This article by Donald Mackay of XA Global Trade Advisors a must-read for every business in South Africa — Gerhard Papenfus

I got into trouble—I think unfairly—for saying that if you wanted to find the next failing sector in South Africa, just look at the industries with masterplans (or the Master’s Plans, which got me into even more trouble). Sadly, this is proving to be true.

In thriving, growing economies, business and sector failure are a grim but important part of the story. In a country like South Africa, with a still incredibly concentrated economy, old monopolies retain their death-grip on the economy only with the support of government. In fact, monopolies are almost impossible to maintain anywhere for an extended period without the help of government.

In the Competition Commission’s 2021 report, “Measuring Concentration and Participation In The South African Economy: Levels And Trends”, they note that “of the 144 sectors of the economy examined by the study, 69.5% were found to be highly concentrated, with 40.3% of sectors being highly concentrated with a presumptively dominant firm. Unfortunately, this is the only such report they published, but if such a study were to be done now, I have no doubt the markets would be even more concentrated.

This matters because consumers fund monopoly rents and monopolies tend to invest more on maintaining the monopoly than on innovation. Because government is the ultimate protector of monopolies, the investment usually takes the form of lobbying (sometimes accompanied by bags of cash).

Three of the four biggest users of the anti-dumping instrument since 2003 are monopolies. One of those was referred to the Competition Tribunal for a fine earlier this year and the other agreed to a settlement of R1.5 billion with the Competition Commission a decade ago, the largest penalty in the history of the Commission. That company is currently being investigated for two new allegations of anti-competitive behaviour. All three of those companies are more than a century old.

Without what Joseph Schtumpeter called “creative destruction”, the sun never goes down on sunset industries. Consumers end up funding the slow and the old and innovation is stifled. In this environment, imports, which often provide the initial pressure to innovate, become national security risks. When the protection is far upstream, as it is with steel in SA, the consumers are everyone from the guy who makes pipes to the person who buys those pipes in the hardware store.

Monopolies, especially failing monopolies, consume enormous state resources. Bailouts divert productive capital to unproductive uses (the R1.6 billion ‘loan’ to ArcelorMittal—Amsa—to keep Newcastle open for another six months. It closed). Because monopolies tend to employ large amounts of people in concentrated areas, job losses are obvious and thus political. Add enough government to your business and you become political. You have no choice. The smaller downstream businesses fail quietly, 10, 20, 30 jobs at a time. They often only matter as offtake from the monopoly but make their input prices high enough and they stop being competitive. You can add protection further downstream, as is happening in steel, but although this will assist some companies it will destroy exports. The result is zombie value chains, utterly dependent on the state for their survival.

After the first big round of protection granted on steel in 2016, price control was attempted and failed, as was always inevitable, because monopolies rely on those large rents to feed the very hungry beast. These are not efficient businesses because there is no reason to be efficient when the state removes your competition.

The whole steel value chain is completely riddled with government interventions, including normal import duties, anti-dumping and safeguard duties, all compounding on each other. Now throw in 110 temporary rebates (reasons to not pay duty because product is not available locally), some of which give duty relief for all duty types while others provide relief for only some of the duty types. Every one of these rebates require a permit to be issued before the benefit can be claimed and the delays in getting the permits issued means many shipments land and the importer still pays the duty.

The steel mini-mills, who make steel from scrap, are given support of around R6 to R8 billion per year, causing massive overinvestment in the sector. Overinvestment means overproduction at a time when the world is awash with steel. Mini-mills mainly make long steel products, as did Amsa Newcastle who was not subsidised, and hence that R1.6 billion ‘loan’ which did nothing to stop the closure of Newcastle. So enthusiastic was the support for the mini-mill sector that the IDC is now facing a meaty write off of R1 billion following its ‘loans’ to SA Steel Mills (a mini-mill).

Yet we remain surprised that the economy remains so concentrated, and appears to be becoming even more concentrated, as if by protecting highly concentrated sectors will miraculously reduce concentration. No one is willing to look this ugly beast in the eye and acknowledge that every policy is a trade-off, but that refusal doesn’t make the trade-off disappear.

In the past, governments often sold monopolies by granting exclusive rights to one person or company to produce or trade a particular good or activity. On 31 December 1600, Queen Elizabeth I granted a monopoly charter to the East India Company which lasted 274 years.

It is completely unfair to compare the monopoly charters of old with some of our current masterplans, but I will do so anyways. The value of monopoly rents is far greater than many realise and the social costs they impose on society, especially in large, upstream sectors is often not counted, but they matter. A lot.

Donald Mackay is the Founder and CEO of XA Global Trade Advisors.