Competition Commission’s role in creating opportunities for small business

Meeting report

The Chairperson opened the virtual meeting, welcoming everyone present. She submitted the agenda for adoption. The purpose of the meeting was to receive a briefing from the Competition Commission on its work about small businesses in the country. Many of our small businesses were struggling and could not compete with big businesses fairly.

Briefing by the Competition Commission
Mr Tembinkosi Bonakele, Commissioner, Competition Commission, presented the role of the Commission in creating opportunities for small businesses. The presentation covered the context of small, medium and micro-enterprises (SMMEs) in the country; a concentrated study that covered a wide range of sectors and sub-sectors in the past five to eight years, and some insights from the study; recommendations for a more coordinated government plan; competition legislation promoting small businesses; enforcement and advocacy initiatives, and examples of mergers protecting SMMEs.

About the study, as it pertains to SMMEs, the SMMEs hold a low share of value, and they face increasing exit rates. In recent challenging times, exit rates have climbed and even overtook entry rates in some years. More industries have seen declining participation (38%) than increasing (24%).

As for competition legislation to promote small businesses, a new provision, on buyer power, was enacted to promote the interest of small and medium-sized businesses. This provision – section 8(4) of the Act – became effective in 2020. In terms of subsection (4)(a), it is prohibited for a dominant firm (as the buyer in designated sectors) to require from or impose unfair prices or trading conditions on small and medium businesses or firms that are controlled or owned by historically disadvantaged persons. The new buyer power provisions apply to sectors designated by the Minister of Trade, Industry and Competition, namely agro-processing, grocery wholesaler & retail, e-commerce and online services.

The objective of the buyer power provisions is to enhance the participation of small and medium businesses and firms owned by historically disadvantaged persons in the economy, by protecting these firms from unfair exploitation by dominant buyers of their products. The Commission has since issued guidelines to the market, which provide clarity to both dominant buyers and suppliers as to how the new legislation will be enforced by the Commission. This includes not only the unfair pricing and trading condition provisions but also the avoidance provisions, whereby it is a contravention to avoid buying from designated suppliers to avoid the application of fair treatment under the buyer power provisions. Amendments to the price discrimination provisions also became effective in 2020.

Discussion

Mr G Hendricks (Al Jama-ah) noted with concern that small business only constitutes about fewer than two percent of the market value. After so many years since the Commission has been in operation, it only achieved 1.6%, despite having prosecutorial powers as well as a court. There is no reason that, after being in existence for so many years, it can tip the scales, and those who controlled everything during apartheid do not control as much as they do, whereas about 50% should have been in the hands of the previously disadvantaged SMMEs. The Commission also has powers to fine businesses. It fines businesses up to billions of Rands. One would wonder if the fines were also redirected towards assisting small businesses or casualties of unfair play by big businesses. The 1.6% is an insult after 28 years of this democracy. What extra legislation can give the Competition Commission more power?

He asked if it was possible to twist the arm of the SBBD, saying that this is an outfit of government advertising. Is there no way the SBBD can assist small businesses to advertise their offerings on different platforms?

Banks are willing to give people credit for motor vehicles, like Mercedes Benz, etc. However, if one is looking for credit for a tractor, there are so many problems. It seems they are making it difficult for small businesses to acquire farming equipment, so that they can retain the benefits they had during apartheid. Is there no way the Commission could investigate lending money to struggling small businesses without charging them interest or exorbitant interest rates?

Mr J De Villiers (DA) welcomed the presentation and stated that he was impressed by the detail and level of research that the Commission went into. The Commission does very important work and serves an important purpose in terms of making sure that there is competition in the market.

