Competition Commission Economic Concentration Report; Committee Report on DTIC Quarterly Performance

Meeting report

Opening Remarks
The Chairperson read from the Preamble to the Competition Act No.89 of 1998: The Act begins by recognising that that apartheid and other discriminatory laws and practices of the past had resulted in excessive concentrations of ownership and control within the Apartheid state and had left the country with an economy characterised by excessive levels of concentration of ownership and control, as well as a lack of participation by all South Africans; that the economy must be open to greater ownership by a greater number of South Africans; that credible competition law, and effective structures to administer that law, are
necessary for an efficient functioning economy; that an efficient, competitive economic environment, balancing the interests of workers, owners and consumers and focussed on development, will benefit all South Africans.

15 years after the Act was promulgated, high levels of concentration and the concentration of ownership continued to dominate the market. The Amendment to the Competition Act specifically enabled the Competition Commission (CC) to address two structural constraints, i.e. high levels of concentration in the economy and the skewed ownership profile.

The Chairperson explained that the purpose of the Portfolio Committee meeting was to receive a briefing from the Competition Commission (CC) on the outcome of the study to understand the patterns of concentration and participation in the SA economy.

Presentation by the SA Competition Commission on Measuring Concentration and Participation in the South African Economy: Levels and Trends
Ms Tanya van Meelis, Acting DDG: Competition Policy and Economic Planning, Department of Trade, Industry and Competition (dtic), introduced her colleagues and Commissioner Tembinkosi Bonakele, Commissioner of the SA Competition Commission; James Hodge, CC Chief Economist and Acting Deputy Commissioner, and Andile Gwabeni, Divisional Manager: Office of the Commissioner.

Ms Van Meerlis noted the Chairperson’s opening remarks on the high levels of concentration and confirmed that the role of the Commission was to address the high levels of concentration and to strengthen the role of the state in being able to tackle the issue of concentration and to stimulate economic transformation. Provisions had been introduced to protect and grow SMMEs as well as firms owned and controlled by historically disadvantaged individuals (HDIs).

She was pleased to report that in December 2021, the Commission completed and handed to the Minister of Trade, Industry and Competition its first ever Economy Concentration Report Tracker.  It was themed Concentration and Participation in the South African Economy: Levels and Trends and detailed levels of concentration in 178 markets in the country and how those had evolved over the past five to ten years. It was a detailed and nuanced study, having collected data from over 80 industry organisations, regulators, government departments, SARS, StatsSA and the Commission itself. The study had served before Cabinet and had provided trends as well as recommendations about how the concentration and the lack of participation could be further tackled.

Ms van Meelis stated that dtic was excited by the study because it provided a baseline for further studies but also provided very rich and detailed data that would assist with policy making.

Mr Bonakele presented the study background and the purpose of the study undertaken by a team led by James Hodge. There was a lot of commentary of the SA economy but there had been little factual information. The study had followed the Commission’s 2019 Report, and the World Bank and the Organization for Economic Cooperation and Development (OECD) publications. The study was designed to aid prioritisation and decision-making across government to address concentration and promote participation and to be repeated biennially to enable tracking of concentration over time.

Mr Hodge provided a detailed account of the report. He also reported on actions to address concentration, which included:
Changes made to the Competition Act in February 2020 to address the challenges and which the Commission had started implementing;
The introduction of contraventions for the abuse of buyer power and price discrimination against SMEs and HDIs with a lower fair trading or impeding participation threshold;
Strengthening market inquiries to enable the competition authorities to impose remedial action, including divestiture, and interventions that promote competition;
The introduction of structure (not only conduct by firm) as a focus for the competition authorities and more stringent regulation of creeping mergers.

Recent actions by the Commission addressed concentration and participation in the auto after-market to open up service/repair to independents; settlement agreements with the two largest grocery retailers to end exclusive leases; a market inquiry into online commerce platforms (consumer goods; delivery; holiday rentals and smart phone applications to address barriers to participation and concentration.

The Commissioner noted that concentration was getting worse in controlled markets. He recommended more coordinated government action, such as Amendments to the Competition Act to address concentration and participation and government legislation and regulations to impact economic structure and address entrenched concentration as well as licensing and procurement, investment incentives and support services, and technology development policies. A government-wide competition policy was required to ensure a coordinated and systematic approach to competition policy across all spheres of government, and to ensure that government actions did not favour incumbents and work against inclusion.

