Patel: Corruption toll could be R27bn to GDP, 76 000 job losses
Cape Town - Corruption costs the SA gross domestic product (GDP) at least R27bn annually as well as the loss of 76 000 jobs that would otherwise have been created, according to Minister of Economic Development Ebrahim Patel.
This is according to a recent exercise by his department to quantify the cost of corruption in the public sector, based on just a 10% increase in price in infrastructure projects as a result of corruption.
Collusion increases the costs of doing business, stunts the dynamism and competitiveness that is needed and has a negative impact on growth and jobs, Patel said at the Competition Law, Economics and Policy Conference at the Gordon Institute of Business Science.
The culture of "rampant acquisition" is spreading so widely that the professional standards of integrity which are a hallmark of functioning institutions are under enormous pressure. There are some troubling matters to address in looking at corruption and the collusion therewith by professional firms, from auditors to lawyers and others."
A World Bank study on competition in SA noted, for instance, that in the case of four cartels in maize, wheat, poultry and pharmaceuticals – products which make up 15.6% of the consumption basket of the poorest 10% – conservative estimates indicate that around 200 000 people stood to be lifted above the poverty line by tackling cartel overcharges.
"There are things we can do, practical things, while the wider battle to ensure integrity in the public and private sectors is pursued," said Patel.
The construction industry, through the seven largest companies, for example, has embarked on a major transformation programme, with three prominent companies selling a large block of their shares to black South Africans. In all, the deal will place construction turnover of "billions of rand" in the hands of black South Africans over the next seven years.
Competition policy is going through something of a golden age, with enormous public interest in the work of the competition authorities and widespread public debate on what is done and what should be done.
Public interest
"The past seven years have seen a focus by government on the public interest consequences of mergers and acquisitions, specifically on employment, small business development, ownership by black South Africans and local industrial capability," said Patel.
"This is not surprising in a society with so many people who are unemployed, where poverty levels are deep, many citizens feel excluded from the economy and wider inequalities threaten the social stability of our still-young democracy. This is a fertile field for demagogues who offer simplistic solutions to the many who are desperate."
He pointed out that some commentators, lawyers and economists – while acknowledging the extent of the problems of joblessness - have asked whether it is the proper remit of competition policy to deal directly with unemployment and with the strong focus on public interest issues.
"Two decades ago, economic goals in many countries were framed in the language only of rates of economic growth, with the widespread presumption that growth always, often automatically, results in wider benefits for society," said Patel.
"Today we live in a wiser world where there is compelling evidence that strong growth has in many cases gone with deepening inequalities and social exclusion, for example of young people. Today there is a broad consensus on the need for inclusive growth."
There is also a growing constituency of policy-makers across the world who see value in well thought-out and transparent public interest conditions being attached to mergers and acquisitions to bring out the inclusivity of the growth.
"In 1994, at the start of the democratic era, the new incoming government identified high levels of economic concentration as a critical challenge. Today, some 23 years later, the public discussion has returned to this issue," said Patel.
Manufacturing
In research currently being done on concentration ratios in the manufacturing sector, preliminary results suggest that the top five firms in the sector as a whole accounted for 13.7% of total manufacturing sales in 2011. By 2014 this had risen to 16.2%.
In a three-year period, the data seem to show a growth of 2.5 percentage points in market share - or based on estimated rand value, it may be equivalent to as much as R54bn of additional sales that, had market share ratios remained the same, would have gone to smaller firms.
"Some of this may be due to efficiency gains or other reasons that could be enhancing overall welfare. But clearly, if increased concentration has the effect of displacing smaller companies, issues of social equity loom large. These levels of concentration may be economically unjustified and, if so, should be addressed," he emphasised.
Racially skewed
In addition, many parts of the economy are still faced with stubbornly racially-skewed ownership profiles, according to Patel.
"The exclusion of most historically disadvantaged South Africans from the ability and opportunity to own productive assets must be remedied to unlock the competitive and development benefits of full participation by all in the economy," he said.
"The effect of these two structural features of these markets is to stunt economic growth, prevent entry of new players, reduce consumer choice, limit the levels of innovation and dynamism in the economy and feed a growing resentment among black South Africans of the failure to realise the promises made by the Competition Act and the vision of the constitution."- Fin24
Patel: Structural features diminish effective competition, limit inclusivity of growth
Given the "potent mix" of South Africa’s challenges with economic concentration and social exclusion, it is time to come up with practical approaches to address high levels of concentration in the economy, according to Minister of Economic Development Ebrahim Patel.
In his view, certain "structural features" diminish the promotion of effective competition in a number of markets and limit the "inclusivity" of growth.
"It seems to me to be better that it be done through the trusted and predictable processes of competition regulation and its sound institutions than that it be left to laws that simply mandate the breakup of companies irrespective of the economic logic thereof," Patel said at the 11th Annual Competition Law, Economics and Policy Conference at the Gordon Institute of Business Science.
In May this year, Patel advised Parliament of his intention to propose amendments to the Competition Act to enable more effective measures to be taken against certain features of market structure.
The key set of amendments will require the consideration of the concentration, ownership profile and structural impediments to entry or expansion in a market when that market is defined and assessed by the competition authorities in mergers or where anti-competitive conduct in that market is scrutinised in complaints referred to the Competition Tribunal for determination.
In addition, the competition authorities must be empowered to consider these questions proactively or at the request of key stakeholders, including parties who are demonstrably unable to overcome these barriers entrenched in the relevant markets, according to Patel.
"Markets plagued by over-concentration and untransformed ownership will need to be identified, investigated and appropriate measures applied to remedy these market features," he said.
"These inquiries, and any remedies that result, will target the primary structural impediments to market entry and ownership, including by black South Africans."
The proposed amendments could potentially seek to incentivise firms to develop relationships and adopt strategies that would alter market structure; reduce concentrations by encouraging entry of historically disadvantaged South Africans (particularly those who own SMMEs); reduce barriers to entry; and expand ownership to ensure that more enjoy substantive economic citizenship.
"I acknowledge that competition law on its own cannot address issues of economic concentration. A wider set of industrial policy measures, including public procurement policies, will have to play a key role. But clearly there is a role for competition law. I welcome your thoughts and proposals on that role," said Patel.
IP
The tension between intellectual property policy and competition policy will be a significant part of the policy debate and it may well be that the weight given to protection of intellectual property in global regulatory systems, will need to be rebalanced, in Patel's view.
"For developing countries like SA, the challenges of the Fourth Industrial Revolution include basic ones like the cost of and access to data that will fuel the new economy; and the question of the power dynamic between regulators in small jurisdictions when faced with large multinational enterprises," he said.
In May this year, he requested the Competition Commission to initiate a market inquiry into high data costs. The inquiry will benchmark SA data costs against international norms and assess the state of competition in the market by looking at, among others, market structure, the current regulatory regime, strategic behaviour by large fixed and mobile incumbents, costs faced and profits earned by telecoms operators, current arrangements for sharing of network infrastructure, investment levels, access to and allocation of spectrum and measures to promote entry of black South Africans into the sector.
It will make recommendations to government on measures to improve competitiveness in the sector and how data costs can be brought down.