He said that he did not hear the Commissioner talking about the basic regulations that are easy for bug businesses to comply with but very hard for small businesses to comply with. For example, the VAT threshold – any business that turns over R1 million per annum is forced to be a VAT vendor. This is a lot of extra effort to be VAT compliant. One's accounting costs expenses double up because the business would need a consultant or someone to help with VAT returns every month. This portion of the money could be reinvested in the business, but it instead goes into the red tape and the bureaucracy of doing these VAT claims. Is it fair to have these highly regulated tax obligations on small businesses? It is not a problem with big businesses because they have the resources to be compliant.

Secondly, labour legislation: it is tough for small businesses that are trying to grow to be subjected to the same strict labour legislation practices that a big business needs to comply with. It is one thing for big businesses but something else for small businesses. These strict labour laws potentially stop small businesses from employing more people. Has the Commission looked at the different regulations, red tape and laws that make it tough for a small business to have an opportunity to grow?

The biggest monopoly elephant in the room is Eskom. There is no small or large business in this country, whose number one problem is not the issue of power supply or not affected by load shedding. What is the Commission saying to the government about this, because it is the one thing that destroys small businesses in the country along with the high tariff costs?

Ms B Mathulelwa (EFF) said she was concerned about the farming businesses. She had written the question to the former Minister about what is happening in Ugu District at the Ray Nkonyeni Municipality in Ward 32, KwaZulu-Natal. There is a cooperative producing fresh produce in their gardens; this cooperative was also supplying overseas. These people were victims of land expropriation during apartheid, as they were evicted from their original farm place. They need a minimum of 50 hectares of land for their production, but there is clearly nothing that can be done since the ANC sold out on the issue of land expropriation without compensation, which is key to economic freedom in our lifetime.

On the taxi ranks and the regulations that will be relooked: she said that the taxi ranks in the bigger provinces with more rural areas are far more spread out, when compared to the urban areas. They have requested a piece of land for so many years, so that they can build taxi ranks. There will be no economic freedom without the state being the custodian of the land. Small-scale farmers need land for their farming businesses, and taxi drivers also need land to build tax ranks in the rural areas. What would the Commission do about the issue of land? There is vacant land all over the country.

Mr F Jacobs (ANC) said that the Commission talked about market inquiry and structural separation; which industries have these been done? Secondly, what have other countries done to break down cartels and monopolies? The European Union was doing well in the digital economy to ensure that the big players of the industry subject themselves to the needs of the people.

He applauded the Commission for the work that it did, and he believed that the Committee should consider adopting the recommendations made by the Commission because they are very good. Most of our economy is still in the hands of monopolies. “We commend the work of the Commission, but it was not enough”, he added.

Mr B Luthuli (IFP) said that, at SAB, there is a huge problem with distribution. Their company is facing challenges with the distribution of its products – they are only given to the big wholesalers, while small businesses were not being considered. Some of these businesses were on the verge of closing. One wonders if the Commissioner can assist in looking into this. He appealed to the Commissioner to assist the small businesses in this space.

Some of the small businesses were not allowed to sell fresh produce in some of the shopping centres. The big retail stores like Pick n’ Pay and Shoprite do not want these small vendors to sell fresh produce outside or within the shopping centres at which they operate. Is there no way this can be investigated to assist those small businesses?

He did not understand why it is that, in most cases, banks are likely to grant credit for vehicle finance, but if a person wants financing to acquire trucks or tractors it is not possible. What is the reason for this? He personally knows of many cases where this has occurred to people.

Mr D Mthenjane (EFF) said that what the Commission has said does not provide solutions. “We are aware of the information presented here, particularly the tactics of big businesses”, he added. He did not hear how far the Commission went and succeeded on cases that they came across, cases they succeeded to prosecute, and those that were difficult for the Commission to prosecute. The Commission must inform the Committee where its difficulties are so that it can intervene where necessary.

The Competition Commission claimed that people were no longer doing businesses in the townships because of crime. Crime is not the cause why many local South Africans do not have businesses in townships. “We do not understand why it is only foreign nationals”, he reckoned. It is because this Department does not take care of its people in townships and rural areas. The Department does not go to the townships and interact with the people in townships to ascertain what their issues are. Instead, big businesses are prioritised.

