Large firms in industries such as farming inputs, agro-processing, healthcare, sin industries (alcohol, gambling and cigarettes) and communications continue to enjoy high concentration of ownership and dominance over certain sectors of the country’s economy, despite post-apartheid efforts to unbundle conglomerates and the enactment of the 1998 Competition Act, which was meant to help usher in new players.
This is according to the findings of the Competition Commission’s first ever Concentration Tracker Report, which seeks to measure the concentration and participation levels in the South African economy. It was released on Tuesday.
According to the report, 69.5% of 144 sectors in the economy remain highly concentrated by large firms, with 40.3% of these sectors reportedly dominated by a single firm.
And less than 10% of the sectors in the country’s economy have managed to have unconcentrated markets since the dawn of democracy.
To gain insight into the ownership levels and trends in SA’s economy, the study makes use of collated data sourced from over 80 organisations such as the South African Revenue Service, Statistics SA and the commission itself.
The big fish will continue to get bigger
One of the key findings is that already highly concentrated markets tend to be more likely to see an increase in concentration in future.
“What we found was that, tracking over a period of five to 10 years, highly concentrated markets with a dominant firm were three times more likely to have seen increases in concentration over that period than reductions in concentration,” said James Hodge, the CompCom’s chief economist.
“This is in stark contrast to unconcentrated or moderately concentrated markets where there is a greater likelihood that they become less concentrated over time,” he added.
The study noted that the farming inputs, agro-processing, sin industries, healthcare, communications, upstream steel value chain and financial services sectors have seen increases in concentration over the last five to 10 years.
Barriers to entry
The report said the increase in concentration in already highly concentrated sectors is consistent with notions that dominant firms maintain their dominance by instituting exclusionary entry barriers that sideline new players and make it harder for them to succeed in their sectors.
To alleviate this the report called for enforcements aimed at reducing ownership concentrations and to start narrowing in on markets that have dominant firms.
“The finding also suggests that proactive measures are needed to ensure that markets do not become concentrated in the first place. This might require greater vigilance in merger control,” the study noted.
Markets continue to shut SMEs out
The Concentration Tracker Report also indicated that the economy is seeing considerably low levels of participation in concentrated sectors.
Making this worse is the relatively higher exit rates for small and medium enterprises (SMEs) in recent years.
According to the report, SMEs between 2012 and 2015 saw an average exit rate of 8% in comparison to large firms, which registered an exit rate of only 3% in the same period.
SMEs are just not sticking around and staying in business long enough, with the report pointing out that SA’s stagnant economic growth over the last five years, as well as existing barriers to entry in concentrated markets for SMEs, is largely to blame for this.
Minister of Trade, Industry and Competition Ebrahim Patel said that although the report has been useful in collating data that presents a sobering picture of who the owners of South Africa’s economy are, this is not an opportunity to punch down on large firms.
“In us looking at economic concentration, we don’t see this as an argument against large companies,” he said.
“South Africa needs large local players who can be our champions in global markets, [players] that can produce goods that are competitively priced and are available to South Africans,” Patel added.
Instead the minister said the report should be viewed as a source of insight on how concentration in sectors has kept SMEs out of markets and consequently affected economic growth rates and limited job creation.
In efforts to decrease concentration levels, the CompCom has through the report made several recommendations.
Some of the key recommendations relate to policy reform of competition policy in the public sector, increasing funding and support to SMEs that will help ensure success, as well as garnering the support and buy-in for transformation of markets from the private sector.
The current report, which serves as a baseline report, will be updated every two years with fresh data to keep track of concentration and participation levels and trends.