He added that the  Concentration Study could aid in determining which initiatives to prioritise and to provide benchmarks for target setting. The Agricultural value chains warranted immediate focus to support broader land reform initiatives and greater coordination was required between regulators and public entities responsible for issuing licenses and concessions. More systematic funding and support was essential.

(See Presentation)

The Chairperson thanked the  Commissioner and invited comments and questions.

Discussion
Mr D Macpherson (DA) stated that it was ironic that the more the Commission tried to force competition, the more it failed in its attempt. The Commission had become paradoxical and maybe that was something to consider.

He found the remarks of the Commissioner extraordinary.  The Commissioner had stated that if it was not possible to incentivise banks to lend money, the Commission would force them to do so. How was the Commission going to force banks to ignore government and prudential regulations and legislation that forbid reckless lending and just lend money to anyone? Banks had to determine that applicants met criteria set down by government.  Was the Commissioner seriously suggesting that banks should forgo legislation and just lend money to anyone? That was the message being sent out by the Commissioner.

Mr Macpherson said that the Commission could not make the link between its presentation and the market concentration The link was that, as the market shrunk because of failed government policies, so concentration took place. Agriculture was a good example. It had become so expensive and uncertain to farm in SA that the only way to make any money from farming was by taking it to scale. Smaller farms had been pushed out of the market, not by bigger farms but by the failure of government to create market access and to take their goods to market. He believed that the Commission was continually seeking to overstep its mandate and to become some super-regulatory authority to intervene in places where it had no authority to do. It was not even close to the mandate of the Commission to force banks to lend money.

He believed that the report contained some salient points but had shown no link between concentration and failed economic policies. The Portfolio Committee should be concerned by some of the comments made by the Commission and some of the proposals being put forward. The Commission should be working out how to make entrance into the market easier by cutting red tape and making it more competitive by allowing more entrants into the market. That was what no one had pin-pointed in the presentation.

Mr M Cuthbert (DA) agreed that the report spoke to government’s inability to develop SMMEs. That was a feature of the report and the reason that the country sat in the position that it did. It seemed that markets and industries where State-owned Enterprises operated exclusively had been excluded from the study. It was all very well looking at the private economy but what about concentration in electricity, road and rail, etc. where there was a real monopoly? If the Commission was worth its salt, it would look at concentration in those sectors and present government with an advisory note suggesting that it could bring private investment onboard, instead of crowding it out. That was a key feature that was missing from every Commission presentation he had ever seen.

He noted that he never heard a word from the Commission when a new Master Plan was announced, or when import taxes were imposed by the International Trade Administration Commission (ITAC) and the SA Revenue Services to protect certain industries, such as occurred in the poultry industry that had allowed players to continue their oligarchy over that particular market.  Local cement was designated under the 20% rule but now PPC Cement was asking for a broad tariff across the industry which would block any foreign competition, but there was no word from the CC about that kind of thing. Why was the Commission so particular in what it did and did not address? Had the CC calculated the impact of the Master Plans and localisation efforts? It was clear to anyone with a bit of a bit of common sense that those kinds of policies aimed to centralise and concentrate market power by excluding competition.

Another comment that concerned Mr Cuthbert was that about divestiture. It was all very well to say that the Commission wanted to force companies to divest from particular markets as it wanted others to participate in that market, but there were jobs associated with divestiture that would be lost. If the Commission told a company to divest and close say 10 of its shops to allow others to open businesses, did it make sense for that company to keep the employees on? Was it within the scope of the Commission say that those people had to be employed in the new business? It did not make sense that people should lose their jobs by virtue of divestiture which was usually practised in cases where countries did not support human rights. Now it was happening in SA. It did not seem to have been thoroughly thought through.

Ms N Motaung (ANC) asked what role government could play in addressing high levels of concentration and low levels of participation in the economy. What would be the impact for consumers if there were increasing levels of concentration? What measures were in place to mitigate against the increased levels of concentration in the economy?