As for the Minister and Deputy Minister, the same thing keeps happening. Can we get an opportunity to have clarity on whether the Minister and Deputy Minister want to be part of this Committee and its engagements? “We are not pleased with the way that they are handling this Department”, he expressed.

The Chairperson said that she was covered by all the comments and questions by Members. The Committee will interrogate this report further, especially the detailed full report to ensure that there was continuous engagement with the Commission.

She asked about the Vodacom matter and how it assisted small businesses.

What is the Commission’s view on what needs to be done to increase the level of engagement with SMMEs by the Department? Small businesses need to be capacitated. She is also concerned about small-scale farmers.

The Committee now understood the role of the Commission better.

The Chairperson handed over to the Commission for its responses.

Responses
Commissioner Bonakele commenced by saying that much of the issues raised by Members go beyond the Commission. It is a matter that government, the judiciary, Parliament, and society at large must tackle. Parliament has a big role to play; congressional hearings in the United States are happening, so the SA Parliament can do this to get involved in some of the big cases and unpack the big cases, and how the cartels and monopolies controlled the market. Parliaments around the world have sought to hold other sectors of society accountable. SA Parliament should call the government to account for the payments of suppliers. The late payments have killed SMMEs, and this was no secret. It would make a huge difference if Parliament would call for those reports regularly. Parliament should invite the Ministers to ask about when they are going to pay suppliers. He is told that service providers have to bribe state officials to receive invoice payments within the prescribed period. This accountability must be applied to all government departments. Parliament should also hold financial institutions accountable for how they lend to small businesses.

Why, in South Africa, do we have a situation where it seems like no one is prepared to take the risk of funding small businesses? When some of the businesses apply for finance, they are not even considered. It is a practice that was called ‘redlining’, in the United States, where banks do not lend in certain areas. The reports that the Commission provides state where it is not doing well with SMMEs; they can probe this information further.

When Parliament intervenes and asks how things are done, people will start thinking differently about their practices.

Commissioner Bonakele said that the Commission does not have control of where the fines go; these fines go to the Revenue Fund. Where fines can go to the victims are normally in civil claims. “We do not haul a big business to court just because it is a big business. You must wait for them to do something wrong or break the law. The system we have is not proactive; we must sit and wait for the laws to be broken and then pursue. Hence, the Commission is not the most effective tool to deal with the issue of structure in the market. This issue is going to be determined by who is prepared to invest and finance. If you want to influence the market structure, you will invest in it.

When you see somebody describing the problem does not mean they are necessarily best equipped to solve the problem.

When it comes to red tape, some of these issues are beyond our scope. Labour issues are specifically excluded from the Commission. There is a need to discuss red tape. The Presidency is currently doing some work on this. “If we can be asked to come and report on the unit in government dealing with red-tape – we need coordination. A small unit will not impact the necessary changes. We need safe harbours for SMMEs by not adhering them to certain requirements and regulations that pose as red tape for them.

On what we have done about Eskom, the Commission has done a lot behind the scenes. The unbundling proposal was a proposal made by the Commission to the government more than 50 years ago. They have always felt that transparency is key. The Commission can provide more details, in writing, on the work that it has done on Eskom.

We told Transnet that we need to understand where there are subsidies and potential problems, and whether customers were subsidising another group. The books must be transparent, and separation helps with that. We have been calling for this transparency for many years. We did so for SAA as well”, he said.

He said the issue of land expropriation without compensation is above his pay grade.

We have done market inquiries in a lot of sectors. We have done work around public transport, and one of the issues flagged as an issue of discrimination are subsidies that are not directed towards sectors or industries that serve a public purpose, such as the taxi industry. They are facing a dire situation. For example, banks do not lend to taxi drivers; they do so through third parties of taxi finances. These third parties charge astronomical interest rates. The taxi owners are squeezed when it comes to this, and they are not subsidised. Taxis transport most people, but they do not get subsidised at all. We believe that this is a huge distortion, because government subsidises buses and trains, such as the Gautrain, which transport the minority of commuters.

