Africa: Increased growth rates, innovative banking sector, investment vs. development aid

The above topics were among those discussed at this year’s #AfricaFinanceForum, hosted by the Corporate Council on Africa.  The annual event featured high-level speakers, such as Rhoda Weeks-Brown, IMF General Counsel, who pointed to increased expected economic growth rates of 3.5% in 2019 (half a point higher than in 2018) and a faster per-capita income rise in Africa  than in rest of the world.  “Also up for debate was the dichotomy of investment vs. development assistance as the key driver of economic development on the continent,” notes Andreas Stargard, who attended on behalf of Primerio Ltd.

Ms. Weeks-Brown noted the rise of pan-African (vs. purely domestic) banks, observing the added benefit of improved competition, as well as the steady rise of fintech on the continent. The latter is especially important as the continent is still under-banked and relies heavily on the informal sector (less than 20% of sub-Saharan Africa’s population has a bank account).  Yet Africa leads the world in mobile money.  Mr. Stargard noted that “[s]he and many other speakers on subsequent panels agreed that there was a delicate balance to be struck by regulators and legislators of weighing innovation against the proper level of FinTech regulation and its integration benefits against anti-competitive effects thereof.  The IMF attorney was careful to point out that banking & financial integration must grow in conjunction with, and to support, economic and trade integration, as financial stability is a public good.  Africa requires strong sector regulators that must remain free from undue political or industry interference.”

Kalidou Gadio, a lawyer at Manatt, provided a sanguine assessment of the state of banking in Africa, noting that it is not up to par globally, but better than it was a decade ago, before and during the financial crisis. He also pointed to the net positive effect of banks facing increasing competition from newcomers to the space, such as Orange, M-Pesa and other telecom firms.

Dr. Maxwell Opoku-Afari, First Deputy Governor of the national Bank of Ghana observed the difficulties in setting proper licensing rules for fintech companies by central banks, and commented on the concentration risk in banking.

Phumzile Langeni, special investment envoy of the RSA, gave an objective speech on the investment opportunities in South Africa, including the President’s FDI incentive programme.  She answered difficult questions with aplomb — for example those about the country’s land reforms, infrastructure troubles, and unemployment — and spoke of the enormous growth potential and the “youth dividend” in South Africa and the continent in general.

The half-day event was rounded out by a panel focussed on central banks’ handling of the unique foreign-exchange problems faced by certain African nations, notably Mozambique and Angola, whose central banks had representatives on the panel, including the issues of ForEx reserve allocation and pegged rates.

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Global ATR economics conference – end of May

Concurrences, in partnership with NYU Stern, will hold the fourth annual Global Antitrust Economics Conference on Friday, May 31 2019 from 8:30 am to 5:00 pm at NYU Stern School of Business.

There will be four panels:

  • Panel 1: Antitrust in Sports
  • Panel 2: Telecom Mergers
  • Panel 3: Pricing Issues in Pharma: Pay-For-Delay, Product Hopping…
  • Panel 4: In-House Counsel Session: Platforms

You can see confirmed speakers, and register for free at http://globalantitrusteconomics.eventbrite.com

 

“Emerging Antitrust”: One size doesn’t fit all?

Pro rem publicam

At the Concurrences “Antitrust & Developing and Emerging Economies” conference held at NYU Law last Friday — and aptly sub-titled “Coping with nationalism, building inclusive growth” — the audience was treated to a (rather iconoclastic, yet fascinating) keynote speech by Nobel laureate economics professor Joe Stiglitz, which highlighted what would become a theme woven throughout the four panels of the day: One size does not fit all when it comes to competition-law regimes, according to a majority of the speakers; imposing a pure U.S. or EU-derived methodology without regard to local economic and/or political differences is doomed to fail.  However, as we outline further below, there were also countervailing voices…

Nobel Laureate Joseph Stiglitz: “Revisit all of antitrust!”

In the words of Professor Stiglitz, his advice to developing nations was (perhaps to the chagrin of U.S. government representatives, such as the FTC’s international director, Randy Tritell): “don’t copy the US antitrust laws and presumptions!”  Smaller markets in developing countries are even more susceptible to market power by few large firms.  Competition law can be used in developing countries to advance the public interest, as there are fewer “tools in the toolkit” in those nations, and in his view, all available tools should thus be used.  He referred to the WalMart/Massmart transaction in South Africa in this regard, noting the public-interest conditions imposed there.

On the day’s Mega Mergers panel, SACC Commissioner Tembinkosi Bonakele noted how the outcomes of truly global “mega mergers” all having been positive, “there has been no outright prohibition, there really is no problem that’s too big which could not be remedied by the authorities and the parties.”