Mr S Mbuyane (ANC) said that the report on concentration was important for the Portfolio Committee as the continued concentration would not transform the fundamental features of the economy or increase participation. The transformation of the economy would remain a pie in the sky. There had been an increase in the market power of the top three independent power producers (IPP). The top three firms’ share for solar had increased from 41% to 51% between 2015 and 2019 and 45% to 50% for wind power in the same period.  What were the possible implications of concentration of renewable power in the country?

Mr Mbuyane noted a high degree of inequity of firms’ income with the share of turnover of the larger firms, where on average 10% of the firms earned 85% of turnover in SA. All SMMEs together received a share of only 1.6% of total economic turnover. That was concerning and it explained why the country could not create jobs as SMMEs were critical job creators. What role was the Commission playing in correcting that abnormality and what role could others play, including the private sector?

The Chairperson asked Mr Thring to type his questions on the chat platform as his voice was unclear.

Mr W Thring (ACDP) noted that it was not healthy to have the bulk of seed provision in the hands of a few. It was a real threat to food security where only a few held the bulk of seeds to feed the nation. Clearly that had to change. Regarding the pharmaceutical sector and the crowding out of smaller family-owned pharmacies, he noticed that there was an upward trend that had to be halted. The Commission was failing to protect smaller players in the different forms of business. Disparity between SMMEs and big business was alarming. It was a result of a failure by government to fast track the ease of doing business by removing red tape.

He was not convinced that the actions of the Commission to address concentration would reduce the pace of concentration.

Mr Z Burns-Ncamashe (ANC) said it was important for SA to understand the importance of economic policy predicated on key principles that addressed the historical legacy of inequality imposed by colonial and apartheid systems which favoured a racial minority of the population – that was a fact. That was what informed the mandate of the Commission and the government should not be apologetic about addressing that. Most of the challenges of the time arose from an institutionalised oligopoly established by oligarchs who were still there and impacted heavily on poverty, unemployment and inequality and it was a shame that any political party would not support the policy that sought to eliminate that. It actually exposed the true colours of those who, when given a platform to protect the interests of SA’s people, revealed that they only wanted to protect the interests of those who benefitted from the economic concentrations.

He noted that when it came to agriculture, it was a fact that land ownership patterns showed that land was still in the hands of white people in SA. That was a fact, not fiction. People in rural areas were still regarded as tenants in their own land who had occupational rights and not ownership rights. The indigenous people did not own the land. What had been the analysis of the Commission on food prices? Oligopoly created barriers and excluded the people from the value chain. Could the Commission explain the features attributable to that? Addressing the question of what could be done to facilitate the entry of new people in the agricultural sector, he believed that there had to be a deliberate and concise programme to bring down those barriers. What was the percentage of ownership patterns in terms of race? His people were just fronting – they did not even own the companies. What about their participation in management?

Mr Burns-Ncamashe addressed the Real Estate Investment and Services subsector, where the three largest listed firms made up 59.5% of assets of 13 listed firms. The sector was highly concentrated. Had the Commission considered an enquiry into that sector? It needed a conscious and deliberate intervention at that level that should extend even to farm land. The CC needed to consider the concentration in that sector.

The Chairperson noted that the potential of SMMEs to create jobs versus the effect of the concentration of the economy on their existence was concerning. The more concentrated the market became, the more difficult it was for SMMEs to trade.  What was the Commission doing to ensure that SMMEs were not being locked out of the market? What measures were in place to deal with market concentration? The scariest market was in the sugar sector, and others, where new entrants had to overcome the market structure to be able to grow their businesses. That was an insurmountable task.

Responses by dtic and the Competition Commission
Ms Van Meelis responded to two themes. What the research showed was the need for increasingly coordinated approach from government. It did not help to give SMMEs support if the structure of the market did not allow access. The converse also applied. Where access was possible, support was needed for SMMEs to enter the market and that support had to be more than one or two interventions.

What could stakeholders do to address concentration in the market? A range of action was needed. Government and the Commission had to develop policy based on evidence and legislative changes needed to be well-informed and well-thought through to address specific problems in the economy.

Ms Van Meelis added that there was also a significant role for business to play. The Amendments made provisions to support small business. For example, contracts with small businesses had to be sustainable and so business had to approach the Commission for assistance. The more active business was in identifying problems about dominance or access to new markets, the more the Commission could do to assist with the variety of tools at its disposal. Likewise, workers could approach the Commission or the Competition Tribunal to assist in potential loss of jobs as a result of the structural problems in the market.

