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