High charges and market concentration are harming growth

High mobile data charges

Representatives from cell phone networks “scrambled for answers” about high data charges when they appeared before the Portfolio Committee on Telecommunications and Postal Services in September. The issue of high charges periodically comes up, this time under the #DataMustFall banner, which states 1GB of data costs R11 in India, R22 in Nigeria, R32 in Namibia, but R150 in South Africa. At the hearings MTN’s chief financial officer Sandile Ntsele disingenuously blustered about the US dollar being the “common denominator”, and not converting rands to the Nigerian naira.

“We don’t have a situation where the South African rand can trade with the Nigerian naira. What you have is that the common denominator being the US dollar. Now, the dollar price depends very much on what the exchange rate between the two countries is.”

Data (and imported telecommunications infrastructure) is priced and paid for in dollars, after buying dollars in local currency. The Nigerian naira is worth US$0.0031, and R1 is worth US$0.073 (1 naira is ZAR 4 cents). Ntsele did not elucidate how cross exchange rates in dollar terms – the “common denominator” – of the increasingly worthless naira makes MTN’s Nigerian data cheaper than in SA with the latter’s stronger currency.

If Ntsele’s confusing argument does not make sense it’s because it was not meant to – it was a red herring, and I hope Parliamentarians did not accept it.

Networks waffle about cost structures that determine high charges, but are reluctant to reveal details – Vodacom refused during Parliament’s 2009 hearings into “excessive and exorbitant” mobile termination rates. But except for networks saying they are spending billions on expansion and upgrades, there is little public information why SA’s data costs, according to Research ICT Africa’ (RIA) submission[i] to the portfolio committee, are placed 16^th cheapest out of 47 African countries.

SA banking industry highly concentrated

But if networks make such easy targets, and “grilled” to politicians hearts’ content, why do the same politicians give the other de facto cartel – how else to describe members of the club known as The Banking Association South Africa, especially the “big four”, a free pass?

South Africa’s “world-class” banks and financial sector are deemed to be one of SA’s jewels in the crown, and the “amorphous market” is extremely sensitive to any criticism of or questions about it. A recent example was the political and market fallout after Minister Zwane made a controversial and baseless statement, which the Presidency repudiated. However, as I describe below, there has always been this sensitivity about the sector, including during more stable political times.

Why are banks shown deference bordering on the religious?

It’s common cause bank charges in South Africa are among the highest in the world, which they deny of course. Fees (non-interest revenue) are a significant contributor to profits, soaring to over R53bn in 2015 from R38bn in 2010 – 41% in five years! But The Banking Association SA’s homepage states inter alia, “despite being a concentrated sector, it is still very competitive”.

In his paper Market Structure and Competition in the South African Banking Sector Munacinga Simatele (2015, Procedia Economic and Finance, Elsevier) found the industry’s concentration ratio is over 80%. This is in the oligarchy to monopoly range (100% is a complete monopoly).

Simatele wrote that although the high level of concentration did not reduce competition, it is “puzzling the industry exhibits relatively high transactions fees in the larger banks” (the big four or five retail banks). His findings and our daily experience brings into question the Association’s oxymoronic statement.

The Centre for Competition Regulation and Economic Development’s (CCRED) Quarterly Review February 19, 2016 states six banks – Standard Bank, Absa, First National Bank, Nedbank, Capitec and Investec – account for over 90% of all retail deposits.

“SA’s retail bank’s market power is derived from various factors including barriers to entry of small banks. Barriers to entry and expansion include regulations and scale economies and financial backing. The rivalry Capitec provided illustrates the benefits of competition as bank charges came down substantially.”

CCRED states established retail banks take advantage of mechanisms like the lack of transparency and complexity of fee structures to prevent customers from switching. And the regulatory environment makes it difficult for new entrants and growth of small and medium-sized retail banks.

A highly regulated environment acts as a “moat” to start-ups

While SA’s “world-class” banking system safeguards the industry, the process of applying for a banking licence in terms of The Banks Act is “onerous, extremely complex and time consuming”. CCRED:

“In addition to the R250 million required as capital, the Reserve Bank scrutinises the directors, business plan, products, risk management policies, corporate governance, internal auditing, external auditors, anti-money laundering measures and IT capabilities. While these are standard requirements in most countries, it is significant only one banking licence (Finbond Mutual Bank) has been issued in South Africa in the last 15 years. Capitec was able to benefit from accessing the licence held by PSG.

