was no evidence proving the deterrent effects of criminal or monetary sanctions on individuals.
'Focus on inputs'
Regulation should perhaps focus on opening up access for entrants to key inputs and facilities that companies need to compete successfully, argues a 2015 review paper by the Centre for Competition, Regulation and Economic Development.
The centre, which has since 2015 been running a research project for The National Treasury on barriers to entry for firms, also notes in the review that industrial policy support tends to favour certain companies and can therefore entrench incumbents, which may impose barriers to entry.
In this way the government's current controversial programme to fund black industrialists, (see this post) may simply result in the creation of a few large incumbents that could risk shutting other competitors out too.
Better would be to improve the quality of overall support and funding initiatives to all firms, mainly small businesses.
BEE let down
Yet the state's Black Economic Empowerment (BEE) policy, aimed at fostering more black managers and entrepreneurs has arguably failed to open the market to more black firms.
In many instances BEE has created a rent seeking black shareholder class who take equity in large firms, instead of doing more to aid new black firms to enter the market.
The government however might begin to see some improvements. New BEE codes of practice, which came into effect in May 2015, incentivise private sector companies to support and fund black suppliers.
A set-aside encouraging government departments, municipalities and state entities to set aside 30% of large contracts over R30m ($2.2m) in size to small businesses (see this post), might also free up the market. This may be a start.
More difficult will be to help more black entrepreneurs to grow their firms and innovate so that they can take on the few existing firms that dominate the market.
This may go someway to combat the concentrated markets, which Patel says "feed a growing resentment among black South Africans of the "failure to realise the promises made by the Competition Act".
Timm is a South African who writes on small business. Click here to sign up for the monthly Small Business Insight newsletter.
Business owners or any individual found to have participated in a cartel can face up to 10 years in jail, after South Africa brought a new provision in its Competition Act into effect on Sunday. But will it act as a deterrent?
The SA government and others have begun to consider a more heavy-handed approach to combating cartels (see this earlier post), which a recent study by the World Bank found raised food costs for the poor in South Africa by an average of 15%.
Yet while moves are still a foot to criminalise cartels in Chile, the New Zealand government in December dropped a bid to criminalise cartels, over concern that criminalisation would have a chilling effect on pro-competitive behaviour.
South Africa joins several other emerging economies including Brazil, where criminal sanctions are used (see the map in this recent presentation). The US, UK, Japan, Canada, Korea, Australia and a number of European countries also have such sanctions.
Among these, in Brazil as of last year more than 350 executives were facing criminal proceedings for alleged cartel offences (under Brazil’s Economic Crimes Law).
However legal experts in South Africa believe criminalising cartel activity would have a negative effect on the commission’s corporate leniency programme, if for example a director of a firm feared being held criminally liable if they spilled the beans.
There has also been some criticism put out in the public that the criminalisation of cartel activity could be unconstitutional.
Ahmore Burger-Smidt, director and competition law specialist at Werksmans Attorneys told Business Day TV that the legislation provides that a consent order can be used in the finding by competition authorities as prima facie evidence of collusive activity having been proved. Linking the two could however be problematic, she points out.
In those countries with highly concentrated markets it is all too easy for firms - big and small - to continue extracting high rents and prices from consumers. The poor have the most to lose. This makes criminal charges seem fair.
Yet will criminalising cartel activity help boost the economy by making it less attractive for existing firms to bar new firms from entering?
A 2003 report by the OECD (at a time when about half a dozen countries had criminal penalties against individuals) said there was no evidence proving the deterrent effects of criminal or monetary sanctions on individuals
The SA government is not content at just adding criminal sanctions. In a speech last month the Minister of Economic Development Ebrahim Patel (pictured above) revealed that further changes to competition legislation are imminent.
Yet the World Bank says prosecution alone isn't enough, South Africa must improve regulations which lower the barriers of entry and cost of doing business for new entrants. Like this the state is likely to play a bigger role in encouraging more open markets.
Timm is a South African who writes on small business. Click here to sign up for the monthly Small Business Insight newsletter.
The announcement last month that South Africa's Competition Commission will launch a market enquiry into the retail sector has raised the question of whether the state is trying to intervene more strongly to ensure fairer competition. This, as a recent move to criminalise involvement in cartels remains stalled.
The Competition Amendment Act, which provides for criminalisation of cartels (as is the case in the US), 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 be jailed for up to 10 years (Presently Chile is debating similar jail terms for those involved in cartels).