Mr Hodge assured Mr Macpherson that the Commission had no intention of requiring banks to ignore prudential law, which was about risk. The Commission was working as part of an inter-governmental working group with the Prudential Regulator and other relevant role players. They were looking at innovation in Fintech which was helpful as it could provide more information and hence a far better assessment of actual risk. International research showed that accurate risk management was important and more information equalled a better risk assessment. In such cases, small firms could get better assessments on risk and therefore, could get better funding. The Commission was working with other Regulators to unlock that potential from Fintech. The big banks were willing to work with Fintech when it supported their business but not with innovations that might disrupt the market. Concentration was a negative in that respect.

He was working with online venture capital markets whose perceived understanding of risk of township companies was exaggerated in comparison with the actual risk. It was acknowledged by the venture capitalists that they did not seek out HDIs, unless they had a mandate from an institutional investor. Government had set up the small business development fund where risks were better assessed but the issue of funding could not be ignored. Start-ups often preceded angel funds and often did not have seed funds. A collective approach was needed to address the funding issue.

He said agriculture was not shrinking, but growing, so that could not be an argument for why the market was becoming increasingly concentrated. There was enormous discrimination in pricing and a substantially lower price was offered for bulk buys. That differentiation did not support small farmers. The original Co-ops had been privatised and so were not focussed on developing farmers but were looking after the interests of the current members, and not looking for new members. A lot could be done in the area of agriculture; such as had been achieved in the citrus sector. He acknowledged the need for commercial farmers but commercials farms were highly mechanised and so did not create jobs. If viable players were brought into that market, they could grow the export sector.

Mr Hodge explained to Mr Cuthbert that in respect of electricity, transport, etc., there was a state monopoly concentration but not much could be done about it and so it was not an interesting topic for research. Although the Commission had not ignored the situation: SAA was prosecuted in one of the first dominance cases and currently the CC had a case against PRASA regarding the Park Station access, long distance buses and PRASA’s access to buses. The cases were not prominent but the Commission had addressed the matter and there was activity.

In response to the question of whether the dtic had liaised with the Commission on the Master Plans, he confirmed that it had as the Master Plans actually had an array of initiatives and tried to deconcentrate the market. The Commission’s guidelines did not advocate a closed group but was about drawing in new suppliers. Localisation should expand the market and decrease concentration.  It was never about closing businesses which would lead to job losses. Divestiture had to be to another business or shareholder that would continue to operate the business. It was not something taken lightly and had only been used when Sasol had divested its fertiliser business. Sometimes divestiture could make a difference. If there was no benefit in one firm owning multiple sites, then one could use divestiture to create competition, reduce concentration and create more jobs. It was not something used frequently by the Commission, but there were instances where it could be important.

Mr Hodge indicated to Ms Motaung that Ms van Meelis and the Commissioner had both touched on what was being done by government - there was a coordinated approach. The example of retail pharmacy had been raised but he pointed out that it was very difficult to prohibit the acquisition of a single retail pharmacy as it did not fail the acquisition test. The individual pharmacies were licensed and when new opportunities arose, e.g. in a new shopping mall where there was a flow of people and a need for a licence, there had to be engagement as there might be a pharmacy that was failing. The Commission had seen such cases and an acquisition could save jobs. The trend was, however, not one which the Commission wanted to see, especially as the large pharmacy groups had moved into primary health care. That expansion involved the medical health schemes and the pharmacy groups were favoured by rewards programmes that drove customers to main stores and away from independent pharmacies, bringing about a more rapid demise of such pharmacies. The level of care and service of independent pharmacies was acknowledged, even by the pharmacy chains and the answer was to work together.

He pointed out that the aim of the report was to help to identify sectors and whether where there was a concern or not, note where concentration was unavoidable and should be tracked in case of abuse, and identify other sectors that would benefit from de-concentration that would bring down prices. Agriculture could be a test case.

