/ 11 October 2013

Acrimony puts SA at back of the class

BMW’s decision not to expand operations here was influenced by the strikes.
BMW’s decision not to expand operations here was influenced by the strikes.

The International Monetary Fund's country report on South Africa last week resulted in a lot of anger.

It fuelled ire in a business world concerned about the climate of investment in the country and displeasure from unions who felt that the IMF unfairly put the country's troubles at labour's door.

But the report did more than point fingers at South Africa's labour regime.

It mentioned a range of structural reforms that are necessary to grow the economy at rates that will put a meaningful dent in our unemployment levels, a chief source of inequality and poverty.

These include product market reforms, such as reducing red tape and regulation to strip away barriers to entrepreneurship and trade and investment.

They also include the recommendation to battle concentration levels in sectors of the economy that are currently dominated by a handful of eye-wateringly profitable and powerful companies.

Fault lines that have to be addressed
The sectors it highlighted include telecommunications, financial services and transport.

The IMF believes that it is these kinds of long-standing structural fault lines in our economy that, if unaddressed, will erode South Africa's ability to grow the economy, as well as withstand the merciless changes taking place in the global economy, where countries and financial systems are becoming increasingly interlinked.

Not least of this is the end of years of loose monetary policy in the developed world.

The rush of money this has sent into developing countries like South Africa has helped us paper over the cracks in our own economy.

In the week since the country report was issued, tension between labour and business has palpably intensified.

Car manufacturer BMW announced that it would not expand operations in South Africa because of strikes in the vehicle manufacturing sector.

Numsa accuses BMW
In media reports, the National Union of Metalworkers of South Africa accused BMW of blackmail.

It is worth noting that BMW chose to freeze local expansion despite an extremely supportive industrial policy that houses the automotive production and development programme — which includes a range of incentives for car manufacturers aimed at boosting production.

Meanwhile, Woolworths chairperson Simon Susman highlighted in the company's annual report that the retailer felt deep concern as it watched "the flow of restrictive, populist legislation" being imposed on commerce, in its annual report.

"Most of this, particularly on the restrictive labour and trade practice front, is materially impacting job and small business generation. It is as if those in work are conspiring with government to keep the unemployed out of work and out of the markets," said Susman.

"It is only by growing private enterprise, large and small, that the fiscus' coffers can be fed. It is business that creates the sustainable jobs and the new industries this country so badly needs. An ever more centralised government stranglehold on industry cannot do this," said Susman.

He stressed that a "strengthened, not a weakened, National Development Plan" was key to a shared vision of growth.

Sharing BMW's sentiments
Nomura analyst Peter Attard Montalto said in a note that many other companies are beginning to think like BMW, who feels that the "risk-reward of further investment simply doesn't make sense for it".

The sentiments from BMW and Woolworths show a marked shift in the local corporate sphere, he said.

The sphere "is normally so unbelievably quiet despite the regulatory burden it sits under, the labour issues it has to endure and the policy uncertainty".

Susman's critique of the government's model of state-led growth was also significant, Montalto said.

The IMF report, like Susman, lauded the National Development Plan and its potential as a means to bring about structural reform and kick-start growth.

But outside of the more commonly cited reforms needed — labour being one — the IMF stressed others that are too often overlooked.

SA ranks lowest
This includes regulation, especially the regulation that governs starting a business.

According to the report, South Africa ranks lowest out of 40 countries for "licence and permits system, regulatory and administrative opacity, and regulatory barriers to trade and foreign direct investment have particularly contributed to the barriers to entrepreneurship and to trade and investment".

The IMF quoted a recent survey by accounting firm Grant Thornton which found that regulations and red tape were the second-largest constraint for business expansion, with the manufacturing sector most affected.

"Problems include the high cost, complexity, and amount of time it takes to deal with red tape associated with starting and running a business in South Africa," the report said.

Susman referred to the apparent battle by "those in work" to keep new entrants out, which is a dynamic also seen elsewhere in the economy.

Various sectors remain highly concentrated, dominated by a handful of large firms.

The going gets tough for new entrants
This is in a context where local companies are relatively profitable compared with their emerging market peers, the IMF said, and they "appear particularly so in sectors with high concentration".

"New entrants, especially [small and medium-size enterprises] often find it difficult to compete with existing firms that have high market dominance, despite government support for start-ups," the report noted.

"These insider-outsider dynamics have resulted in higher prices in some sectors to the detriment of consumers or of other companies that use those goods and services as inputs."

The IMF gave the example of the sector including telecommunications, transportation and financial services, which provide very important inputs to other industries "Hence, economies with costly and inefficient goods and services will find their competitiveness in other industries negatively affected."

The IMF indicated that competition regulation, though well developed, needed improving, particularly the time taken to try cases.

"The [competition] commission's ability to deal with abuse of market dominance could be strengthened, for example, by moving to effects-based standards in its inquiries," the IMF proposed.

Major positive steps
It is encouraging to see that in the week that these comments were made government took a major positive step to improve competition in the telecommunications sector.

On Friday the Independent Communications Authority of South Africa issued draft regulations on mobile and fixed-line call termination rates.

These are aimed at reducing the fees major telecoms companies charge for connecting calls across networks.

These interconnection rates have been a major source of profits for dominant companies, according to analysts, including the likes of companies such as MTN.

The draft regulations propose cutting call termination rates from the current 40c to 10c by March 2016.

For smaller operators such as Cell C, who have a market share 20%, asymmetrical termination rates are proposed in a bid to address the high levels of concentration in the local sector.