Submission to the Minister of Economic Development in response to Government Gazette notice No. 1345, the Competition Amendment Bill 2017 on behalf of the Small Business Institute, the SBI (formerly the AHI).

Via email: competitionbill@economic.gov.za

The SBI (www.smallbusinessinstitute.co.za) is a 75-year-old, not-for-profit organisation, constituted to promote the economic and business interest of its more than 100 chamber organisation members and thousands of small and medium enterprises (SMEs) in the wider economy. We are a member of Business Unity South Africa (BUSA) and stand for sustainable, market-led job creation, inclusive economic growth, transformation and ethical leadership.

As a representative body of chambers and businesses, we will confine ourselves only to broad comments.

INTRODUCTION

The bill amending the Competition Act of 1998 aims to address a persistent structural distortion in the South African economy: the high market concentration in several key sectors. To this it attributes the exclusion or hindrance of new entrants and competitive rivalry; the capacity of companies in these sectors to abuse any dominance they enjoy; the ability of small and medium enterprises to gain purchase in the economy; and the country’s slow rate of transformation.

The SBI agrees that the impact of anti-competitive conduct on small and medium sized businesses and, relatedly, the exclusion of black South Africans in the economy must be addressed to level the playing field for participation. We agree that requiring the competition authorities to consider SMEs as a ‘public interest’ may assist with this and are 100% behind the assertion that there is an economic argument as well as one of equity for transformation and inclusivity.

We also welcome the expanded definition of exclusionary conduct to include not only “barriers to entry and expansion within a market, but also to participation in a market”, echoing the way we evaluate obstacles in the ‘start-run-grow’ continuum for SMEs.

It’s important to stress that SMEs do not exist purely to serve the supply chains of government and big business, but with South Africa’s history and resultant over-concentration we design (and accept) policy meant to support this arrangement rather than allowing the dynamism of market forces to enable rivals. We would encourage you to test this legislation against this pattern of policy making.

That the effects of market concentration entrench gross inequality in our society is indisputable. However, the SBI believes government has other appropriate legislative and regulatory instruments – perhaps already too many for so little demonstrable progress – to address the variety of factors dampening our economy and blocking entry for small previously disadvantaged players to the market. Using competition law to advance industrial policy objectives and structural change in the economy is a tall order and could tax the resources of the Commission.

As the Tribunal explained during the Distillers case: “Thus the public interest asserted pulls us in opposing directions. Where there are other appropriate legislative instruments to redress the public interest, we must be cognisant of them in determining what is left for us to do before we can consider whether the residual public interest, that is that part of the public interest not susceptible to or better able to be dealt with under another law, is substantial.”

That said, as the ‘big voice for small business’ the SBI recognises the competition authorities as a well-functioning state agency with an important purpose. If under-resourcing is a problem, perhaps the state should divert money from the many inappropriate drains on the fiscus, like utilities and airlines, for instance, to the Commission and Tribunal.

UNINTENDED CONSEQUENCES

A country’s competitiveness is fundamentally about how hospitable the economy is to businesses of all sizes, what natural and regulatory advantages and disadvantages it offers, and how well the economic actors within it are able to operate. This legislation raises several red flags of unintended consequences, which could ultimately harm the very subjects targeted for benefit.

Some of the proposed remedies and wider scope may introduce a significant amount of discretion on behalf of the competition authorities, leading to market uncertainty, higher costs and unrealistic time frames. Ambiguities open the way to possible vexatious and lengthy litigation, which in turn may harm business activity and the small business operators within the supply chains of those sectors concerned. Such policy and regulatory uncertainty will discourage investment and the reasonable risks businesses take to innovate, diversify and grow.

The focus of the draft Bill is the enhancement of small businesses.  This intent is laudable.  But, there is no known universe of the number of SMEs operating in South Africa, in sector value chains and in local supply chains. It is for this reason we are embarking on a fundraising exercise to conduct a thorough and rigorous baseline study in 2018; we will share our data through open-source platforms. We hope to improve the ability of policy makers to design policy to address known problems, not inferred, or worse, ones that do not exist.

Despite acknowledgement of SMEs’ potential as employment generators and their contribution to GDP, our collective poor understanding of this business community means the draft Bill might very well lead to chilling and perverse consequences, contrary to the objectives of the Bill, such as prohibiting pro-competitive joint venture arrangements and positive collaboration between large and small firms; thus reducing the ability of SMEs to survive and innovate.

CONCENTRATED MARKETS VS GOOD BIG BUSINESS

Cartels and the prohibited practices cases the Commission has successfully prosecuted, as well as its research into the concentration in key sectors, are realities we do not dispute. The country requires significant interventions to dismantle the barriers to entry for true rivals to develop in our economy. But again, we caution against unintended consequences. When the state and big business end up in the same sentence, the little guy often becomes just a punctuation mark. The government in such a highly concentrated economy naturally wants to control certain sectors of the economy, but over-regulation, lobbying, influence peddling – elements of state capture – become rife and none of it plays out positively for small business. We have sacrificed our junior mining sector on the altar of an over-zealous minister. In the end, SMEs are often the kikuyu lawn on which the elephants trample partly because of knock-on effects in the supply chain and as a result of diminished investment and investor confidence.

