Revised Industrial Policy Action Plan (IPAP): public hearings

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Trade, Industry and Competition

01 March 2010
Chairperson: Ms J Fubbs (ANC)
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Meeting Summary

Prof Patrick Bond of the Centre for Civil Society analysed the South African economy over the past fifteen years to provide an argument for opposing the IPAP policy of the Minister of Trade and Industry. He concluded that it made no sense to have an export oriented industrial policy. A much stronger imports substitution approach was going to be needed. The Committee asked about the problem of the decline in real fixed investments and the outflow of profits and dividends.

The Competition Commission spoke about the importance of the industrial policy, that it enabled South Africans to make choices. It must be viewed through a wide lens at it was coordinated with other economic policies, and that lessons on industrial policy should be taken from other high growth countries. Competition and industrial policy were understood to be complementary, and they mutually reinforce to set up competitive capabilities. This would be realised if market dynamics were understood and negative conduct of large firms was thoroughly dealt with. Investigations in intermediate industrial products were on steel and chemicals products, and cartels in the construction industry were being uncovered. He further noted that South Africa became vulnerable to the world financial crisis because it liberalised its exchange control in 1995. This had negative impact on small companies, consumers and farmers. In order to deal with anti-competitive pricing, he stated conditionalities, competition enforcement and strategic development finance were other options and measures available under the law. Members of the Committee wanted to know why price-fixing was not criminalised, why cars produced locally to be sold at a higher price than when they are exported, and what role the Commission intended to play on those regional issues that affected local industries.

Meeting report

Centre for Civil Society submission
Prof Patrick Bond, Director: Centre for Civil Society at the University of Kwazulu-Natal School of Development Studies, presented to the Committee that the policies under the previous government administration included unsustainable growth based on consumption that was fuelled by credit extensions. The Minister for Trade and Industry, Mr Rob Davies, had underestimated the problem and the extent of the damage caused by the policies of the previous administration. This was demonstrated by the unprecedented crash of the manufacturing industry. The vulnerability of South Africa to huge crashes was as a result of government policies. An example of this was the 1995 government exchange control liberalisation as well as the lack of investment in savings, which led to a foreign debt spree. Former Minister of Finance Mr T Manuel’s policies were deemed to have provided macro-economic stability. However the currency had experienced extraordinary turmoil during that period. No other country in the world had had as many currency crashes as South Africa. South Africa had five major currency crashes that were measured in a 15% range. This was an extraordinary phenomenon especially if one made the claim that Mr Manuel’s Finance Ministry encouraged stability.

Mr Davies’ problem was the high interest rate, which directly reflected the vulnerability since the South African Reserve Bank (SARB) hiked its interest rates every time the currency crashed. Growth of 5% that was recorded during the early naughties was based upon hot money, credit and special home mortgage advances. South Africa had a United States (US) style financial bubble that drove the economy. This came to a point where the household debt range of 2008 was 80% of disposable income. This was at an untenable level and it highlighted how dangerous the property bubble had become. The winners from this whole situation were the bankers with high profit rates. South Africa had been on an unsustainable growth trajectory going into the big crisis. The World Bank described South Africa’s inequality as the worst in the world. South Africa had had an incredibly low level of gross fixed investment, which had coincided with liberalisation. If one took away the sports stadia, investments by SAA, Coega and Gautrain etc then there were not much left in terms of real productive investments. Money for these ‘white elephant’ investments came from debt.  The amount of foreign debt was terrifying and it could get much worse as early as in the next three weeks when the World Bank would consider a $4 billion loan for Eskom. This would present an extreme danger for the climate. South Africa had been listed as a real threat to the World Economy because of declining foreign debt repayments since 2001. The declining payments incidentally coincided with the biggest companies in South Africa being given permission to move to London and Melbourne. These companies took profits and dividends out of the country.

South Africa had the highest emissions intensity of green house gases in the world. South Africa’s emissions in terms of per person and in terms of economic output outstripped those of even the US. Mr Davies had pointed out that eco-protectionism was emerging, for example, putting high tariff costs for goods imported from countries with high emissions. South Africa was terribly exposed partly because of the availability of cheaper electricity for big companies, this included Anglo America, ArcelorMittal etc. These companies had negotiated theses cheaper deals during the apartheid era. In conclusion it made no sense to have an export oriented industrial policy. A much stronger imports substitution approach was going to be needed. 