The impact of concentration on the consumer was that more market power enabled firms to raise their prices and avoid competition, or even to not drop prices. During the Covid-19 pandemic, the cost of the Covid test had come down but the cost to consumers did not drop. He pointed out that the drop of the test to R500, as enforced by the Competition Tribunal, had made a massive difference to consumers. Concentration was often seen to keep competitors out; it acted as an exclusion to growth by preventing new firms from entering the market and could harm businesses. He referred to research by the World Bank. Concentrated industries could keep prices so high that businesses downstream, which were more job intensive and had the potential to grow, could not compete with imported products.

Mr Hodge - in response to the question about what could be done – said he saw competition laws as the toolkit of change that dealt with abusive dominance. One area of focus was the buying power of small businesses and historically disadvantaged businesses. Work had to be done to improve the contestability of small markets but it was not something the Commission could do alone as it could not address the lack of funding; it did not have access to retail chains; nor could it address the food regulations that prevented small-scale farmers from selling to markets. A holistic approach was needed.

He informed Mr Mbuyane that the Commission was watching the space of the renewable energy sector. Firms had originally gone into a bidding process to supply Eskom over a 20-year period as it had required a considerable investment in solar power, but there would now be a more direct market for the purchase of renewable energy. Regulation now allowed for self-generation and for the sale of energy. If the Commission found, for example, that wind power in the Eastern Cape was controlled by a couple of firms that did not allow municipalities access to a competitive price, the Commission would have to step in. The Commission had not yet turned down any transactions but, for competition purposes. The Commission was interested in the sector.

Mr Hodge confirmed that the Commission was active in areas like renewable energy and gas and was actively seeking to bring in more players.

He added that the Commission had a work programme, and indeed, a five-year plan to deal with de-concentration but part of its strategy was to decide which cases should be addressed in order to make the best use of the budget. The Commission was looking at new tools to deal with abuse. The market enquiry tool was an important tool as it focused on factors that hindered competition and enabled the removal of hindrances to competition. Merger control was to ensure that things did not get worse, but it did not enhance competition. Abusive dominance tools allowed the Commission to address the conduct of dominant companies. It could have a pro-competitive effect but often simply removed the abuse that was happening. That left market enquiries as an important channel for reducing concentration. A recent market enquiry had found that exclusive leases not only kept large competitors out of the malls, but also small businesses in the food services that provide consumers with choice. As regulator, the Commission could impose remedies, whereas, before it could only make recommendations.

Addressing Mr Thring, Mr Hodge said that he assumed most of his input were largely comments. He informed Mr Thring that there had been challenges to the seed market but it was more around distribution, rather than the intellectual property of seed varieties. Seeds were staples for most people. Global varieties of seeds had been registered in SA. There was concentration in the distribution of both local and overseas varieties. Broader stakeholder action was required and there should be research into the market as the matter could possibly be tackled at a local level.

He confirmed that the Commission agreed with Mr Thring in respect of pharmacies. There had been a few mergers, which had been subjected to scrutiny. There was concern about the overall trend, especially as the big retailers were also wholesalers and distributors. The lack of distribution of vaccines had hobbled independent pharmacies in their ability to offer a product that drove consumers to the big retail chains. The move to primary care by the pharmacy chains would have a significant impact, even under the National Health Insurance Scheme because it too purchased services from the private sector.

He confirmed that red tape was an issue for SMMEs and needed to be reduced but it was now a focus of the President and the dtic. Mr Hodge stated that the Commission had been granted the tools to address the issues, including imposing fines for abusive behaviour. That should be a stronger deterrent. The change in law had enabled the Commission to create a prima facia case where the businesses had to explain why their prices were set at a particular level. The additional powers had been translated into action.

As indicated in the last slide of the presentation, the Commission accepted that it could not do it, i.e. reduce concentration and restructure the market, alone but a coordinated approach would ensure success. Certain actions of government countered what the CC was doing. Noting Mr Burns-Ncamashe’s comments about transformation, he pointed to the preamble at the commencement of the session that had confirmed that the Commission was committed to transformation. It was a structure inherited from the apartheid era and the persistence of some firms that had been granted a state monopoly during that era, meant that it had to change. The Competition Act gave the Commission the tools to address that matter. Exclusion was a problem for the growth of the economy as some people who could develop the market and grow jobs could not access the market.

