The South African Competition Commission (“Commission“) recently published its report on economic concentration (“Report“), which highlights patterns of concentration and participation in the South African economy. The report includes details of the Commission’s power to launch market investigations in highly concentrated industries, as well as its increased power to impose structural remedies on companies in these sectors.
In March 2022, the Commission briefed Parliament’s Trade and Industry Portfolio Committee on its report. the Report was released in late 2021 and highlighted patterns of concentration and participation in the South African economy. It includes details of the Commission’s power to launch market investigations in highly concentrated industries and its increased power to impose structural remedies on companies in these sectors. These remedies are deemed necessary to remove barriers to entry for new entrants, primarily for small and medium-sized enterprises (SMEs) and businesses owned or controlled by historically disadvantaged persons (“HDP Companies“).
It is widely recognized that South Africa’s markets and ownership structures are overly concentrated, primarily due to the legacy of historical disadvantage. South Africa’s constitutional mandate prioritized the abolition of racialized economic structures, which was a glaring feature of previous political dispensation. A more robust system of competition regulation was formulated as a lever to advance the broader process of economic transformation. Democratic government has made competition regulation its preferred method of regulating private business in the public interest to, among other things, foster an economically inclusive economy.
It is in this context that the Commission sought to carry out a first study on the levels of concentration in the economy. The initial study revealed that certain industries in South Africa, including ICT, energy, financial services, food and agribusiness, infrastructure and construction, industrial intermediates, mining, pharmaceuticals and transportation, were highly concentrated. The Commission used market share estimates in these industries as a proxy to inform its assessment of structural conditions. The report is based on the Commission’s preliminary research on structural conditions in various market sectors. For example, the report states that the top three companies generate 50% of wind and solar power, and the top three refiners and LPG suppliers have a market share of over 65%.
The report highlights the shift in focus from simply protecting competition and market participation to more actively promoting improved competition, reduced economic concentration and active promotion of wider participation and distribution of ownership. It has become commonplace that the mandate of the South African antitrust authority is dual in nature. It has always been true that the Commission’s remit transcends pure competition issues into the realm of public interest, which includes economic transformation. It is in this context that amendments were made to the Competition Act in 2019, aimed at ensuring the achievement of economic transformation. These amendments seek to achieve this by tackling high levels of concentration, strengthening small business development and tackling the “race-biased” distribution of ownership through merger control, l imposition of structural remedies, prosecution of abuses of dominance as well as, pertinently, market intelligence requests.
Concretely, and in relation to market investigations, the amendments lower the threshold for intervention by competition authorities by introducing a “prejudicial effects” test. In other words, competition authorities will be able to conduct a market investigation if a characteristic or a combination of characteristics of a market adversely affects competition in that market, even if this impact is not substantial. Following a market investigation, the Commission may take any action (including imposing structural remedies such as divestitures) to remedy, mitigate or prevent an alleged adverse effect on competition and make a recommendation to the Court of competetion (“Court“) for the Tribunal to make an appropriate order in relation to such adverse effect on competition.
In addition, following a market investigation, the Commission may make recommendations for policy, legislative and regulatory change to the Minister for Trade and Industry, as well as recommendations to other regulatory authorities. regulations concerning competition issues. In fact, the report’s findings should serve as the basis for a broader set of recommendations to government to address deep-seated structural issues related to persistent concentration, lack of participation and ownership transformation. Government intervention is deemed necessary as most sectors are directly influenced by government through legislation, regulation, licensing and procurement, among others. These levers are considered to have an impact on the structure of the market.
Certainly, it emerges that there is a series of government initiatives aimed at improving the economic trajectory of the country, which can be reinforced by the recommendations of the Commission or its active role in policy formulation. Inclusive economic growth appears to be high on the government’s agenda, reiterating far-reaching economic reform measures outlined in the 2019 National Treasury Economic Policy Paper, aimed at tackling economic transformation, inclusive growth and increased competitiveness.
Competition policy is certainly poised to be a key driver of economic reform, with the economic inclusion of SMEs and HDP firms meeting one of the main objectives of competition law, which is to give to all South Africans the opportunity to participate equitably in the national economy. With an alignment of objectives, competition authorities are expected to play a vital role in government efforts for greater economic inclusion. The Commission understands what is at stake, with Commissioner Tembinkosi Bonakele stressing that inclusiveness is not only a social imperative, but also a platform for more competitive and dynamic markets, greater economic growth and increased employment.
The amendments will give the authority the power to “deconcentrate” what it considers to be otherwise highly concentrated markets. The Commission will have more power to launch market investigations in sectors it considers to be highly concentrated, with increased power to impose structural remedies on companies in these sectors if they are found to be creating barriers to entry for new entrants. Moreover, the conclusions of the Commission following a market investigation will be binding unless they are challenged before the Court. Thus, companies operating in highly concentrated sectors, especially those identified by competition authorities, must now prepare to be in the more intense spotlight.