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Lifting competition barriers will help the economy grow

| Economic factors

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.

CCRED proposes a policy agenda aimed at opening access through a raft of complementary measures. It is not advocating more regulation, but different regulation. It is time to change the rules of the game through four approaches.

First, regulate for competitive rivalry. Regulation should favour entrants and ensure incumbents can be effectively challenged, particularly in industries such as energy, telecommunications and banking.

Economies of scale mean that SA will continue to need large companies. But the value of alternatives, even in keeping the incumbents fit and responsive, has been underrated. For example, in telecommunications, spectrum access can be allocated to Mobile Virtual Network Operators through a transparent auction process and basic facilities such as poles and ducts need to be opened for cabling by amending municipal regulations. Independent fuel traders and suppliers can be given access to pipelines and port facilities. Financial inclusion can be extended by supporting branchless banking and mobile money. The design of cities and towns is critical to opening spaces to independent retailers, and local government can support them.

Second, amend the Competition Act to protect the competition process and to ensure that smaller participants and black industrialists are able to enter, grow and be given weight in decisions.

The act provides for tests based on "substantial" lessening, preventing or distorting competition. This approach privileges large complainants able to demonstrate a significant effect, while potentially efficient smaller businesses have little chance of doing the same. While market inquiry provisions in the act provide for assessing harm to the competition process, they do not result in binding actions or sanctions.

Third, the government should introduce proactive enabling measures to support new entrants and rivals. For example, penalties paid by companies in contravention of the Competition Act could be pooled to form a lower interest and higher risk development fund to finance entrants, with an emphasis on supporting black industrialists.

Taking on more risk requires the understanding that increasing competitive rivalry has gains for the economy which go far beyond returns to the entrant. The impact on market prices and dynamism affects customers of all the companies in a sector. Some may fail, but contestation between rivals is part of the process.

Increasing dynamism and rivalry should be considered on an economy-wide basis; competition in one value chain cannot be separated from an understanding of the concentration and competition dynamics in related sectors or those in neighbouring countries. For instance, supplying food is as much about packaging and logistics as it is about the agricultural product. In the agro-processing sector, the objective should be to invest in expanded production capacity while widening participation, so southern Africa can become a net food exporter.

Current initiatives such as the agro-processing supplier development funds from the Pioneer case settlement and the Walmart acquisition have demonstrated some success and need to be replicated and linked with strategies along value chains. Partnering with retailers is particularly important in opening up supply chains.

CCRED encourages cities and the government to test and learn. Introduce initiatives that support suppliers to find markets and enable entrepreneurs to try and try again. The depressed state of the economy suggests we have nothing to lose.

• Prof Roberts is director of CCRED and Vilakazi is a senior researcher at CCRED

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