Mr Hodge agreed that agriculture was an important market where there was a huge potential to create jobs and also to address ownership which was more important than salaried positions as ownership allowed one to build capital, to build and grow businesses and to grow wealth over time. Land access was important, as were water rights and funding.  Funding was critical as there was little funding available for agricultural start-ups. There were risks in the sector, but also potential. He repeated the need to address market structure, concentration, access to markets and the buying power of those on the processors side. For example, during Covid, processors had reduced costs to dairy farmers but there was now an amendment to stop those processors from increasing costs again. It was a complex area and addressing ownership patterns, including share ownerships schemes, was important.

He agreed that there was a high level of assets and ownership concentration in the reality business, and not everyone was listed. The Commission had not considered a market enquiry but was concerned about concentration of markets and the sector had been prioritised for the five-year programme. The Commission could not address local situations because there might be a lot of retail space in a particular node and an agency might not be concentrated in that node. The Commission was looking at a more strategic approach on a higher level. Market enquiries were an expensive line of work, but the real estate industry was on the radar of the CC. The most recent market enquiry was into online markets where small business owners had access to markets. The CC was required to conduct two market enquiries a year and so would be announcing another one soon.

Mr Hodge said that the Chairperson’s questions had repeated other questions but he agreed that small businesses did have to overcome market structure and the Commission needed to consider how to scale up small businesses, remembering that there was always a percentage of SMMEs that would close over time. The question was whether the focus of government policy should be support for establishment of SMMEs or growth, or both. He added that regulators should not be working silos but should have a strategic view of what they wished to achieve.

Mr Bonakele addressed the conclusions of the study which confirmed what the World Bank study had established. There was a need to grow the economy and it could not be done by government alone, but needed assistance from social partners, banks, etc. Why was it easier to buy an expensive car than to buy a tractor? It could not be ‘us and them’. The Commission did not want to rock the boat to cause it to sink, but to take it forward. The document was a study and not binding; it was not about liking what one saw – but it was what it was. One should take the study and use it as it should help government and others to think about the situation.

He said that Mr Cuthbert had raised the issue of promoting SMMEs amidst the rising concentration of the economy. That was an issue for the Commission as it was not succeeding in stemming concentration. Enforcement by the Commission would never be enough. There had to be better collaboration by the entire SA society. Concentration did not work for anyone, even those in the majority, as there was no opportunity for growth.

He stressed that the Commission was working with SoEs, such as in the case of the separation of power in Eskom. The various government actions, such as the Master Plans and the designation for the cement industry, were a concern. The Commission understood where government was coming from, but it shared concerns about what would happen to the price of cement, for example, which was an issue raised by the Western Cape government as there was now a cement monopoly in the Western Cape. No matter where one came from, one did not want the price of cement to rise to unacceptable levels.

Food prices were being monitored and a report issued every six months. There had been predictions that food prices, especially in wheat and other grains and sunflower oil, would rise as a result of the war in the Ukraine.

Mr Bonakele affirmed that the issues were linked to unemployment as one could not address unemployment without competition in the economy. Funding was important and everyone should be concerned about funding in SA. The collapse of the Land Bank was a real concern and had created a gap that government simply had to fix.

He added that agriculture had worked in groups that the producers had formed in order to prepare the way for exporting products overseas, but government policy had to focus on marketing, so that the farmer could concentrate on growing the food.

The Chairperson suggested that the Portfolio Committee would value the opportunity to observe the coming Conference of the Commission at which the report would be discussed in depth. She liked the analogy provided by the Commissioner that the CC was not outside the boat rocking it but inside controlling it. She acknowledged that the Commission had responded most fully to all questions.

Formal consideration of the report on the 2nd and 3rd quarter financial and non-financial performance of the DTIC
The Secretary informed the Committee that no further input had been received from Members of the Portfolio Committee in respect of the report.

He read through the concluding remarks and the single recommendation that the Minister of Trade, Industry and Competition should consider establishing an incentive to encourage the development of film studios in provinces other than the Western Cape.

The Report was adopted by the Committee with no amendments or objections.

Closing Remarks
The Committee Secretary informed Members that the following meeting would be on Wednesday 16 March 2022: a briefing by the Companies and Intellectual Property Commission on its financial and non-financial performance for the 2021/22 financial year to date (Quarters 1-3) and a briefing by the Companies Tribunal on its financial and non-financial performance for the 2021/22 financial year to date (Quarters 1-3).

The meeting was adjourned.