SA’s competition policy good, bad and ugly?

South Africa’s competition policy has elements that are good, bad and ugly, with the bad and ugly stifling economic growth and threatening investment.

The country’s competition landscape is under intense scrutiny after the Competition Tribunal’s recent decision to block Vodacom’s R14 billion acquisition of a co-controlling stake in Vumatel parent Maziv even after the merging parties agreed to a range of additional conditions competition authorities wanted.

Busisiwe Mavuso, CEO of Business Leadership South Africa (BLSA), says the decision shocked the telecommunications sector, threatens a R10 billion investment into fibre networks in underserviced parts of South Africa and risks halting broader industry consolidation.

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“South Africa’s competition policy is a necessary focal point of economic and political discourse, particularly regarding its ability to foster fair competition while also promoting social equity.”

The good elements of SA competition policy

She says the good elements include competition policy’s commitment to inclusive growth. “The integration of public interest considerations into merger assessments marked a shift from traditional competition law focused solely on economic efficiency.

“For instance, high-profile mergers such as Walmart’s acquisition of Massmart and AB InBev’s takeover of SABMiller included conditions that mandated support for local businesses and job protection.”

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While these conditions were imperfect, they demonstrated the policy’s potential to drive economic transformation by ensuring large corporations contribute positively to communities where they operate, she says.

“South Africa also benefits from an established and still-strong regulatory framework through independent bodies, notably the Competition Tribunal’s oversight of the Competition Commission. There has also been prosecutorial success against anti-competitive practices in sectors such as construction and food. The penalties imposed for price-fixing practices during the Covid-19 pandemic indicated a willingness to maintain market integrity.”

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The bad elements of SA competition policy

However, there are the bad elements and Mavuso warns the effectiveness of our competition policy is undermined by several factors.

“By integrating public interest considerations into competition assessments of mergers and acquisitions, the policy creates an unduly complex regulatory environment that deters foreign investment.

“Merger and acquisition evaluations, based on their social impact, can result in investors viewing the regulatory risks as too high, while adding public interest elements increases costs, which erodes South Africa’s ability to attract investment,” she says.

Mavuso points out that in the Walmart-Massmart case, for example, among the conditions the Competition Commission attached to Walmart’s acquisition of Massmart was a commitment not to retrench for several years. “This added a layer of uncertainty, risk and cost for the merging parties that was difficult to predict in a dynamic retail market.”

There is also growing criticism about the efficacy of the competition policy’s enforcement mechanisms in the face of anti-competitive practices, she says. “While there have been some prosecutorial successes, the current framework may not be sufficient to address emerging challenges.”

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The ugly elements in SA competition policy

Moving on to the ugly elements, Mavuso says the historical instances where public interest criteria were misapplied are undoubtedly one of the least attractive aspects of our country’s competition policy.

She says the public interest grounds outlined in Section 12A (3) of the Competition Act require consideration of aspects such as the effect the merger will have on:

• an industrial sector or region
• employment
• the ability of SMEs or businesses owned by historically disadvantaged individuals (HDIs) to enter, participate in or expand within the market
• the ability of national industries to compete in international markets and
• the promotion of a greater spread of ownership.

“However, our research shows that “the ability of national industries to compete in international markets” has hardly featured in merger decisions. This element is vital to ensuring South Africa’s export competitiveness.”

In addition, Mavuso says the reliance on “the promotion of a greater spread of ownership, in particular, to increase the levels of ownership by historically disadvantaged persons and workers within that market” can be seen as misguided.

“While it is understandable that the interests of HDIs be considered, direct legislation, such as the Broad-based Black Economic Empowerment Act should drive transformation. Using competition regulation in this way even risks flying against the objectives of other direct legislation.”

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Remember the Burger King transaction?

She says one of the most egregious examples of the Competition Commission failing to balance public interest considerations was in its initial blocking of the Burger King transaction. Burger King was to be sold by Grand Parade Investments (GPI), a majority black-owned company, to a foreign private equity firm.

In its public statements on the matter, the Commission made no reference to public interest considerations related to employment, or the ability of SMEs or HDI-owned firms to effectively enter, participate in or expand within the market, Mavuso says.

“However, if HDI-owned firms are prevented from exiting their investments, they cannot free up capital for other investment opportunities, effectively preventing them from competing or creating value for their investors.”

The decision had a direct and negative effect on almost all the black investors in GPI, who supported the transaction. GPI’s competitiveness was also damaged as a black-owned company and the precedent damaged the competitiveness of HDI-owned investment firms in general.

Mavuso says the Commission lost sight of the fact that HDIs must be allowed to realise value by exiting investments as they see fit, as well as investing in alternative assets, thereby increasing black ownership elsewhere.

Ultimately, the then minster of the department of trade and industry, Ebrahim Patel and the parties came to an out-of-court arrangement, which included imposing an employee share ownership trust. But the damage was done, Mavuso says, as the arbitrariness of how public interest considerations were applied was clear for all to see.

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Vodacom and Vumatel – market concentration should not be a concern

She says in the Vodacom-Maziv case, the Competition Tribunal must still release its reasons for blocking the deal. “However, they are largely expected to relate to concerns about market concentration. However, not all market concentration is created equally.

“In certain sectors, notably renewable energy and telecommunications, concentrated players are better positioned to invest in the infrastructure necessary for growth and inclusion. They can achieve the economies of scale needed for lower prices and more efficient operations. In this case, having larger players is not anti-competitive. It stimulates a more competitive economy overall.”

Mavuso says the arbitrariness of how public interest considerations are applied appears to be particularly glaring in the Vodacom-Maziv case. “The merging parties had committed to investing at least R10 billion and passing at least one million homes in lower-income areas over five years, providing high-speed internet to over 600 adjacent schools and police stations at no cost, creating up to 10 000 new jobs and establishing a R300 million enterprise and supplier development fund to prioritise SME development.”

However, these proposals died as the Tribunal blocked the deal and Mavuso says South Africa’s poor will disproportionately pay the cost of this regulatory overreach.

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In other developing countries, competition policy focused on direct foreign investment

“It is worth noting how South Africa’s competition policy differs from other developing markets. The focus on integrating public interest factors and black economic empowerment (BEE) into competition regulation contrasts with many developing countries’ priority to attract foreign direct investment with less stringent regulatory oversight on foreign acquisitions and stimulate efficient, competitive markets.”

She believes that competition regulation must return to its core objective of fostering competition. “Ensuring that consumers have access to choice and are free to exercise their choice leads to clear public benefits. The economy becomes more competitive, every point of the supply chain becomes cheaper, consumers are better off and South African final products are more competitive in international markets.

“There must be a rational and transparent approach to applying competition policy to create a predictable environment and reduce risk for those businesses operating in South Africa in those considering transactions. This would maximise public interest.”

Call for coherence across government

Mavuso says competition policy and our competition authorities play a vital role in South Africa’s economy but they should not be repurposed for other objectives, no matter the merit of those objectives themselves.

“There should be coherence across government, with different ministries directly regulating the issues within their competencies, rather than using competition law to regulate indirectly. It is essential that our regulators maintain their focus on fostering genuine competition and stimulating meaningful economic growth. This will provide a bedrock for a more equitable South Africa.”