Business and Economy

How will Zuma use competition laws to de-concentrate SA’s economic ownership?

President Jacob Zuma revealed that the department of economic development will this year present an amendment to the Competition Act that seeks to dismantle cartels and monopolies in certain sectors of the economy as part of his administration’s “radical economic transformation” agenda. Photo: GCIS

 

It went largely unnoticed, but President Jacob Zuma made one of his most significant policy pronouncements yet on economic redress in his recent State of the Nation Address.

Zuma revealed that the department of economic development will this year present an amendment to the Competition Act that seeks to dismantle cartels and monopolies in certain sectors of the economy as part of his administration’s “radical economic transformation” agenda.

“It will among others address the need to have a more inclusive economy and to de-concentrate the high levels of ownership and control we see in many sectors,” Zuma said.

The impending amendment caught my attention because it suggests drastic or radical policy action.

It also raises two critical questions pertaining to the future mandate of the Competition Commission:

  •  Will black ownership, rather than competition, be the overriding consideration when the Competition Commission approves or blocks mergers and acquisitions?
  •  Does “de-concentration” mean that competition authorities will be empowered to break up monopolies and oligopolies to alter the structure of industries?

The first question is straightforward and goes to the heart of what the government is trying to resolve: low levels of black economic participation. As far as I know, the Competition Commission has never blocked an acquisition or merger on the grounds that it will hinder black economic empowerment (BEE).

The commission approves or blocks transactions on the basis of its impact on market competition and consumers. In other words, the Competition Commission has always prosecuted or punished anti-competitive behaviour instead of tampering with market structures by breaking up companies that weaken competition or abuse their market power. BEE may in future come into play when approving or blocking mergers and acquisitions.

The second question deserves more attention than the first because it implies that government intends to interfere with market structures to enable more black people to own and control a bigger stake of the economy.

 It is not unreasonable to conclude that we could see a situation where government deliberately breaks up monopolies and oligopolies to create space for black-owned companies to enter industries that they have previously failed to break into.

The fresh push in legislative reforms to boost BEE is born out of the fact that the economy is dominated by white-owned local firms and foreign multinational companies, some of which have in the past been penalised for market collusion or accused of operating like cartels.

It is not unreasonable to conclude that we could see a situation where government deliberately breaks up monopolies and oligopolies to create space for black-owned companies to enter industries that they have previously failed to break into. 

This does not only lead to predatory pricing, where consumers are fleeced by the cartels, but also erects barriers to entry that keep potential competitors out of the market. Presently, the competition authorities do not have instruments in their policy arsenal that are designed to break up oligopolies.

However, there are international policy examples we can copy and implement. Perhaps a less drastic way of breaking the stronghold of a few dominant players would be to introduce new competitors in these markets to challenge the status quo. This is easier said than done, since this strategy has not really worked in SA.

I suspect that competition authorities will have to go to extreme lengths to end oligopolies and monopolies if black-owned firms are to enter key industries of our economy. One extreme option is to amend the Competition Commission to issue divestiture orders to dismantle companies that stifle competition and sell broken-up parts to new owners to increase competition.

Divestitures have been used in the US and UK as a remedy for monopolistic and oligopolistic markets. Competition watchdogs in the EU and Canada are also empowered to issue divestitures, although they have not been used in recent times. In the US, the splitting up of Standard Oil more than a century ago stands out to this day as a model for divestiture remedies.

In 1911, the US Supreme Court ruled that Standard Oil, which controlled 60% of US oil production at the time, had abused its dominant position in oil refining. The company was broken up into 34 oil companies that competed directly, leading to the birth of US oil giants such as Exxon, Mobil, and Chevron.

A more recent example was the US Justice Department’s decision last year to permit beer maker Anheuser-Busch InBev (AB InBev) to acquire SABMiller, provided that SABMiller divested its interest in US beer producer MillerCoors. As part of approving the transaction, AB InBev was also prohibited from implementing schemes that could potentially limit the ability of independent beer distributors to sell the products of AB InBev’s rivals.

In the UK, airports operator BAA Airports was ordered by competition regulators between 2007 and 2009 to sell Gatwick, Edinburgh and Stansted airports in order to promote competition. If the South African government is committed to restructuring our economy, there is a likelihood that divestitures will form part of the competition policy arsenal.

Since divestitures are a powerful policy tool, I also suspect they will be used sparingly and where appropriate, given that they could potentially do more harm than good by disrupting industries and hurting the economy.

 

  • Andile Ntingi is CEO and co-founder of GetBiz, an e-procurement and tender notification service.

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