Andreas Stargard and Commissioner Tembinkosi Bonakele (South Africa)

Observes Andreas Stargard: “Commissioner Bonakele also pointed to the importance of international merger enforcers cooperating on remedies, in order to allow these positive outcomes to be maintained.  Taking up Professor Harry First’s hypothetical of a joint or ‘merged’ antitrust enforcement agency, Mr. Bonakele considered a combined merger authority for the African continent a possibility, especially in light of the many small jurisdictions which individually lack resources to police cross-border M&A activity.”  Mr. Bonakele expressed the concern that “the smaller, national enforcers certainly feel as if they cannot block a mega deal on their own, so they largely defer” to the established agencies, such as the EC and DOJ / FTC.

In response to Frederic Jenny’s critical introduction of the South African Competition Amendment Act, Commissioner Bonakele commented that the current legal regime lacked the ability to tackle concentration as a market feature in itself, whilst the SACC had a comparatively positive track record on unilateral enforcement issues.  Overall, he disagreed with the moderator that most of the Bill’s changes were drastic, stating simply that it would in fact bring South Africa more in line with other international regimes.

As to the ministerial intervention powers, he identified two concerns, namely the use of the agency’s resources as well as the possible risk of abuse by a minister who could employ the new law to pursue ulterior motives against a firm or a sector.

Counterpoint: public interest or politicization?

Prof. Ioannis Lianos characterized the “slightly fuzzy public interest test” as largely a scheme to enhance the bargaining power of the competition agencies that do apply such a test.

Canadian attorney and former enforcer Lawson Hunter pointed out that the trend of growing political interference in the merger approval process has spread globally, not only in developing nations but also in well-established regimes — often under the guise of national security reviews, which are “obscure, opaque in process, fundamentally political, and without any ‘there there’.”  Merger review has “simply become very broad and less doctrinal.”  “I found it interesting that Mr. Hunter recommended that other antitrust agencies should give more frank input into their sister agencies, if and when those stray from the right path,” said Stargard, who focuses his practice on competition matters across the continent.  “Hunter also pointed to the tendency in emerging antitrust jurisdictions to abuse the remedy process in merger control to address economic issues that lie well outside the actual competition concerns that may have been found — an issue we have also come across, sadly.”

Commissioner Bonakele closed the final panel of the day by addressing the recently ratified South African Competition Amendment Bill: he admitted that there were some “radical” provisions in the law, such as the power to break up companies, as well as the existence of a risk of government using the law’s new national security provision in a protectionist manner. He concluded by stating his personal worry that the law had possibly too much ambition, which could be difficult to implement in reality by the SACC.

The New South African Competition Amendment Bill – What it Means for Business

By Michael-James Currie currie2

Background

On 1 December 2017, the Minister of Economic Development (under whose auspices the South African competition authorities fall), Ebrahim Patel, published draft amendments to the South African Competition Act [PDF], 89 of 1998 (Act) for public comment.

The proposed amendments (Amendments) to the Act, which principally aim to address concentration in the market, go well beyond pure competition issues and bestow a significant public-interest mandate on the competition authorities.

In this regard, Minister Patel has remarked that the old, i.e., current, Act “was focused mainly on the conduct of market participants rather than the structure of markets, and while this was part of industrial policy, there was room for competition legislation as well”.

south_africaPatel’s influence in advancing his industrial-policy objectives through the utilisation of the public-interest provisions in merger control are well documented. AAT contributors have written about the increasing trend by the competition authorities in merger control to impose public-interest conditions that go well beyond merger specificity – often justified on the basis of the Act’s preamble which, inter alia, seeks to promote a more inclusive economy.  The following extracts from the introduction to the Amendments indicate a similar, if not more expansive, role for public interest considerations in competition law enforcement:

“…the explicit reference to these structural and transformative objectives in the Act clearly  indicates that the legislature intended that competition policy should be broadly framed, embracing both traditional competition issues, as well as these explicit transformative public interest goals”.

The draft Bill focuses on creating and enhancing the substantive provisions of the Act aimed at addressing two key structural challenges in the South African economy: concentration and the racially-skewed spread of ownership of firms in the economy.

The role of public interest provisions in merger control have often been criticised, predominantly on the basis that once the agencies move away from competition issues and merger specificity and seek conditions that go beyond that which is strictly necessary to remedy any potential negative effects, one moves away from an objective standard by which to assess mergers. This leads to a negative impact on costs, timing and certainty – essential factors for potential investors considering entering or expanding into a market.

As John Oxenham, director of Pr1merio states, “from a policy perspective it is apparent that consumer-welfare tests have been frustrated by uncertainty”. In this regard, the South African authorities initially adopted a position in terms of which competition law played a primary role, with public-interest considerations taking second place.  Largely owing to Minister Patel’s intervention, the agencies have recently taken a more direct approach to public-interest considerations and have effectively elevated the role of public-interest considerations to the same level as pure competition matters – particularly in relation to merger control (although we have seen a similar influence of public-interest considerations in, inter alia, market inquiries and more recently in the publishing of industry Codes of Conduct, e.g., in the automotive aftermarkets industry).

