SOUTH AFRICA: GROUND-BREAKING ECONOMY CONCENTRATION TRACKER TO GUIDE ENFORCEMENT BY THE COMPETITION AUTHORITIES, GOVERNMENT AND REGULATORY REFORMS, AND MORE PRIVATE SECTOR REGULATION

By Heather Irvine Wednesday, December 08, 2021
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The Competition Commission of South Africa (Commission) has published its first Economy Concentration Tracker Report (available here), which was handed over to the Minister of the Department of Trade, Industry and Competition (DTIC) yesterday.

This comprehensive research report, drawing on a range of data, highlights the persistent levels of concentration in the South African economy, particularly in farming; grain; fishing; forestry; livestock; sugar; potato; liquor and cigarettes; gambling and retail as well as industries involving key intermediate manufactured products; energy; airlines; the automotive industry; financial services; healthcare; communication; media; property and construction.

The Commission’s research has identified a high degree of inequality in company income when considering the overall distribution of income across all tax-paying companies. The top 10% of companies earn 86% of all income whilst the bottom 50% earn only 1.6% of income. This translates to a Gini coefficient of 0.837, which far exceeds the Gini for household expenditure at 0.63. Small and medium enterprises (SMEs) account for 95% of taxpaying companies but only account for 25% of turnover.

The Commission’s Chief Economist, James Hodge, noted in his presentation that once industries become concentrated, the trend is towards more concentration and so more deliberate action to address this is needed.

Amendments to the South African Competition Act have already come into effect, in particular, to address abuses by dominant buyers in designated sectors of the economy, and to prevent price discrimination which hampers participation by SMEs and historically disadvantaged individuals (HDIs).

The report will be used by the Commission to guide its enforcement of the Act, in merger control, in enforcing the amended abuse of dominance provisions, and in identifying areas for market inquiries, such as particular chains within the agricultural sector.

This study will also be used by Government to provide the basis for a broader set of interventions beyond competition law that address deep-seated structural issues in relation to persistent concentration, a lack of participation and transformation of ownership. These interventions may include:

  • An audit of how a range of government measures impact on the structure of a sector. This may include an assessment of whether legislation or regulations place barriers to broader participation, but also whether some government support measures, from procurement to state funding, may favour incumbents over challenger businesses.
  • Immediately prioritising the agricultural value chain to support smaller producers and improve South Africa’s land reform efforts.
  • Greater co-ordination among regulators, including, for example, when licences are issued, to ensure that there is broader participation.
  • A review of laws that require the exercise of concurrent jurisdiction over competition, when there is a transfer of ownership(for example, in the hospital sector).
  • More funding and support to scale our development finance institutions. 

The Commission also recommends more involvement by the private sector, which includes that:

  • Private sector financial institutions must do more in the funding and development of SMEs and businesses owned by historically disadvantaged entrepreneurs. More ambitious and concrete targets should be set for these institutions, alongside annual reporting against these targets. This may require more widespread concessionary funding and fintech innovations that provide for the reduction of risk and the use of less onerous funding terms.
  • Private companies across the economy should be required to scale up procurement from SMEs and HDI-owned companies.
  • Government can also make greater use of conditionalities placed on sectors subject to State support, including procurement and licensing.

In his address, Minister Patel noted that this report traces its roots back to Government’s Reconstruction and Development Plan, which included a call for action to open the economy to enable more young South Africans and women to participate.

He highlighted that rising inequality is a global challenge, especially in technology markets, but that the level of inequality in South Africa is even higher and is a barrier to the country’s ability to grow and develop.

Whilst the Commission has made some strides in dealing with abuses by dominant companies, more needs to be done. Dominant companies raise prices, hamper innovation, and tend to operate in concentrated markets that are more susceptible to collusion.

This, Minister Patel noted, has real costs for our economy, which we need to address through various regulatory interventions and structural changes. 

Companies in these sectors should ensure that they have comprehensive competition law compliance programs in place. They should actively participate in any proposed legislative and regulatory changes. This includes proactive engagements with the DTIC and any applicable regulators.