He said that their divestiture emanated mostly from mergers. They have not had enforcement cases, except for when they have ordered divestiture, which was agreed to by Sasol in the fertiliser space where they sold the downstream operations to other players. They had found that it provided chemicals for making fertilisers and it was favourable for its own company that was marketing fertilisers. It agreed to exit that level of the market. The breaking up of companies is not easy; it is a drastic measure, but they have it for extreme cases where the markets have completely failed.

In the EU, to some extent Germany, on the digital market, they have designated certain firms as essential firms – firms that are like gatekeepers in the market. They are now obligated to behave a certain way. For example, they cannot exclude competitors and discriminate.

The issues of small businesses in agriculture were glaring. It is hard to obtain finance for agriculture from the banks. One does not understand the reasons behind this, but they are said to be riskier compared to others. This seems to be a structural impediment, and calls for a conversation that must be held by the government and Parliament with the banks to understand why this was the case.

The Commission has dealt with the issue of distribution of SAB, which has been a challenge, but lost the case on appeal. South African Breweries (SAB) was allowed to do what it wants to do under distribution. The outcome of that case is that the Commission cannot force SAB on how to arrange its distribution, but it can engage with them fairly, with the intervention of the Minister. SAB is playing such a huge role in that ecosystem. There were so many businesses that got destroyed because of this matter of distribution.

He said that they would undertake the South Coast to see what was happening in the shopping centres within the area. The CIBH and Vodacom matter was currently under evaluation; he cannot comment on it, at this point.

The Chairperson thanked the Commissioner for the engagement. They are on their way to call on all those big retailers and businesses to come and account to the Committee.

Follow-up discussion

Mr April said that he listened attentively to what the Commissioner said. He was pleased with its work, but in the Northern Cape, there is a cabal that has monopolised transportation from the mines, where it is the big businesses that transport the coal from the mines. The smaller businesses are not directly getting the work, but the smaller businesses were doing the work, while the big and white-owned businesses were taking a huge chunk of the money and doing nothing. 

Ms Mathulelwa asked what the Commission has done so far since its inception. They need to hold the businesses accountable and conduct oversight to the main contractors. They need to do away with main and sub-contractors. She said that it was recently found out that, in some cases, especially in plumbing, the big businesses that are the main contractors did not even have the tools to do the job they are contracted for. We found that the businesses that were doing the work were the smaller businesses. It is not like the government does not know this; they know this very well. Sub-contractors are doing 100% of the job in most cases. We need to get rid of the main contractor and sub-contractor situation and then source services from sub-contractors. 

Mr Mthenjane believes that the Commission should assist the Committee in identifying which big companies were bullying the smaller ones, and provide that information to the Committee to invite these companies to the Committee to account.

The Commissioner pointed out that there are systemic issues that need to be considered; they require policy changes that emanate from the behaviours of companies. For example, the banks are systemic: if they decide to not lend to SMMEs, the Department can close shop. Hence, the Commission suggests that Parliament should invite the banks, to understand these systemic issues that exist in that sector.

Monopoly behaviour is enabled by government. The Commission saw the prosecution of a cartel for bread price-fixing, after having won the case. Part of the strategy of the bread markers was to eliminate SMMEs that were on that market. They would reduce the prices until they sacked out the SMMEs and then they increase the price again. We got some of the fines from the bread cartel redirected to the entry-level players into the bread market.

The Commission looks at 30 mergers in one month, and up to 500 mergers in a year. These reports can be provided to the Committee.

On the cabal issue in the Northern Cape, this is information that they can receive offline and then intervene accordingly.

The Chairperson thanked the Commissioner for the responses.

The Committee considered and adopted its outstanding minutes of 09 March 2022. It also discussed and made changes to its programme.

The meeting was adjourned.