Discussion
Mr S Marais (DA) asked how the problem of the decline in real fixed investments should be addressed. The outflow of profits and dividends was a huge problem. Was a similar pattern of this trend emerging in the Automotive Industry?

The growth fixed capital investments were low, not so much as a result of bad policies but because of private capital, which had glutted these markets by not investing in expansions. There was a long history of over investment that was highly concentrated. This meant that it was not up to the return of profits to reverse the problem; it was going to have to be fixed by the state.  The state would have to take over industries, nationalise and in some instances restructure industries. For example turning off the cheap electricity and re-distributing it freely to masses of people who would in turn buy appliances. This would take courage from an extremely vested interest.

Mr B Turok (ANC) informed Prof. Bond that the Minister of Finance had made responses in a debate on where South Africa stood economically. Strong criticisms were welcome by the Committee. What would you do if you were the Minister of Trade and Industry?

Prof Bond said that Africa and South Africa were exporting under adverse conditions; this included the inability to compete with East Asian markets. There were now huge possibilities for imports substitutions as a result. Imports as opposed to exports would provide higher growth during this period.
 
Mr X Mabaso (ANC) expressed his appreciation of the submission. What role could highly developed educational institutions play in the economy and could they seriously assist in helping the economy to get out of this dilemma?

Prof Bond expressed his agreement with Minister of Higher Education, Mr B Nzimande, that there was far too much neo-liberalism taught in South African universities. Most graduates were taught to let free markets go. A skills development programme was needed.

Mr B Radebe (ANC) also expressed his appreciation of the presentation. There was a school of thought out there that considered the decision of the liberalisation of exchange control to be advantageous, was this a wrong decision? Was the financing of the IPAP a good thing?

Prof Bond replied that the financial rand should not have been dropped. Dr Joseph Stiglitz, a Nobel Laureate, had said that it was an exceptionally good exchange control mechanism; it kept the money of especially rich white South African in South Africa.

Competition Commission submission
Dr Simon Roberts, Executive Director: Competition Commission, stated IPAP was an important step forwards. It was required to alter growth path, shape industrialisation for rapid ‘catch-up’, employment creation and inclusion. The overall performance of South Africa had been poor especially where it mattered most such as in investment and employment, and it had been fragile and structurally weak. So in the absence of industrial policy, South Africa would continue on the same path.

Decisions that big companies took were always determinants of outcomes in terms of employment, investment, income, and production. Patterns of competitiveness reflected past decisions and entrenched positions of power of large firms. For example, exports were skewed to resource and energy based commodities, not to create jobs. Diversified activities had had poor performances was due to the conduct of large firms.

Competition and industrial policy were properly understood as complementary and mutually reinforcing to build competitive capabilities. Understanding market dynamics and dealing with the conduct of large firms with negative industrial development consequences made this possible.

Investigations and cases in intermediate industrial products mainly came from steel and basic chemicals products that IPAP1 identified. These investigations were dealing with the conduct of companies like Sasol and Iscor. The impact of anti-competitive pricing was to disadvantage more labour absorbing downstream industries. Cartels uncovered were being investigated especially those in construction materials such as steel and cement. Some cases dealt with the exclusionary conduct of large firms that raised barriers to entry, for instance, the excessive pricing of steel and tinplate, polymer chemicals and fertilizer inputs.

Liberalisation

Prior to 1996 there was a lot of regulation. Now liberalisation meant there was less interference from the government. This had a negative impact on returns to farmers and agricultural production, small processing firms, and consumers. For example, the Eastern Cape wanted to be the growers of maize but it lacked storage facilities. Now it was in the process of building silos before it could grow maize. Conduct by large firms to keep new entrants out was having a negative impact on output and employment in the bread and poultry business.

Cases about past conduct took too long to finalise. Attempts to discipline large firms had been ineffective for a long time. There were successes in uncovering bad conduct and developing information and an analytical base but there was so much that has still to be done. Liberalisation assumed more efficient market-based results, but extensive private regulation replaced state regulation. Cartel conduct appeared to have taken another form, and the Competition Commission was now focusing on related conduct such as information exchange. It was also difficult to put remedial measures in place for monopoly pricing of inputs, as that required a lot of time for investigations and tribunal hearings.