Minister Patel speaks

Minister Patel speaks

The current amendments, however, risk elevating public-interest provisions above those of competition issues. The broad remedies and powers which the competition agencies may impose absent any evidence of anti-competitive behaviour are indicative of the competition agencies moving into an entirely new ‘world of enforcement’ in what could very likely be a significant ‘over-correction’ on the part of Minister Patel, at the cost of certainty and the likely deleterious impact on investment.

The proposed Amendments, which we unpack below, seem to elevate industrial policies above competition related objectives thereby introducing a significant amount of discretion on behalf of the agencies. Importantly, the Amendments are a clear departure from the general internationally accepted view that that ‘being big isn’t bad’, but competition law is rather about how you conduct yourself in the market place.

The Proposed Amendments

The Amendments identify five key objectives namely:

(i) The provisions of the Competition Act relating to prohibited practices and mergers must be strengthened.

(ii) Special attention must be given to the impact of anti-competitive conduct on small businesses and firms owned by historically disadvantaged persons.

(iii) The provisions relating to market inquiries must be strengthened so that their remedial actions effectively address market features and conduct that prevents, restricts or distorts competition in the relevant markets.

(iv) It is necessary to promote the alignment of competition-related processes and decisions with other public policies, programmes and interests.

(v) The administrative efficacy of the competition regulatory authorities and their processes must be enhanced.

At the outset, it may be worth noting that the Amendments now cater for the imposition of an administrative penalty for all contraventions of the Act (previously, only cartel conduct, resale price maintenance and certain abuse of dominance conduct attracted an administrative penalty for a first-time offence).

Secondly, the Amendments envisage that an administrative penalty may be imposed on any firm which forms part of a single economic entity (in an effort to preclude firms from setting up corporate structures to avoid liability).

We summarise below the key proposed Amendments to the Competition Act.

Abuse-of-Dominance Provisions

Excessive pricing

  • The evidentiary onus will now be on the respondent to counter the Competition Commission’s (Commission) prima facie case of excessive pricing against it.
  • The removal of the current requirement that an “excessive price” must be shown to be to the “detriment of consumers” in order to sustain a complaint.
  • An obligation on the Commission to publish guidelines to determine what constitutes an “excessive price”.

Predatory Pricing

  • The introduction of a standard which benchmarks against the respondents own “cost benchmarking” as opposed to the utilisation of more objective standards tests.
  • The benchmarking now includes reference to “average avoidable costs” or “long run average incremental costs” (previously the Act’s only tests were marginal costs and average variable costs).

General Exclusionary Conduct

  • The current general exclusionary conduct provision, Section 8(c), will be replaced by an open list of commonly accepted forms of exclusionary conduct as identified in Section 8(d).
  • The definition of exclusionary conduct will include not only “barriers to entry and expansion within a market, but also to participation in a market”.
  • The additional forms of abusive conduct will be added to Section 8(d):
    • prevent unreasonable conditions unrelated to the object of a contract being placed on the seller of goods or services”;
    • Section 8(1)(d)(vii) is inserted to include the practice of engaging in a margin squeeze as a possible abuse of dominance;
    • Section (1)(d)(viii) is introduced to protect suppliers to dominant firms from being required, through the abuse of dominance, to sell their goods or services at excessively low prices. This addresses the problem of monopsonies, namely when a customer enjoys significant buyer power over its suppliers”.

Price Discrimination

  • The Amendment will look to expand Section 9 of the Act to prohibit price discrimination by a dominant firm against its suppliers.
  • An onus of proof has been shifted on to the respondent to demonstrate that any price discrimination does not result in a substantial lessening of competition.

Merger-Control Provisions

  • Introduction of certain mandatory disclosures relating, in particular, to that of cross-shareholding or directorship between the merging parties and other third parties.
  • Introduction of provisions which essentially allow the competition authorities to treat a number of smaller transactions (which fell below the merger thresholds), which took place within three years, as a single merger on the date of the latest transaction.
  • Introduction of additional public-interest grounds which must be taken into account when assessing the effects of a merger. These relate to “ownership, control and the support of small businesses and firms owned or controlled by historically disadvantaged persons”.

Market Inquiries

  • Granting the Commission powers to make orders or impose remedies (including forced divestiture recommendations which must be approved by the Tribunal) following the conclusion of a market inquiry (previously the Commission was only empowered to make recommendations to Parliament).
  • The introduction of a new competition test for market inquiries, namely whether any feature or combination of features in a market that prevents, restricts or distorts competition in that market constitutes an “adverse effect” (a significant departure from the traditional “substantial lessening of competition” test).
  • Focussed market inquiries are envisaged to replace the “Complex Monopoly” provisions which were promulgated in 2009 but not yet brought into effect.

Additional Amendments

  • Empowering the Commission to grant leniency to any firm.
  • This is a departure from the current leniency policy, under which the Commission is only permitted to grant leniency to the ‘first through the door’.