“There are also prudential laws that include capital adequacy ratios that have to be maintained. This is a substantial [opportunity] cost given that [such] capital has to be in liquid assets that bear little return.

“The balance in regulation between the clear prudential rationale and the chilling effect on competition [emphasis added] is contested. Easing regulation enhances competition and promotes efficiency, while strict regulation brings about stability by providing incentives and protections that restrict businesses strategies in the interests of preventing risky behaviour. There is no consensus which competitive structure optimizes both competition (efficiency) and regulation (stability). However, it is apparent that neither extreme is ideal.

“The costs of limiting competition are generally less well understood and there is a danger that the balance is tilted in favour of protecting the established position of incumbents under the rationale of prudential requirements [emphasis added]. Other means of guarding against risky behaviour such as through closer bank supervision should not be forgotten.”

A highly regulated environment acts as gatekeeper to an industry, or profession (that’s another story), for new entrants. South Africa’s labour laws, including affirmative action and black economic empowerment and the proposed minimum wage, limits job creation, particularly in small business, the traditional job creator.

A highly regulated financial sector is not unique to South Africa. Goldman Sachs CEO Lloyd Blankfein last year stated regulations acts as a “moat” around their business and can prevent start-ups from challenging them.

However, the key difference between mature, developed economies like US and SA is the concentration of industries here – banks as Simatele describes, and generally the oligarchic nature of SA’s economy where few very large companies use barriers to entry, including wage bargaining practices, to prevent new entrants (see below).

A presentation by Barruch Ben-Zekry (2007) of the University of California, Berkeley states US banks have a low level of concentration compared to the rest of the world (19% for the largest). Benefits of concentration mainly relate to the stability of banks.

“[But] high concentration is typically not desirable. It leads to higher prices, lower outputs and smaller consumer surplus. Firms in highly concentrated markets sustain high profits for long periods [refer SA banks’ R53bn revenue from fees].

“As in almost any industry, high concentration leads to low levels of competition, and higher prices [e.g. bank fees] – this is no exception [emphasis added]. Higher interest rates are often the by-product of high levels of bank concentration, which is particularly bad for investors as it makes investment more risky.”

Another important difference between SA and other markets, including Africa, is the amount of red tape to start a business. Despite government purportedly committed to cutting red tape, according to Shoprite Holdings CEO Whitey Basson, “red tape is impeding trade and smothering the small business sector at a cost of hundreds of thousands of jobs”. SA’s banking sector is no exception.

Gordhan reverses position on high bank charges

After Pravin Gordhan took office as finance minister in 2009 he expressed concern about bank charges and promised to look into it. Instead, reportedly after banks said they would review their business interests in South Africa, Treasury pressurised the Competitions Commission to drop or wind down their investigation into high charges, and let banks regulate it themselves.

Over three years ago I wrote to Gordhan and asked him to relook at the matter. He did not reply. His reversal[ii] on the charges is another indication of his ineffective, don’t-rock-the-boat first tenure as finance minister.

However, after his intervention charges escalated, with new and higher charges instituted almost simultaneously across the board. The introduction of Mzansi accounts – entry-level “cheap” accounts (they’re not really) – did not hide the fact charges were increasing by large increments. Despite this banks and Treasury claimed “progress” had been made.

The public are captive consumers with little choice. Since 1994 the only new bank entering the market and overcoming high barriers to entry was start-up Capitec.

The mechanisms banks use (like complex fee structures) are similar to those cell phone networks use, particularly before Cell C and Telkom entered the market. Complex mobile pricing has always been a bone of contention, and before porting customers were locked into a service provider forever.

High call termination (interconnect) rates resulted in “South Africa’s cell phone operators ripping off consumers”. In 2012 SA’s prepaid rates were 360% more expensive than Namibia, and SA was placed 32^nd place out of 46 African countries. After Icasa initially “failed consumers”, from 1 March 2014 termination rates dropped to 20c a minute for calls to networks that have more than a 20% market share, and introduced an asymmetric rate of 44c a minute for calls to networks with less than 20% market share.

