The Competition Commission’s Measuring Concentration and Participation in the South African Economy says 69.5% of 144 sectors in the economy remain highly concentrated by large firms, with 40.3% of these sectors reportedly dominated by a single firm.
There is no doubt in my mind that there are parts of the economy that are unduly concentrated, and I applaud the competition authorities’ work trying to unravel this.
What worries me, though, is that the concentration notion is an excuse to impose yet more interventionist legislative decrees that will have exactly the opposite effect, because that is what has been happening for the past 20-odd years.
The principal way of measuring concentration is the Herfindahl-Hirschman Index (HHI), which has the simple formula of squaring the percentage market penetration of each participant in an industry and adding up the results.
A market with an HHI of less than 1,500 is considered a competitive marketplace, an HHI of 1,500 to 2,500 is moderately concentrated, and an HHI of 2,500 or greater is highly concentrated.
So far, so good. Looking through the commission’s report, I notice that the banking industry is named as one of those highly concentrated industries, because of the dominance of the “big four”, as the report describes them.
Intuitively, this makes no sense to me. SA has a plethora of banks, local and foreign – at least 18, and many more if you count the foreign banks registered locally. The banking industry has been dynamic and large-scale new entrants have made significant progress since the end of apartheid.
But the report says, “Similarly, certain oligopolistic industries remained highly concentrated, such as banking (the top four banks), insurance (the top four life insurers) and certain agricultural sectors (storage, bread and sugar).” To describe South Africa’s banking system as “oligopolistic” is just arrant nonsense.
The commission’s method of calculation uses assets under management (AUM) as a measure of the banking market, as opposed to customers or market cap – more on this later. But let’s go with their calculation, and let’s just use the top eight banks, which constitute about 95% of the AUM.
The market shares are roughly this: Standard Bank: 24%, FirstRand 21%, Absa 19%, Nedbank 17.2%, Investec 7.6%, Capitec 2.3%, Discovery Bank 0.19%, and TymeBank 0.03%. Do the HHI and you get a score of 1,953.04
That is in the mid-range of “moderately concentrated” – nowhere near “highly concentrated”. To draw the conclusion that the SA banking sector is “highly concentrated”, you have to ignore all banks other than the top four, which is ridiculous.
In any event, AUM is only one way to calculate banking market share. By customers, Capitec is now by far the market leader; it also has more branches and more ATMs than two of the notional “big four”, and its market cap is larger than three of the “big four”. Excluding Capitec from the calculation is an act of wilful manipulation of the data.
You would expect the Competition Commission to applaud this extraordinary post-apartheid, poor-centric new bank. But no such luck.
Much of the rest of the report follows the same pattern; selective, stilted, excessively ideological, disconnected with the real world.
Just to note a few examples; there is no doubt that the beer industry in SA is excessively concentrated – there is basically one local producer. But here is the strange thing; beer in SA is very cheap. In a recent survey of 60 countries around the world, beer in SA came out the cheapest. A sophisticated analysis of market concentration would surely note the correlation between consumer price and market concentration is not a perfect match, as the beer industry in SA demonstrates. What the beer market suggests is that price is not always determined by the number of market participants but more by what the market will bear, but this rather basic conundrum flies straight over the heads of the commission’s report.
To note another example – my favourite – the airline industry. The report describes the industry as “relatively concentrated”, particularly on some of the thinner routes. But nowhere does the report mention that the reason why new airlines are struggling to establish themselves is because the government has been stuffing the state-owned airline full of taxpayers’ cash for the past decade.
So where is this all coming from? I suspect it has its origins in three things: First, the ANC’s pervasive notion that government should control the commanding heights of the economy, a notion which goes back all the way to the Freedom Charter.
Second, the rent-seeking class wants taxpayer cash to get into business, but to do so, has to concoct an argument that SA needs more of this or that industry in order to get their hands on this rent. Hence, the big push to try and “scientifically” demonstrate industry concentration.
And, third, organisational inertia. If you create a government department and give it a function, it will find a reason for being, even if that reason for being is based on a fallacious “analysis”.
Overall, South Africa’s economy is diverse and complicated; it’s not a disaster area waiting for the government to fix; actually government is a disaster area waiting for the private sector to fix. It’s by no means impossible to do business, but it is increasingly difficult to operate, and the reason has little to do with concentration and a lot to do with having a dysfunctional, lazy, inept and corrupt government. DM168
This story first appeared in our weekly Daily Maverick 168 newspaper which is available for R25 at Pick n Pay, Exclusive Books and airport bookstores. For your nearest stockist, please click here.
- Spelling corrected. Apologies.