What does this all mean going forward?

The above proposed amendments are not exhaustive. In addition to above, it is apparent that Minister Patel envisages utilising the competition agencies and Act as a “one-stop-shop” in order to address not only competition issues but facilitate increased transformation within the industry and to promote a number of additional socio-economic objectives (i.e., to bring industrial policies within the remit of the competition agencies).

In a move which would may undermine the independence and impartiality of the competition agencies, the Amendment also intends providing the responsible “Minister with more effective means of participating in competition-related inquiries, investigations and adjudicative processes”.

The amendments also strengthen the available interventions that will be undertaken to redress the specific challenges posed by concentration and untransformed ownership”.

Competition-law observers interviewed by AAT point out that the principle of separation of powers is a fundamental cornerstone of the South African constitutional democracy and is paramount in ensuring that there is an appropriate ‘checks and balances’ system in place. It is for this reason that the judiciary (which in this context includes the competition agencies) must remain independent, impartial and act without fear or favour (as mandated in terms of the Act).

The increased interventionist role which the executive is envisaged to play, by way of the Amendments, in the context of competition law enforcement raises particular concerns in this regard.  Furthermore, the increased role of public-interest considerations effectively confers on the competition agencies the responsibility of determining the relevant ambit, scope and enforcement of socio-economic objectives. These are broad, subjective and may be vastly different depending on whether one is assessing these non-competition objectives in the short or long term.

Any uncertainty regarding the relevant factors which the competition authorities ought to take into account or whose views the authorities will be prepared to afford the most weight too, risks trust being lost in the objectivity and impartiality of the enforcement agencies. This will have a direct negative impact on the Government’s objective in selling South Africa as an investor friendly environment.

In addition, as Primerio attorney and competition counsel Andreas Stargard notes, the “future role played by the SACC’s market inquiries” is arguably open to significant abuse, as “the Competition Commission has broad discretion to impose robust remedies, even absent any evidence of a substantial lessening of competition.”

  • Mr. Stargard notes that the draft Amendment Bill, in its own words in section 43D (clause 21) “places a duty on the Commission to remedy structural features identified as having an adverse effect on competition in a market, including the use of divestiture orders. It also requires the Commission to record its reasons for the identified remedy. … These amendments empower the Commission to tailor new remedies demanded by the findings of the market inquiry. These remedies can be creative and flexible, constrained only by the requirements that they address the adverse effect on competition established by the market inquiry, and are reasonable and practicable.”
Andreas Stargard

Andreas Stargard

Although the Amendments recognise that concentration in of itself is not in all circumstances to be construed as an a priori negative, the lack of a clear and objective set of criteria together with the lower threshold (i.e., “adverse effect”) which must be met before the competition authorities may impose far-reaching remedies, coupled with the interventionist role which the executive may play (particularly in relation to market inquiries), may have a number of deterrent effects on both competition and investment.

Mr. Stargard notes in this regard that the “approach taken by the new draft legislation may in fact stifle innovation, growth, and an appetite for commercial expansion, thereby counteracting the express goals listed in its preamble:  Firms that are currently sitting at a market share of around 30% for instance may not be incentivised to obtain any greater accretive share for fear of being construed as holding a dominant market position, once the 35% threshold is crossed“.

The objectives to facilitate a spread of ownership is not a novel objective of the post-Apartheid government and a number of pieces of legislation and policies have been introduced in order to facilitate the entry of small previously disadvantaged players into the market through agencies generally better equipped to deal with this. These policies, in general, have arguably not led to the government’s envisaged benefits. There may be a number of reasons for this, but the new Amendments do not seek to address the previous failures or identify why various other initiatives and pieces of legislation such as the Black Economic Empowerment (BEE) legislation has not worked (to the extent envisaged by Government). Furthermore, the Tribunal summed up this potential conflict neatly in the following extract in the Distillers case:

Thus the public interest asserted pulls us in opposing directions. Where there are other appropriate legislative instruments to redress the public interest, we must be cognisant of them in determining what is left for us to do before we can consider whether the residual public interest, that is that part of the public interest not susceptible to or better able to be dealt with under another law, is substantial.”

Perhaps directing the substantial amount of tax payers’ money away from a certain dominant state-owned Airline – which has been plagued with maladministration – and rather use those funds to invest in small businesses will be a better solution to grow the economy and spread ownership to previously disadvantaged groups than potentially prejudicing dominant firms which are in fact efficient.

Furthermore, ordering divestitures requires that there be a suitable third party who could effectively take up the divested business and impose a competitive constraint on the dominant entity. It seems inevitable that based on the proposed Amendments the competition authorities will be placed in the invidious position of considering a divestiture to an entity which may not yet have proven any successful track record. The Amendments do not provide guidance for this and although the competition authorities have the necessary skills and resources to assess whether conduct has an anti-competitive effect on the market, it is less clear whether the authorities have the necessary skills to properly identify a suitable third party acquirer of a divested business.

