A move for inclusion: Competition Commission’s Concentration Report
At a glance
- The Competition Commission released a report on measuring concentration and participation in the South African economy, which found that a lack of competition in both upstream and downstream businesses contributes to low productivity growth and falling export performance.
- Small- and medium-sized enterprises (SMEs) face constraints such as high regulatory load, inflexible labor markets, slow economic growth, and high levels of concentration, resulting in a high SME exit rate.
- The Commission is focusing on promoting the growth of SMEs and firms owned by historically disadvantaged persons (HDPs) through merger conditions aimed at reducing barriers to entry and increasing ownership by HDPs and workers in firms. They are shifting from protecting competition to actively promoting competition enhancement through the reduction of concentration. Clients should be aware of sector-specific competition law enforcement and seek legal advice to address concentration concerns.
Market concentration measures market structure by evaluating the number and size distribution of enterprises within a market. The Concentration Report found that while large enterprises have the capacity to manoeuvre through adverse economic times, small- and medium-sized enterprises (SMEs) face a mix of constraints such as a high regulatory load, inflexible labour markets, slow economic growth and, most importantly, high levels of concentration. The Commission found that South Africa’s SME exit rate was inordinately high. SMEs are cited as having a vital role in creating jobs and the Commission therefore considers facilitating SME economic success to be well within its mandate.
This aligns with the Commission’s mandate in terms of the Competition Act 89 of 1998 (as amended) (Act) vis-à-vis public interest considerations. The most recent amendments to the Act emphasise this mandate and focus on protecting and stimulating the growth of SMEs and firms owned and controlled by historically disadvantaged persons (HDPs), together with protecting and promoting employment, employment security and worker ownership.
Concentrated sectors
The Concentration Report found that concentration persisted in specific sectors, including farming and agro-processing, healthcare and financial services, and that concentrated sectors were likely to remain so over time. The Commission also noted that concentration could increase in multiple ways – through merger activity; through pro-competitive conduct (such as innovative firms increasing their market share over time); as well as through anti-competitive conduct (such as via abuses of dominance).
Although merger activity itself was not found to necessarily be a main driver for concentration in these industries, the Commission identified that to break down concentration, merger conditions aimed at reducing barriers to entry may be successful. The Concentration Report also flagged that, in sectors where government licenses are issued, the licensing process itself may achieve the greater spread of ownership which may then be altered through merger activity which results in consolidation.
The Commission appears to be applying these findings by more regularly imposing a wider range of public interest conditions on mergers. Previously, the Commission’s public interest conditions had focused on employment issues – in particular curbing merger-related retrenchments. There has since been a shift to developing more extensive conditions addressing, in particular, the ability of SMEs or firms controlled or owned by HDPs to effectively enter into, participate in or expand within the market, and increasing the levels of ownership by HDPs and workers in firms in the market. The Commission now appears to be applying a positive obligation on parties to promote these goals (and not only to ensure that they are not harmed via a merger).
The Concentration Report’s findings highlight the emerging shift in focus on the part of our competition authorities from simply protecting competition, to actively promoting the enhancement of competition through the reduction of concentration. This approach is being applied in the merger context through attempts to enhance economic inclusion by promoting broader participation and a greater spread of ownership.
Clients should therefore be mindful of emerging sector-specific competition law enforcement, particularly in markets identified as being concentrated, and seek legal advice early to address perceptions of concentration or lack of market dynamism, in order to prepare for the possibility of intervention by competition authorities.
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