Options and measures

In dealing with anti-competitive pricing, there were a number of options that the competition law provided. For instance, more competition enforcement was needed to include acting on facilitating conduct for cartels, and to increase deterrence to ways in which entrants were excluded. Market enquiry provisions provided more powers to investigate industries where there were anti-competitive outcomes and recommended pressures. Other measures available included conditionalities linked to advantages provided by the state as reflected in IPAP. This was real partnership but it required proper monitoring and enforcement. Improved regulation was another option especially where there were entrenched dominant firms in key industries.

It was important to set up incentive structures that would reflect a future structural change in the economy that the country wanted to create. Local competition was important for dynamic gains. Macro-policy needed to understand that large firms set prices in imperfect markets. To be regional in vision and implementation was fundamental so as to start building structures that were truly South African. An institutional framework was crucial to the implementation of IPAP in order to get information that could be used for analysis on industries and firm strategies, coordination, and regular monitoring. Effective tools and levers would provide pointers on how to deal with large firms.

Discussion
Mr B Radebe (ANC) commented that IPAP was putting more emphasis on competition. He asked if the Competition Commission was ready for that, and what support was needed from the government?

Dr Roberts replied that the Commission looked at anti-competitive conduct. It did not bring down prices but it worked on instances of finding contraventions in the Act. It worked on the premise that competitive prices were lower than anti-competitive prices. It worked for low prices but also pushed for a competitive outcome. So it was looking for longer-term priorities such as low prices but it could not regulate those prices.

Mr A Westhuizen (DA) forwarded a devil’s advocate remark. What did the Commission think about his remark that the money that some South African companies profiteered from cartels, was circulating in the SA economy because it got invested and gave good salaries to the workers of the companies that benefited.

In terms of the Competition Act, Dr Roberts said the Commission did not have problems with profits. What it was against was people making money without effort. It was fine if a business was providing a good service to its clients. The problem was only when a business made profit but failed to invest in its machinery and workforce. High profits for one firm may mean lower profits for another firm. There were firms that made products for other firms. The money went to shareholders of the companies.

Mr S Marais (DA) commented that the perception about the Competition Commission was that if one were successful, the Commission would lower the prices of one. But that was not the case because its focus was on anti-competitive actions or practices. Regarding regional issues, he asked what role would the Commission play because garments from neighbouring countries were cheaper than the cost price of raw material produced in South Africa and this led to factories being closed down. Should the emphasis not be on decreasing prices? For example, in the motor industry there were a lot of tariffs on manufactured vehicles. As a result these same products were sold at a higher price locally than the exported ones and this was not benefiting the SA economy.

Dr Roberts explained that impropriety was the highest price you could get. If you were a monopoly, you had total pricing power. Competition was a way of disciplining large firms. It also empowered consumers. Consumers had power if they could go and buy from alternative suppliers. Competition was about good rivalry and buyers stood to benefit from it.

Mr L Greyling (ID) wanted an explanation why the Commission said deterrence was not strong enough because amendments to the Competition Act had been made a while ago. If the amendments were not strong enough, why could price-fixing not be criminalised?

Criminalisation, Dr Roberts elaborated, could be effected if regulations were in place. For criminalisation to work the Commission would have to partner with the National Prosecuting Authority (NPA) so that criminals could be prosecuted. At present, it was difficult to make criminalisation work but the Commission was trying hard to get the NPA involved in these matters.

Prof B Turok (ANC) commented that as a Committee they were not always clear about the meaning of the word “ competition”. What Dr Roberts made clear in his presentation was that there were three areas of competition. The first one dealt with competition between South African firms, the second one about competition against imports, and the third one was about competition in an international environment. The Committee conflated the meaning of the word “competition”. But his submission unpacked it. The submission would be effective if the Committee included it its Report on the serious findings of the hearings.

Mr X Mabasa (ANC) noted challenges emanating from the input from the Competition Commission of South Africa. If a sister Commission was not established in Southern Africa, though it existed in SA, it therefore meant South Africans would be out-witted. Without the Competition Commission being so effective, and not maintain the effectiveness, South Africa would not realise BBBEE seeing the light of the day because the emerging business would naturally do business according to the book while the big ones would do it in a cruel fashion. The value of the Competition Commission work would add value to the development of the economy.

The Chairperson, due to time constraints, asked Dr Roberts to reply in writing within five working days to those questions he could not answer.

The meeting was adjourned.


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