Fundamental limitations of SA’s economy impedes growth

The same argument against concentration of banks can be applied to mobile networks, and other industries. This is one of the fundamental limitations of SA’s economy, and one – few retail banks and high charges – the IMF’s David Lipton mentioned in a speech this year. The economy is characterised by monopolistic/oligarchic companies and practices, overregulation, inefficiencies, high barriers to entry and high costs, among other things, contributing to a lack-lustre economy of stagnant growth, inflation and high unemployment.

Excessive bank fees and cell phone charges are only two manifestations of this structural deficiency – they won’t call it that, though – inherited from the pre-1994, apartheid-protected way of doing business, which was part of the deal the ANC made at transition.

How do you accumulate a corporate cash pile of R725bn? From oligarchic/monopolistic profits that are up to 50% more than elsewhere and a reluctance to reinvest after you have taken all you can from the captive economy and consumers.

In a free, that is, open and competitive market, if fees are high, either there are economy/industry-wide push-factors on costs, or the largest firms, for example, the established largest four banks and two cell phone networks, are behaving as a cartel or in a cartel-like manner. Both instances deserve investigation.

I wrote before of SA’s many economic policy blunders and lack of understanding of a free market system. In this environment government generally appeases big business – as big business appeases government, closing the mutually gratifying circle – accepts their explanations and is reluctant to get tough (as the Nigeria government did with MTN, say) even when the national interest and well-being of SA’s 55 million people are at stake. 

“Equitable and prosperous” SA not achievable without economic transformation

In an op-ed in the Sunday Times, Barclays Africa’s (Absa) chief executive Maria Ramos, writing about the group’s R57m increase in student funding due to the university crisis, unctuously stated: “This is not a knee-jerk reaction, but a natural response of our Shared Growth initiative, which is driven by the desire to build a more equitable and prosperous Africa [emphasis added].”

Putting aside the opportunistic timing of Barclay’s move (“we know our contribution is not enough to resolve the problem for every student” – a Band-Aid on a gangrenous wound), Ramos displays the deluded and schizoid thinking of her ilk – SA politicians and big business.

They allegedly fail to understand (thereby absolving themselves) that the economic “problems” of SA – the meta-message of university and social unrest – is the direct result of an economy that cannot grow and develop into an equitable and prosperous one because of the deficiencies I’ve been writing about. Lipton (edited extract):

“Why is growth so weak? The South African economy is reeling (in addition to external shocks) from the effects of misfortunes and home-grown problems, and something that developed with the evolution of the economy. This involves (crucial structural) issues that are very familiar to you: those included and successful in the advanced economy – large businesses, banks and unionised workers – maintain entry barriers against potential competitors – small and medium-sized enterprises and the unemployed [the excluded]. The result is a huge part of the labour force is left on the outside, undereducated and with no opportunities for advancement.

“At the same time, the private sector – supported by government regulation – has created privileged markets working against the interests of consumers. They also damage competitiveness by keeping business costs high.

“In the finance sector, there are only a few retail banks in operation, and their fees are high. Small enterprises have trouble accessing banking services, though there has been some improvement of late. Barriers to entry into the industry favour existing institutions.”

Rightly so South Africa is obsessed with state capture and the well-known and politically connected family and group of companies allegedly behind it – we talk of nothing else; it’s so exhausting.

But the more extensive and insidious economic capture – one that is contributing to dooming the country to economic and social mediocrity (SA is the most unequal society in the world) – referred to above is considered, in our upside-down world, by its economically included defenders to be perfectly legal, ethical, normal and acceptable.

I support aggressive, nonpartisan investigations into mobile network and bank charges and the market concentration of industries. The Competition Amendment Act that came into effect on 1 May 2016 that provides for criminal liability of individuals, including directors and managers, who act in contravention of the Act, is an overdue step in the right direction.

But SA’s history and the politicisation, including the successful lobbying by pressure groups, of the economy indicate it may be too little too late, though. So don’t expect resolution soon on excessive cell phone and banks charges, and the urgently needed transformation of the economy.