However the only portion of the amendment that has come into effect is a section which brought into force the provisions relating to market enquiries, under which the present probe (which will look into such things as shopping mall leases and the impact of large retail chains on small firms) is being constituted.
Testimonies from those involved in cartels have largely been secured by allowing those that come forward first to be treated with more leniency (rather than their firm be subject to fines of up to 10% of turnover).
The competition authorities fear that criminalising cartel involvement, would remove any incentive for those involved to co-operate.
Yet despite the competition authorities having since 2004 imposed R4.8 billion in penalties on firms involved in cartels, it appears to have had little effect in boosting the participation of small businesses in the market.
What went wrong?
Competition experts Gertrude Makhaya and Simon Roberts (pictued below) argue in a 2013 article that competition policy in South Africa has failed to undermine the market power of the dominant firms because legal proceedings by well-resourced incumbents tend to drag on for years.
One need only consider the case of Jim Foot, who in 2005 became the first small business owner in South Africa to win a case of discriminatory pricing, when he took his case before the Competition Tribunal.
Foot argued that petro-chemical giant Sasol was charging his small company (with 18 employees) 15% more than the price it charged his larger competitors for the coating he needed for his fencing poles.
With no legal training Foot then conducted his own defence in court against Sasol’s legal team which was made up of six lawyers and an economist. Against amazing odds he won. Sadly on review the judgement was overturned.
To address this some have suggested that this should be funded either by increasing the resources available to competition authorities, or by getting non-governmental organisations to take up issues on behalf of small businesses and consumers, as is done in some other countries.
Makhaya and Roberts also add that competition law alone cannot address market dominance, but needs to be linked with other policies, including helping with access to finance.
In addition, they say South Africa's affirmative action policy BEE has also compounded market dominance as the policy encourages the sale of substantial minority stakes. The new shareholders therefore have a stake in maintaining the status quo to protect the rents, while the incumbent firms have an interest in seeking politically connected investors to protect their existing position.
Barriers of entry
Perhaps the real problem lies with the high barriers to entry that appear to stifle small firms in many sectors. The Centre for Competition, Regulation and Economic Development (CCRED) at the University of Johannesburg where Roberts is based, has recently begun conducting research into this area.
In a review paper released in February, the centre notes that while competition policy has been successful in some areas, the competition authorities’ record in dealing with strategic entry barriers constructed by incumbent firms to prevent or retard entry has been "mixed at best".
In addition when it comes to industrial policy by state, the centre says support for entrants has not always been effective and assistance has often been focussed on incumbents rather than on new entrants.
"Conditionality has not been implemented in all cases and in some cases incumbent firms appear to have made windfall profits without any conditions being attached. This has had clear detrimental effects on downstream industries and on job creation."
The state has recently been intervening ever more in trying to boost market share for smaller businesses.
It's been doing this through funding the setting up of incubators (both directly and through an incentive to private sector organisations and companies) and tweaking the BEE codes so that call for big companies to buy more from small firms.
Now it wants to channel 30% of state procurement to small businesses (see this post on why this may be a bad idea).
This is all in line with South Africa' Medium-term Strategic Framework 2014-2019 (the implementation plan of the country's National Development Plan) which calls for the state to take measures to increase competition in regulated sectors or by broadening price regulation in sectors that are natural monopolies.
What one wonders will be next? Will the competition authorities be asked to go hard on mergers in the way that they did when they subjected the approval of the Wallmart-Massmart merger in 2011 to certain conditions such as the establishment of a programme to develop local suppliers?
While up to March the programme had benefited 31 small companies to the tune of R212 million in support and finance, holding large companies over a barrel like this is hardly the way to encourage them to invest and create jobs. It should only be done in the very specific situations - where the risks are such that small firms could lose with a merger.
In the end it's hard to pinpoint to what extent market forces play in a country that is almost unique in that it has both one of the lowest start-up rates and the highest business failure rates among emerging economies (see this earlier post).
To be effective in lowering barriers of entry, competition policy must be coupled with market support, easier access to finance, better business support, and investment in basics like better education, health, safety and security and infrastructure. Only then can one hope to create the right eco-system.
Timm is a South Africa who writes on small business in emerging economies and is currently in São Paulo. Follow Small Business Insight on Twitter at @Smallbinsight and Facebook.
Stephen Timm is a