In addition and importantly, promoting competition within the market achieves public interest objectives. Likewise, anything which undermines competition in the market will have a negative impact on the public interest considerations.

John Oxenham

John Oxenham

As John Oxenham and Patrick Smith have argued elsewhere, “competition drives a more efficient allocation of resources, resulting in lower prices and better quality products for customers. Lower prices typically result in an expansion of output. Output expansion, combined with the effect of lower prices in respect of one good or service frees up resources to be spent in other areas of the economy. The result is likely to be higher output and, most importantly for emerging economies, employment”.

While it is true that ordinarily, a decrease in concentration and market power should result in an increase in employment we have not seen a comprehensive assessment of the negative costs associated with pursuing public interest objectives. Any weakening of a pure competition test must imply some costs in terms of lost efficiency, or less competitive outcome, which is justified based on a party’s perspective of a particular public interest factor. That loss in efficiency and less competitive outcome is very likely to have negative consequences for consumers, growth, and employment. Accordingly, the pursuit of “public-interest factors” might have some component of a loss to the public interest itself. We have not seen that loss in efficiency (and resultant harm to the public interest, as comprehensively understood) meaningfully acknowledged in the proposed Amendments.

A further risk to the broad and open ended role which public interest considerations are likely to play in competition law matters should the Amendments be passed is a significant risk of interventionism by third parties (in particular, competitors, Trade Unions and Government) who may look to utilise the Act to simply to harass competitors rather than pursue legitimate pro-competition objectives. The competition authorities will need to be extra mindful of the delays, costs and uncertainty which opportunistic intervention may lead to.

Although there are certain aspects of the Amendments which are welcomed, such as limiting the timeline of market inquiries, from a policy perspective the Amendments appear to go far beyond consumer protection issues in an effort to address certain socio-economic disparities in the South African economy, and may, in fact very likely hinder the development of the economy.

Based on the objectives which underpin the Amendments, it appears as if the Department of Economic Development is focused on dividing the existing ‘economic pie’ rather than on growing it for the benefit of all South Africans.

From a competition law enforcement perspective, however, firms conducting business in South Africa are likely to see a significant shake-up should the Amendments be brought into effect as a number of markets have been identified as highly concentrated (including, Communication Energy, Financial Services, Food and agro-processing, Infrastructure and construction, Intermediate industrial products, Mining, Pharmaceuticals and Transport).

[To contact any of the contributors to this article, or should you require any further information regarding the Amendment Bill, you are welcome to contact the AAT editors at editor@africanantitrust.com]

EAC expands to accept 6th member in accession of S. Sudan

Landlocked and Oil-Rich South Sudan Joins Free-Trade Zone

As South Sudan was officially admitted to the East African Community (EAC) as its sixth member in Arusha (Tanzania), on Wednesday, March 2, the beleaguered nation joined a free-trade zone that will allow it to benefit from more open labour movement, less restrictions on capital flows and other increased economic integration.  The other member states are Tanzania, Kenya, Uganda, Burundi, and Rwanda.  After integration with S. Sudan — the youngest nation on Earth — the region will have a population of an estimated 163 million.

John Oxenham, of Pr1merio Africa advisors, says: “South Sudan’s former institutional weaknesses were (apparently, despite the ongoing civil strife in the country) sufficiently remedied that the EAC governing body saw fit to grant the application for admission that had been pending since 2011.  Basic governance principles must be met for EAC membership, and we are not even talking competition-law here…”

As the EAC charter provides, all members must demonstrate and strive to achieve “good governance including adherence to the principles of democracy, the rule of law, accountability, transparency, social justice, equal opportunities, gender equality, as well as the recognition, promotion and protection of human and peoples’ rights in accordance with the provisions of the African Charter on Human and Peoples’ Rights.”  (EAC Treaty, Chapter 2 Article 6 (d)).

 

Setting aside civil-rights concerns or worries about political instability, the integration of an oil-rich nation may ultimately benefit its neighbouring fellow EAC members, such as Kenya and Uganda.  It remains to be seen whether integrating a less-than-stable country into the EAC zone will harm the competition legislation the region enacted in 2006.  As AAT author Elizabeth Sisenda pointed out recently, the organisation “has been setting up the mechanisms for its enforcement to-date through capacity building and mobilizing resources. In 2010, the EAC subsequently enacted competition regulations to assist in implementing the Act. One of the main challenges that has been encountered in the EAC with regards to the implementation of competition law and policy has been the unique economic and market structure of the member states.  The majority of the EAC member states are economies that are transitioning from state-regulation to liberalization.”

We note that S. Sudan’s northern neighbour, the Republic of [the] Sudan, is currently a COMESA member state and thereby subject to the COMESA competition-law regulations and related merger-notification regime.  South Sudan has, since at least the 2012 talks in Uganda, likewise been in negotiations with the COMESA governing bodies to discuss accession to that free-trade zone.

