The South African Competition Commission’s Concentration Report

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In November 2021 the Competition Commission of South Africa released a report on the structure of the South African economy. This captures the structure of the economy at present and over parts of the last decade, with time periods dependent on sector availability for each sector.

To do this many different sector-level datasets are employed, but one novel dataset relied on is formed by data from the South African Revenue Services (“SARS”) and the National Treasury (“NT”) — a dataset formed from administrative tax data (it is assumed all underlying confidential data is kept as such).

Using these datasets, different means of describing the structure of the economy are employed. One novel approach is to form a Gini coefficient that compares cumulative proportions of firms against cumulative proportions of income they receive. As with Gini coefficients applied to household income, the Commission uses this approach to indicate how unequal the economy is, overall and across sectors. Other methods employed to understand the structure of the economy include analyses overall and by sector on firm counts, market shares, concentration indicators, entry and exit rates, the proportion of firms classified as small, medium and large, and the percentage of income captured by the top 10% of firms and bottom 10% of firms, as well as at different parts of the distribution (with these latter methods essentially being creative ways to think about the data underlying the Gini coefficient).

The main aim of the study as stated in the conclusion is to “provide an important means to determine how the economic structure evolves and how initiatives by the Commission and other spheres of government are impacting the structure of the economy”. This is described in the introduction to be premised on the fact that concentration does matter, because it may be associated with — amongst many items — lower labour shares, higher margins, lower transformation, and structural constraints on growth. Whether this is the case in each sector is not covered in detail in the report. The report does caution that concentration may also occur for good reasons — for example due to innovation or scale economies, but this is also not analysed.

Conclusions from the report are mentioned in the presentation, and are namely that: 1. The study shows that once markets are concentrated, the trend is towards more concentration and so more deliberate action is required to change the trajectory, and 2. The South African economic conditions and structure are hostile to SMMEs and therefore undermine inclusion and the job creation potential of the economy.

Regarding policy implications, the study mentions the existent Competition Act Amendments (regarding buyer power and price discrimination that negatively affect the participation of SMEs and HDIs, the power of market inquiries, the attention to creeping mergers and the focus on market structure as a key priority for the competition authorities). Workability of these in practice is awaited and precedent likely imminent. The report goes on to highlight the many other actions the Commission has and is taking to help improve the structure of the economy such as the online platforms inquiry, the auto aftermarkets guidelines, and the settlement agreements around exclusive leases with grocery retailers.

The report finally highlights that tackling this at a policy level cannot be done solely through the Commission and competition law, and rather requires a whole Government effort. Government levers that impact economic structure and can be focused to address entrenched concentration are stated to include legislation and regulations; licensing and procurement; investment incentives and support services and technology development policies. It is mentioned that this concentration report can help determine priorities, for example around broader land reform initiatives and greater coordination between regulators and public entities responsible for issuing of licenses and concessions. Lastly it is stated that there should be more consideration given to “more systematic funding and support to scaling SMEs and HDI firms including focusing development finance institutions and regulated changes to private sector funding patterns”. It is unclear where the detail around each of these policy implications are in the report — this could be better headlined given that it underscores the purpose of the report.

The next iteration of the report will be in six months. Commending the Commission for their work in building a yardstick that measures their and others efforts insofar as it impacts on the structure of the economy (and likely allows for more budget to be given where good outcomes are seen), it is hoped that future iterations will include mention of the following:

1. Why the Gini coefficient is robust measure, when applied to the distribution of income across firms, including how income (understood as revenue) by each firm is a good measure of “inequality” for firms. Is a firm that has a higher turnover assumed to be more economically secure than a firm that has lower revenue? It is not unheard of to see large firms running at a loss and small firms running with secure margins. If the focus is on profits, how does one account for the many catches here — how does one think about the many benign reasons for higher or lower profits, including strategic choices to declare profits in different years and to have a heavier or lighter cost base for various reasons? Whilst a philosophical discussion may not be useful here, a brief explanation in the thinking may help to make the Gini coefficient method more compelling.
2. Why broader methods, for example, including multiplier analyses are not of focus, since these would, if done accurately, provide insight into all of the linkages in the economy, including which firms have the biggest impact on the economy.
3. More on the “why” and hence the “so what”. A mentioned above, headlining the policy implications in detail would help underscore the purpose of the report. But in order to do so, one would need to document in the same report all of the reasons for the increasing concentration. If agriculture is of focus, why are farm numbers consistently decreasing? If broader product and service business are of focus, why are they not entering and staying? What do individuals and businesses need (beyond competition policy as we know it) to start a business and grow it? What is Government doing and not doing here to compete with private sector to help this?
4. More updated and broader data. I had previously commented that the banking data is outdated and shows a very different picture when looking at customer count as opposed to banking assets. That there is a significant competition (as opposed to very little) becomes apparent when simply looking at a different indicators. If not of focus, reasons for not the focus on certain indicators and not others may be useful to mention throughout the report.
5. More on the good news, as to what is being achieved. Data prices are falling. Recent mergers are followed by more competition by competitors on the grocery shelves. Every improvement can and should be indicated. This would however involve broader thinking than structure, with a sector level focus on prices and innovation.