South Africa

Maverick Citizen: Op-ed

The conundrum of regulating digital business

Regulators are facing tough decisions about how to manage digital businesses. Many know that there is something special about the contribution digital businesses can make to economic and social development. But they also have a sense that these businesses should comply with the prevailing rules, which are aimed at ensuring market activities are fair and not harmful.

How can we take advantage of the job opportunities created by digital business and ensure the protection of gig workers’ rights at the same time?

Digital businesses are special because they are changing the deep forces that determine industrial structure: transaction costs, how information is generated and shared, how production occurs, how products get from producers to consumers, and how risk is managed. They can radically reduce costs, serve new customer segments and create new forms of income-generating work.

The South Africa in the Digital Age (SADA) initiative, convened by Genesis Analytics in partnership with GIBS and the Pathways for Prosperity Commission, has shown that supporting the scaling of these digital businesses is critical for South Africa. SADA identified that the scaling of opportunities in just one area of the digital economy – global business services – can create 500,000 jobs over the next 10 years.

However, South Africa’s complex web of regulatory architecture is one of the factors, among a few, preventing this scaling. So here is the conundrum: how do you support digital businesses to scale without tying them down with regulatory red tape, yet still ensure they are responsible businesses that do not harm, or exploit society?

Digital platforms make for an excellent example of thinking through this question. They are a genuinely new form of business that connect market participants together virtually, removing information asymmetries and generating trust between strangers. They are often borderless, collect enormous amounts of data from their participants and offer new forms of “gig” work.

This poses a number of regulatory considerations: what benefits should they provide to their supply-side participants, how can anti-competitive behaviour be prevented given how quickly they can scale and who should benefit from the monetisation of their data?

There is no commonly-agreed best practice on how to recognise and protect the work of supply-side participants earning an income through digital platforms. South Africa has made important gains in protecting the right to fair pay, humane work conditions, employment benefits and collective bargaining. While it may seem obvious that platform participants should be afforded the same protection as those in traditional employment, there is a real risk that doing so will prevent these nascent platforms from scaling and creating an important source of income-generation for more South Africans.

Evidence from markets with scaled platforms, such as India, suggests that strong competition among platforms is a powerful mechanism for protecting the interests of supply-side participants. In a market with strong competition, participants can choose to take their business to another platform. The platforms also have an incentive to develop their supply-side participants to improve their customer experience by providing technical and soft skills training.

Unfortunately, platforms have the tendency to be anti-competitive. They can scale so quickly by providing a cheaper and more efficient offering that they can dominate a market. Price is often a traditional mechanism for competition regulators to assess when a business becomes monopolistic, but the growth of platforms is often associated with an aggregate reduction in prices. As such, competition regulators need to consider other features of anti-competitive behaviour, such as exclusive supplier contracts, which make it difficult for emerging platforms to compete. 

In addition to labour and competition regulation, digital platforms are posing entirely new regulatory issues that need to be resolved. Digital platforms generate enormous amounts of personal data that track the consumption, payment and movements of both demand- and supply-side participants. This data is valuable and can be monetised in a number of different forms – sold to advertisers, incorporated into credit scoring, or used to design new products.

In Kenya, Uber has partnered with the fintech Jumo to offer its driver-partners vehicle financing using behavioural data from their Uber accounts to generate a credit scorecard. In India, local e-hailing platform Ola even has their own vehicle financing arm.

These examples evidence how platforms can have a strong social impact by helping supply-side participants graduate to higher forms of income-generation. But they pose an important philosophical question – who owns this data and who should benefit from its monetisation? To date, most countries have regulations in place regarding data privacy, but not governing data ownership and commercialisation. One response is the suggestion of forming data trusts, which place the data generated by platforms – and the commercial benefits from it – in the hands of the platform participants, managed by trustees in the same way that legal trusts work.

E-hailing in South Africa faces the same issue. The majority of South Africans earning an income as a driver on platforms like Uber, or Bolt, do not own their own vehicles. As such, they have to share their revenue with the vehicle owner, or pay leasing fees. Purchasing their own vehicle is out of reach for many of these drivers because of the large capital outlay and difficulty getting a loan. A partnership between the platforms and an innovative financial service provider could help, but this would only be at the platform’s behest. The data is not open and it does not currently belong to the participants.   

Regulators in South Africa have some tough decisions to make. It is clear that the business models of many digital businesses, such as platforms, are significantly different. As such, they should not be subject to a blanket “one size fits all”, regulatory approach. Much of our regulatory architecture in South Africa is becoming outdated and needs to be refreshed with these new business models in mind. But there is a significant risk of regulating too much too early. Regulators need to be mindful of placing onerous requirements on digital businesses that will stifle their ability to scale. In the SADA strategy primer, we outline the key issues of digital business regulation that will allow digital business to scale and be responsible stakeholders in South African society. MC

Mark Schoeman is the Digital Economy Manager at Genesis Analytics.

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