ECONAfrica: African Corporate Debt — Reality, Regulation and Risks

By Peter O’Brien

In our new AAT series, ECONAfrica, Pr1merio economist Peter O’Brien discusses corporate debt issues on the continent.

Debt debates on Africa nearly always talk about sovereign debt. But in economies which are growing, even if with plenty of ups and downs, firms need to finance expansion. Banks can help, yet this is often not so easy to organize. Another option is to issue corporate bonds (‘CB’). Since rating agencies generally assess clients on a three letter basis (sometimes with a + or – at the end), we will make our 3R assessment of African CB. What’s the reality, what’s the regulatory situation, and what are the risks and rewards?

Overview

First, a thumbnail sketch (admittedly based on limited evidence) of the stylized facts:

  • So far, all African countries (including the Middle East) account for less than 5% of the value of all CB issued by Emerging Market Economies (EME).
  • Within that, South Africa, Mauritius and Egypt add up to around two thirds, with South Africa alone as one third.
  • Most CB in Africa have maturities no more than 10 years
  • Over half of the bonds are fixed interest
  • Roughly 30% of the CB are considered high yield (another way of saying that investors reckon the risks are substantial)
  • It seems as if there is more or less an even split between CB issued in local currency (hence with local currency coupon rates) and those in foreign currency (nearly all $ or euro)
  • The investors are in the main a group of 50-60 funds
  • In South Africa, as of October 2015, foreign holdings of local CB were 35% of the total
  • In a number of African countries, the leading corporate borrowers are parastatal firms
  • Corporate debt, measured as a percentage of GDP, is far lower in African countries than in most others. While many other places, especially some of the big EME, are vulnerable to macroeconomic damage stemming from corporate debt, Africa (including South Africa, where this percentage has remained remarkably stable) should be fairly safe
Economist corporate debt in South Africa has remained the same as percentage of GDP

Corporate debt in South Africa has remained the same as percentage of GDP (Source: The Economist)

Lessons Learned?

What does this picture tell us? Its principal message is surely that this is an area certain to experience major changes, and quite possibly major expansion (not only in volume but also in the players involved).

Now to regulation, both internal and external. The country that seems to have explicitly made provision for corporate debt, and its restructuring, is South Africa. In Companies Act 71 of 2008, enacted in 2011, there are clauses that set out possibilities for Corporate Debt restructuring.  Since enactment, over 400 companies have applied for these methods of handling the problems, and there are upwards of 80 entities offering specialized advice in the field. This prudent approach no doubt stems in part from the size and significance of corporate borrowing in that country. Elsewhere, legal and regulatory issues seem, on balance, to hold back greater reliance on CB. In part there are accounting and corporate governance standards which local companies may not yet meet. In part, it appears that the disclosure requirements that must be met before recourse to CB can be made may constrain the actions of companies (bank borrowing generally requires less disclosure). On the external side, the Basel 111 stipulations matter, in particular because they limit the possibilities for underpricing of CB (a practice that has been fairly frequent till now).

What is missing in the regulatory environment, however, is any overall examination of what might be done to stimulate the prudent use of CB. If this were to be done, such regulation would need to assess financial, economic and anti-trust issues.

The risks and rewards of the CB approach to corporate funding, and indeed the opportunities to use it, are very different across Africa. From economies such as Kenya and Botswana, where the phenomenon is on the rise, to those of the Maghreb, where political uncertainties in very recent years seem to have stunted what was a promising growth, to many parts of West Africa, where to date there is seemingly little activity in this area, each country has its own environment. However, the ever greater integration in the various regions means that there may well be prospects for making better use of private regional funds and of sovereign funds. Either way, African companies should look forward with optimism to utilizing more local capital. It is the job of regulators to ensure this is done in a sound way financially, and that these markets operate competitively.

 

Which economy is growing 2-3% above global average…?

… Africa’s

AAT the big picture

According to a recent article in Polity, “Africa’s economy is projected to continue growing at between 2% and 3% above the global average over the next five years, helping it retain its position as one of the key emerging markets for 2015.

It quotes a GIBS (Gordon Institute of Business Science) study showing that sub-Saharan Africa’s growth “outstripped global growth for the past 15 years,” which has “slowed down somewhat, owing to a number of challenges, including the drop in commodity prices.”  The GIBS study is the result of an assessment of countries’ institutional evolution, measuring how countries were performing in terms of developing competitive business and living environments across political, social and economic spheres.

Kenya was highlighted, with the authors noting that “Kenya, in terms of perceptions, is a very important country on the continent; it has, since 2007, put in place a number of reforms to build competitiveness. However, it doesn’t come out very well when you look at the data behind industry and comes out poorly in [the DMI], but what you find on the ground is that there is [an entirely] different sentiment.”