Expanding market inquiries to specifically examine the effects of market concentration on competing businesses, SMEs and the historically disadvantaged is a good idea. SBI supports more enforcement tools for the Commission and ensuring their recommendations are binding. However, the Bill does not address the difficulties SMEs face bringing prohibited practices and so we would encourage a mechanism for them to participate – perhaps with small and black business organisations and consumers able to call for inquiries, or be given the status of a ‘super complainant’ should they lodge an issue for a market inquiry.

We would also like to see the abuse provisions strengthened, particularly in relation to barriers to entry and support the ideas the Centre for Competition, Regulation and Economic Development (CCRED) (www.competition.org.za) has promoted encouraging legislating for competition, not just against anti-competitive behaviour.

Market inquires, though, should not be initiated as witch hunts. While it may well be that there is “evidence that highly concentrated markets stultify innovation much needed for viable, inclusive economy growth”, it is equally clear from many international studies that big ain’t necessarily bad – it is a prerequisite for competing globally, committing sufficient resources to R&D and innovation, operating efficiently, and reaping economies of scale. What matters is how dominant players conduct themselves in the market.

Often, the small number of large firms that make up an oligopolistic market may robustly compete against each other, which is better for the economy, the consumer and small businesses purchasing inputs from them.

It may be worth considering whether the emphasis for inquiries should be on markets containing entrenched dominant firms where their position is a ‘super dominant’ position and has not been earned, or sustained by innovation. For example a significant proportion of prosecutions of dominant firm conduct have been against previous or current state owned and supported firms such as SAA, Arcelor Mittal and SASOL. Focusing in this manner is also consistent with criteria for competition tests in mergers, which would arguably make assessment by the Tribunal and adjudication by the Competition Appeal Court less discretionary and would open up the markets that are most in need of enforcement do so. Such criteria could apply to all the abuse provisions, rather than identifying excessive price and price discrimination amendments separately for effects on small and black businesses.

The bill’s explanatory notes agree that “while concentration often imposes significant drawbacks on the economy and society, it may also bring benefits” and “scale is a desirable economic feature, particularly in mid-sized economies with export ambitions.” We welcome, therefore, the admonition that authorities should weigh whether the economic benefits of achieving economics of scale outweigh the costs of concentrated markets so as not to dull the desire for commercial expansion and innovation, or limit the number of sufficiently large businesses to procure from new entrants desirous of supplying them with goods and services.

EXECUTIVE PARTICIPATION

The bill would like to bestow the minister with “more effective means of participating in competition-related enquiries, investigations and adjudicative processes”. Citing interventions into the Walmart, AB InBev and Coca-Cola acquisitions and merger, respectively, the notes remind us of the “innovative conditions” imposed by government on these transactions and yet, contrary to the spirit of the evidence-based ethos of the bill, no corresponding report has been prepared of whether or how these interventions have been successful.

Since the minister already has the right to participate in hearings and market inquiries, as do his sector-relevant colleagues in cabinet, we are concerned that this proposal could undermine the independence and impartiality of the Competition Commission. To inject a political coefficient into the equation opens the door to hijacking what is now an objective process of evaluating causes and effects. We would suggest that the proposal to allow the minister to initiate an inquiry be scrapped to minimise the perception of capricious investigations, leave it to the evidence to warrant an inquiry and to accommodate the suggestion that a test for inquiries embrace the ‘super dominant’ criteria.

We accept that it is “necessary to promote the alignment of competition-related processes and decisions with other public policies, programmes and interests”, but if fostering SME development and wider participation in the market is the bill’s aim, we need only to look at section 18(2)(b) of the Small Business Act of 1996 as amended. This legislation already requires the executive to assess the ‘effect and application of legislation on small business’. Merely enforcing this clause should be sufficient to align the cabinet behind promoting small and medium businesses (the job creators of the world), transformation and inclusive growth.

CONCLUSION

Research by our partners SBP (www.sbp.org.za) shows that SMEs are struggling to survive; they are subject to increasing shocks presented by a weak economy and consumer demand, strained by inadequate skills resources, weak real disposable income growth and a lack of ability to enter viable markets, including those outside our borders. Any additional uncertainties in the regulatory environment that curtail investment will, in turn, show a considerable ripple effect on the health and sustainability of our country’s small business community. Regulatory good governance proposes that all laws and regulations should be targeted – and most importantly, be proportionate – to minimise unintended consequences to the economy and society.  Causes and effects of proposed regulatory interventions need to be thoroughly researched and supported by robust evidence.

The challenge with tougher legislative amendments is that they often fail to address issues with current legislation in force.  If the business environment is already complicated by lack of implementation or enforcement of existing laws and regulations, it introduces another element of unpredictability. The proposed interventions in the draft Bill in an area that is loosely defined as market failure, such as the proposals on deciding on prices in a particular sector where they are perceived as being artificially high by a cartel or dominant firm (and firms often charge different prices for good reason), could very well worsen the environment for SME sustainability and growth.

We will watch with interest as the Bill is shaped by public commentary and travels through the Parliamentary process. We would be happy to make ourselves available to present before the relevant subcommittee(s).

Bernard Swanepoel
Chairman

Sipho Nkosi
Vice Chairman

Winda Austin-Loeve
President