Treasury-funded study: Cell-C saved SA consumers R47bn; Capitec R20bn

Now here’s a study that could be worth its weight in gold. A research centre at the University of Johannesburg was commission by National Treasury to investigate how best to introduce black industrialists into the South African economy. It concluded that the current approach of fashion throwing money at the problem – the route favoured by the politically connected – is a mistake. Instead, the strategy should be to seriously promote competition. Because it is competition which shakes up the status quo; opening the market to new entrants; and which produces huge benefits for consumers and hence the nation. The researchers looked closely at the price war in mobile phones where Cell-C and Telkom triggered a staggering R47bn in savings for consumers. And the entry of Capitec into banking which, the research shows, put an extra R20bn into the pockets of consumers through introducing keener pricing on all bank charges. This study will obviously be welcomed by those who support free enterprise. But it is also a powerful voice against crony capitalist corruption, where self-serving elites apply the distribution of public funds according to the connection to power- and melanin levels. – Alec Hogg

From the CCRED of the University of Johannesburg:

The South African economy needs a new approach to regulation, competition, and industrial policy to open the economy for greater participation, particularly by black industrialists, according to research released today by the Centre for Competition, Regulation and Economic Development (CCRED) at the University of Johannesburg.

In a series of studies funded by the National Treasury, CCRED has identified substantial barriers to the entry and growth of new entrepreneurs and producers hoping to gain a foothold in the market.

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“Entry barriers are significant, but their magnitude and how they can be reduced is poorly understood,” said Professor Simon Roberts of CCRED. “Our studies – into both individual firms and important economic sectors – underscore what South Africa needs to ensure a more inclusive economy, including greater performance-based competition, investment in capabilities and learning, and mechanisms for rewarding effort and creativity.”

The obstacles to rival entrants according to the research are a combination of intrinsic features of the markets, consumer behaviour, strategic exclusionary conduct by incumbents, as well as risk aversion in financing entrants.

The key constraints include the challenges in accessing markets and value chains, overcoming consumer inertia and switching costs, achieving scale and obtaining ‘patient’ capital.

While finance is often cited as the determining factor in new business success, Roberts said that without addressing the other barriers to entry, funding alone is likely to be a waste of money. Similarly, implementing procurement measures without building capabilities and addressing the power of dominant firms is unlikely to ensure sustainable businesses.

“We chose our focus areas according to several criteria,” said Roberts, “They include a history of concentrated markets and anti-competitive behaviour; the economy-wide impact and those sectors where competition policy, regulation and microeconomic policies overlap.”

The CCRED studies cover agro-processing, the ‘network industries’ of banking and telecoms, supermarkets, low cost airlines, beer brewing, liquid fuels, renewable energy and mobile money. The firms the Centre studied include Capitec, Fruit & Veg City, Soweto Gold, 1Time and FlySafair.

Cell C logoAmong their findings are that the entry and growth of Capitec has saved consumers close to R20bn per annum since 2010; the reduction in mobile call termination rates, which enabled Cell C and Telkom (mobile) to be more effective competitors, has saved consumers R47bn over 2010 to 2015; and low cost airlines reduced prices by as much as 38%. Fruit & Veg City opened routes to market for suppliers and offered fresh produce at substantially lower prices. All entrants widened access and the extension of services to consumers.

The Centre’s recommendations – with a number of practical ideas – include regulating for competition; providing funding for risk and rivalry; amending the Competition Act; and opening routes to market.

“Ownership and control matter,” said Roberts. “Participation and the share of returns need to be much more inclusive for South Africa – and the region – to address poverty and foster a healthier, more competitive economy.”