Competing contradictions in costly "competition" policy - Politicsweb

Feb 25, 2019
25 February 2019 - Larger companies thus enjoy a double privilege: protective tariffs against cheaper imports, and minimum wage requirements that smaller ones cannot afford. Trade and labour policy thus contradict competition policy. So does procurement policy.

John Kane-Berman 
Two weeks ago Cyril Ramaphosa signed into law the contentious Competition Amendment Act of 2019. At more or less the same time, South Africa's major steel manufacturer, ArcelorMittal SA (AmSa), reported its first full-year profit since 2010. Once a state-owned enterprise by the name of Iscor, this behemoth benefits from tariffs designed to reduce the amount of competition it faces from cheaper imported steel. Smaller manufacturers have long complained about the protection that AmSa enjoys, presumably because it is "too big" to be allowed to "fail".

The argument is usually made that AmSa must be protected to preserve all the jobs this huge company offers. But this ignores all the jobs lost in smaller companies unable to take full advantage of cheaper imports, and also without the lobbying power of AmSa.

In his state-of-the-nation address earlier this month, President Ramaphosa said that it had long been recognised that one of the constraints upon growth was "the high level of economic concentration" in South Africa. Hence the amendment to competition legislation (which will presumably not be applied to AmSa).

The amendment gives enormous power to the Competition Commission to order businesses to be broken up. This will supposedly make it easier for smaller black firms to enter the economy, although the recent imposition of a statutory national minimum wage will undermine their ability to do just that. Arguably, if the economy is over concentrated, one of the reasons is that the collective bargaining system enables larger firms to saddle smaller ones with unaffordable wage rates.

Larger companies thus enjoy a double privilege: protective tariffs against cheaper imports, and minimum wage requirements that smaller ones cannot afford. Trade and labour policy thus contradict competition policy. So does procurement policy.

In his state-of-the-nation speech, Mr Ramaphosa said the government would "intensify" the "buy South Africa programme". Apart from reducing competition from imported goods, this will put up costs wherever local goods are more expensive than imported ones. On one page of his speech the president promises to "address" regulatory barriers and make it easier to do business. On the next he promises "measures" to increase the proportion of local goods and services procured "both by the government and the private sector".

The latest version of the mining charter requires at least 70% of the value of mining goods to be obtained from South African manufacturers, subject also to various racial requirements. The result will be additional costs for mining companies already reeling under the impact of the remorseless rise in electricity, labour, and other costs.

Tough local content requirements were recently gazetted for the defence sector. A higher local content requirement is also in the offing for the motor manufacturing industry. Presumably when Mr Ramaphosa promises additional "measures" he means that these will be introduced by regulation where they are not already in force in terms of one or another charter or code.

Amended "preferential procurement regulations" for all organs of state came into operation in April last year, when the applicable ceiling was raised from R1 million to R50 million. Below the ceiling, price need account for only 80 points out of 100 when companies tender for government contracts. The other 20 points are awarded for black economic empowerment (BEE) status. Above the ceiling, BEE scores only 10 points.

The effect of hoisting the ceiling to R50 million has been to make race a qualification for a great many more government contracts, so pushing up costs. According to the 2019 budget tabled in Parliament last week by the finance minister, Tito Mboweni, total infrastructure spending in the coming financial year will be R276 billion. "Goods and services" costs of central and provincial government will amount to another R251 billion. If spending by local government and state-owned entities on goods and services is added to these amounts, total procurement spending will be well above half a trillion rands.

The effect of the racial procurement regulations will be to limit competition for a large number of government contracts to BEE-compliant companies (and those fronting as such). The result will be higher costs – these to be incurred by a government whose finance minister pointed out in his budget speech would this coming year be spending R243 billion more than "we earn".

Perhaps one of the reasons Messrs Mboweni and Ramaphosa had such a hearty laugh together on budget day was at the quaint idea that extracting taxes was something governments "earn". 

* John Kane-Berman is a policy fellow at the IRR, a think-tank that promotes political and economic freedom. Readers are invited to take a stand with the IRR by clicking here or sending an SMS with your name to 32823. Each SMS costs R1. Ts and Cs apply.

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