Meet the Enforcers: Companies Tribunal’s Prof. Kasturi Moodaliyar

meet the enforcers

Interview with Professor Moodaliyar marks second in AAT interview series highlighting African enforcers

In the second instalment of our Meet the Enforcers series, we speak with Prof. Kasturi Moodaliyar. An Associate Professor of Competition Law, she is part-time member at the Companies Tribunal; ICASA’s Complaints and Compliance Committee; and the Film and Publication Board Appeal Tribunal. She holds a B.Proc. LLB.LLM.(Natal), M.Phil (Cambridge), and Prog. Economics and Public Finance (UNISA)

As an academic in South Africa, focussing on competition law, how do you perceive the major differences and challenges that developing or younger antitrust-law jurisdictions are faced with, compared to more established ones? Specifically with regards to the Competition Commission, what is your assessment of its strengths and weaknesses?

The Commission has established a credible reputation in the area of anti-cartel enforcement and merger regulation. However, it has been less effective in addressing abuse of dominance. This is a risk as there is increasingly an expectation that the Commission address problems of single firm dominance in concentrated markets in the South African economy. If performance continues to lag in this area it will impact negatively on the perceived effectiveness of the Commission. While under-deterence of abuse of dominance reflects some limitations in the legislation it also highlights the challenge of resource constraints faced by the Commission. Such cases demand extensive legal and economic expertise – a shift of priorities to this area may impact performance of the Commission in areas in which it has traditionally had more success (cartel busting, mergers). The use of complementary tools like market inquiries and advocacy will be important and can asset the Commission – but also places a burden on resources.

Regarding staff turnover: Do you see the personnel turnover in recent history to be of sufficient magnitude to have an impact on the performance of the enforcement agency?

It is a worrying development although there are signs that it is starting to stabilise. Although key executives were lost there are still a number of highly experienced staff at the middle management level within the institution that must be nurtured and developed. Some have moved into executive level positions. This is a positive development but also points to a level go juniority in the executive which may impact on effectiveness. Will watch this space.

On Leadership: Do you consider it a benefit or a hindrance if leadership want to introduce their own philosophy of what competition law should seek to achieve on the agency’s activities during their tenure, or do you think that the law is sufficiently clear, such that leadership should focus on efficient and effective delivery of the service, and leave the interpretation to the Tribunal/courts.

It is natural that any leader will bring their own perspective to the role – this cannot be avoided. However, it will be important for the leadership to ensure that such perspectives do not undermine their objectives in giving effect to the mandate of the Commission – which is set down in the Competition Act. Fortunately there are checks and balances in the adjudicative process (Tribunal, rights of appeal) to ensure that these objectives are not contradicted.

Prioritisation: Every agency has budgetary constraints. What are the factors that you think should be most important in how cases are prioritised, should this be based on the developmental needs to society, particular sectors, or even particular areas of the law. What do you think of the prioritisation of recent Section 8 cases, SAB (10 years on an issue that has been extensively sanitised by foreign agencies), Gold Reef News (de minimis), and Sasol Polymers (niche, with limited potential for downstream beneficiation)?

The Commission’s stated prioritisation principles seem reasonable (as they appear in annual reports). However, there is somewhat of a disjuncture between the principles and the outcomes – particularly with respect to abuse of dominance cases. In fact, the outcomes in respect of anti-cartel enforcement have been largely consistent with the application of the Commission’s prioritisation principles – so credit is deserved here. However, new thinking around prioritisation is needed for abuse of dominance cases. In this regard there needs to be a better integration between the Commissions’s policy and research activity, the use of market inquiries and its advocacy with its planning and actions around enforcement against abuse of dominance.

Do you believe that the Competition Tribunal has a role in relation to broader competition advocacy initiatives in South Africa by way of the decisions made?

Advocacy is primarily a function of the Competition Commission, not the Tribunal. The Tribunal must first and foremost safeguard the integrity of its adjudicative function by ensuring impartiality in its decision making processes. There is no harm done though if the Tribunal makes a contribution to the such initiatives as a bi-product of good decisions.

How important, in your view, is the political independence of competition enforcers?

It is very important if the integrity and effectiveness of the agency is to be upheld.

Comparing merger review in an African jurisdiction (any jurisdiction) with that of other competition enforcement agencies worldwide, where do you see the key differences?

A significant difference does appear to be the elevated status of public interest issues in merger proceedings.

What is your view about the elevation of non-competition assessments above those of pure competition tests in merger review? Is it good for the adjudication of competition matters generally?

It is not a problem in and of itself, and is to be expected given various developmental challenges. However, public interest considerations should not trump core competition concerns. In other words, agencies should strive to achieve consistency between the ‘pure’ competition policy objectives (competitive market structures, efficient outcomes etc) and public interest considerations. However, significant dangers arise when public interest objectives conflict with competition policy objectives. Where there are conflicts, alternative policy mechanisms should be considered so that agencies can focus on core non-conflicting objectives. Otherwise they may end up achieving nothing by trying to please everyone. This also means that the public interest considerations that do fall within the mandate of competition agencies should be carefully circumscribed.

