Towards a fair and efficient economy for all Comments on IPAP Simon Roberts Public Hearings on IPAP Portfolio Committee on Trade and Industry 2 March 2010

Overview Importance of industrial policy Competition & competitiveness Insights from analysis of Commission in selected sectors Implications and some wider observations Towards a fair and efficient economy for all

The importance of industrial policy Industrial policy is about making choices, in the absence of which we will continue on the same path South Africa’s overall performance has been poor: o Especially where it matters most (investment and employment) o It has been very fragile, and structurally weak The IPAP is an important step forwards Concerted industrial policies are required to alter growth path, shape industrialisation for rapid ‘catch-up’, employment creation and inclusion Industrial policy must be viewed through a wide lens, coordinated with other economic policies Take on lessons of comparative development in past 16 years, of the use of industrial policies in high growth countries, and the need to recognise market failures as intrinsic features (cannot just be ‘corrected’) Towards a fair and efficient economy for all

Competition & competitiveness Decisions of large firms determine outcomes in terms of employment, investment, production, incomes And, patterns of competitiveness reflect past decisions, and entrenched positions and power of large firms: o Exports are skewed to resource and energy based commodities, not creating jobs o Diversified activities have had poor performance, subject to large firm conduct o Persistence of anti-competitive outcomes, including where explicit cartels have been tackled – question of effective competition Competition and industrial policy are properly understood as complementary, mutually reinforcing to build competitive capabilities: o By understanding market dynamics o By dealing with conduct of large firms with negative industrial development consequences o Through supporting new entry, such as through development finance Towards a fair and efficient economy for all

Investigations & cases in intermediate industrial products Mainly steel and basic chemicals products, as identified in IPAP1 Dealing with conduct of former SOEs, such as Sasol and Iscor Impact of anti-competitive pricing is to disadvantage more labour absorbing downstream industries Exclusionary conduct to raise barriers to entry Examples: – Steel & tinplate excessive pricing – Polymer chemicals – Fertilizer inputs Same rationale in e.g. Telkom excessive pricing of broadband infrastructure Cartels uncovered, especially in construction materials such as reinforcing steel, cement, many others being investigated Towards a fair and efficient economy for all

Cases in food & agro-processing Liberalisation in 1996/97 meant power in value chain moved to inputs, processing and retail levels – Negative impact on returns to farmers (and on agricultural production), small processing firms, and on consumers, Inputs (monopoly pricing, exclusion and cartels) : – fertilizer – Storage (silos) – Tinplate Processing: – Bread, flour, mealie meal – Milk – Conduct to keep new entrants out, negatively impacting on output, employment (e.g. bread, poultry) Retail: leases; slotting; category management; buyer power Towards a fair and efficient economy for all

Effect? Bread prices Towards a fair and efficient economy for all

Impact of competition enforcement? Some successes, much to be done. Cases are about past conduct and follow due legal process. Outcomes? Example of food: – Far-reaching liberalisation assumed more efficient market-based outcomes, but extensive private regulation replaced state regulation – Cartel conduct appears to continue in other forms; Commission focusing now on related conduct, such as information exchange – Monopoly pricing of inputs (fertilizer, silos, tinplate)? – extensive time required for investigations & Tribunal hearings, limitations in remedies – Complementary interventions through supply chain are required Success? In uncovering conduct, and developing info and analytical base Has been less effective disciplining of large firms to date – very time & resource intensive Towards a fair and efficient economy for all

Achieving more competitive outcomes: dealing with anti-competitive pricing? Options, under competition law? o More competition enforcement, to include acting on facilitating conduct for cartels; increased deterrence; ways in which entrants are excluded o Market enquiry provisions provide more powers to investigate industries where there are anti-competitive outcomes, and recommend measures o Complex monopolies – to address ‘conscious parallel conduct’ Other measures? o Conditionalities linked to advantages provided by the state/SOEs, reflected in IPAP. This is real partnership, but requires proper monitoring and enforcement when necessary. (Do not repeat ArcelorMittal) o Strategic development finance, for real dynamism o Improved regulation? An option where there are entrenched dominant firms in key industries. o Other levers? Export duties (if exports are used to create local scarcity)? Towards a fair and efficient economy for all

Implications and wider observations Incentive structures to reflect future structural change, opportunities & encouraging building productive capacity in diversified industries o Is strong path dependency in developing productive capabilities o Demand patterns are very important factor, procurement link o Local competition important for dynamic gains, not rent seeking Macro policy needs to recognise that prices are set by firms in imperfect markets: concentration and collusion  prices flexible up, sticky down; implies exchange rate volatility impacts on inflation Regional in vision, and implementation Institutional framework crucial to IPAP implementation: o Centre for information gathering and analysis on industries and firm strategies (drawing from public institutions - IDC, Competition Commission etc) o Coordination and regular monitoring o Effective tools & levers Towards a fair and efficient economy for all