What skills would you encourage regional African practitioners focus in on for purposes of developing antitrust advocacy in the region?

They should build a technocratic and professional staff with strong legal and economic skills. These core functions should also be supported by strong policy research and analysis skills – also of the technocratic professional (rather than political) variety. As an academic in this field I would also encourage ongoing training to strengthen those research, investigative and analytical skills.

Thank you, Professor Moodaliyar.

Government-mandated sharing of trade secrets: anticompetitive interference

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Ms. Zulu proposes foreign competitors share trade secrets with SA counterparts

Perhaps it is time for increased advocacy initiatives within the South African government, or at a minimum a basic educational program in competition law for all its sitting ministers.
In what can only be described as startling (and likely positively anticompetitive), Lindiwe Zulu, the S.A. Minister of Small Business, has demanded foreign business owners to reveal their trade secrets to their smaller rivals.
The South African Competition Commission, and perhaps one of the Minister’s own fellow Cabinet members, minister Ebrahim Patel, who is de facto in charge of the competition authorities, can see fit to remind Ms. Zulu that fundamental antitrust law principles (and in particular section 4 of the South African Competition Act), preclude firms in a horizontal relationship from sharing trade secrets that are competitively sensitive – i.e., precisely those types of information Ms. Zulu now proposes to be shared mandatorily amongst competitors.
While SACC has utilized this provision with much success against big business in South Africa, it would be remiss not enforce the provisions of the Act without fear or favor should the traders act out on the instruction of the Minister.  It is also time that the Cabinet seeks to enforce business practices which comply with South African legislation.
BDLive‘s Khulekani Magubane reports in today’s edition (“Reveal trade secrets, minister tells foreigners“) that “foreign business owners in SA’s townships cannot expect to co-exist peacefully with local business owners unless they share their trade secrets, says Small Business Development Minister Lindiwe Zulu.”

Lindiwe Zulu. Picture: PUXLEY MAKGATHO

Lindiwe Zulu. Picture: PUXLEY MAKGATHO

“In an interview on Monday she said foreign business owners had an advantage over South African business owners in townships. This was because local business owners had been marginalised and been offered poor education and a lack of opportunities under apartheid.

“Foreigners need to understand that they are here as a courtesy and our priority is to the people of this country first and foremost. A platform is needed for business owners to communicate and share ideas. They cannot barricade themselves in and not share their practices with local business owners,” Ms Zulu said.”

Research fellow at the SA Institute for International Affairs Peter Draper said Ms Zulu’s remarks, underscored government’s mistrust of foreign investors which was also reflected in business regulations. “If you connect this to the broader picture, essentially this is part of a thrust to single out foreign business, which is contrary to the political message President Jacob Zuma went to portray in Davos. We are at a tipping point and we are going beyond it. You can only push foreign business so far before they disengage,” he said.Mr Draper agreed with Ms Zulu’s remarks on the effect of apartheid on local business owners in townships but said foreign business owners had to confront their own challenges with little state support.

“Apartheid did disadvantage black people and over generations it inhibited social capital. Many foreigners have trading entrenched in their blood. Wherever they go they bring social capital, networks and extended family. Is that unfair? I don’t think so. That’s life,” he said.

Ms Zulu’s comments show the about-turn in the African National Congress’ (ANC’s) ideology of Pan Africanism and in line with remarks by party leaders.

After a week of looting in Soweto last week, ANC secretary-general Gwede Mantashe told residents in Doornkop that immigration laws needed to be strengthened to protect the country from terror.

Patel not mincing words, diluting competition-law factors in mergers

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Economic Development Minister of South Africa, Ebrahim Patel, recently stated that the Competition Commission (“Commission”), South Africa’s key competition authority, will be asked to focus on jobs, industrialisation and small business development in lieu of ‘pure’ antitrust-law issues.

Patel stated that government would require the Industrial Development Corporation to focus on supporting black industrialists, and on the competition authorities to promote economic transformation “not as a by-product of but an explicit objective of competition policy.” According to Patel, competition bodies are in a position to contribute directly to the state’s objective of creating a more equal economy, where workers shared in the benefits of growth. His department is allegedly already in talks with the construction industry on a restitution package to redress collusion and price fixing. The end result, he stated, would be that larger companies will provide funds to support small producers and local suppliers.

Patel’s controversial views have already influenced Commission merger decisions and can clearly be seen in the recent Afgri/AgriGoupe case, where the authority entered into an agreement with the foreign buyer of the local grain and poultry company Afgri, requiring the new owners to contribute R90 million ($9m) to a fund to support small-hold farmers with training and loans.

Based on Mr. Patel’s latest pronouncements, South Africa is on a path to politicizing antitrust law and making pure competition considerations a secondary objective to public-interest considerations.

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