Lauralyn Kaziboni and Maria Nkhonjera
The African Competition Forum and World Bank Group (ACF-WB) Competition Policy Report reviews cross-cutting issues in competition enforcement in Africa, providing key insights on constraints and key areas for intervention, which we consider below.1
Competition policy is fundamental in driving economic growth and household welfare as it impacts inequality, poverty and unemployment. Increased competition can drive local firms to be more productive, increase exports and generate more value for the economy overall. However, the Global Competitiveness Report (2015) indicates that 78% of African countries are in the bottom half of the intensity of local competition index. The prevalence of cartel agreements and abuse of dominance lessens competitiveness thereby limiting economic growth and transformation. Government involvement through burdensome regulatory requirements, protecting monopolies and increasing operational costs among other factors has had the effect of further lessening competitiveness.
While some authorities, such as in Kenya, have increased the number of cases handled, others have only just gone through draft legislation for competition law (e.g. Uganda, Republic of Congo). There remain challenges for authorities in general which need to be addressed, including: inadequate human capacity, lack of awareness on the benefits of competition, limited funding, lack of political will, and non-existence of competition curriculum in schools.
Strategic industries
The ACF-WB report identified priority sectors that are pertinent to ensuring competitiveness, economic growth and welfare development based on their linkages to the rest of the economy. These sectors include cement, fertiliser and telecommunications. Cement is a key input in construction and links to housing and infrastructure. Fertiliser is a key component in agricultural productivity. Telecommunications is essential in the rapidly globalising world and influences connectivity with other countries. These industries are prone to anticompetitive practices such that opening up the markets could bring significant benefits in the continent at a regional and country level.
There are cross-cutting and industry-specific factors that shape the competitive dynamics of these sectors. These common features include small economies which can support few players; realising economies of scale which sometimes requires that firms have operations or sell into more than one country; high capital investment outlay; high sunk costs; and restricted access to essential inputs. In the cement, fertiliser and telecommunications industries there is a role for sector regulators and competition authorities to play in encouraging competition.
Cement
In at least 18 African countries, one supplier holds more than 50% of the market while the rest of the market is divided among the small players.2 Dangote Cement has become one of nine pan-regional players, which largely comprise large European producers and some smaller entrants, as discussed previously in this Review.3 The nine players produce an average of 18.9 million tons per annum (mta) across the region compared to 3mta produced by the smaller players. The competition dynamics in this industry are influenced by supply chain organisation which consists of limestone production; production or import of clinker; and production or import of cement (blended or ordinary). At the same time, import restrictions and antidumping tariffs protect the incumbents in producing countries allowing them to determine price and supply. Among the 22 countries and regional bodies with readily available information, 45% prohibit cement imports. This limits consumer choice and enables the entrenched incumbents to charge higher prices.
Vertical integration in the cement industry can create efficiencies where firms can invest in distribution networks avoiding free rider concerns or solve the hold-up problem by investing in clinker production capacity. However, vertical foreclosure may be a concern in instances where a vertically integrated clinker producer may have the incentive to foreclose downstream grinders. State policies on limestone exclusivity awarded to firms, for example, may reinforce dominance or make it challenging for potential entrants to the market. Non-standard application of rules on obtaining licences for exploration, production or import also have the effect of undermining rivalry. Market sharing, excess capacity, high concentration of firms and information exchange via industry associations seem to encourage collusive behaviour. In the past, cartel cases have been uncovered in SACU, Egypt and Tanzania.
Fertiliser
The African market is highly dependent on imports with only 28% of African countries having the capacity to produce their own fertiliser. In addition, 58% of countries have a single supplier that holds over half the market. This in effect shapes the supply of the commodity in African markets, affecting competitive outcomes. Global fertiliser markets are dominated by a small group of players from large producing countries. Given the concentrated nature of the global market, importers of fertiliser are largely price-takers in the global market unless otherwise vertically integrated in the production chain. Dominant players have a tendency towards maintaining high prices by limiting supply below competitive levels. This is confirmed in a CCRED study which analysed the state of competition in fertiliser trading in the SADC region.4 Global export cartels raise the final prices of some fertilisers by 29%, with African retail prices being well above prices in the Black Sea and Middle East regions. The weak competitive landscape globally thus directly affects African economies.
Anticompetitive behaviour in the sector can also be facilitated by governments’ involvement in the fertiliser supply chain and more specifically direct state participation in the importation or production of fertiliser. Various state regulations or rules reinforcing dominance have been shown to play a critical role in shaping competitive dynamics in the sector and more often than not, hindering competition. Examples range from restrictions on the number of import licenses granted and distortionary import taxes to state monopolies on natural resources.
Telecommunications
In Africa’s telecommunications sector, 47% of mobile and wireless markets have a player with more than 50% market share. Sub-Saharan African countries pay the highest prices globally for mobile and broadband services. Key segments of Africa’s telecommunication services continue to exhibit monopolistic structures and specific features of this industry make it prone to market concentration and anticompetitive practices. There are 11 existing monopolies in international gateway services and 6 in internet wireless services. The largest telecommunications groups are MTN, Vodafone, Bharti Airtel, Orange and Etisalat. In 88% of African countries where two or more of the 5 largest telecommunications groups are present, these companies jointly control over 70% of the market.
The state’s direct participation in the telecommunications market, high mobile termination rates and limited availability of spectrum are also identified as factors that constrain competition in this market. These findings are consistent with findings by CCRED which identified access to spectrum as a key barrier to entry adding that while existing market players have access to spectrum, new spectrum is not regularly allocated to new entrants.5 Opening up mobile, wireless and international calling markets to competition can significantly increase growth and competitiveness in the region. Previous studies referred to in the report show that entry of an additional mobile operator in a sample of 40 African countries led to a 57% increase in mobile subscriptions, while opening up international calling services to competition was found to have reduced prices by 90%.
Implications
Evidence suggests that there is progress in the adoption and implementation of competition policy in the region. Despite this, in some areas such as cartel enforcement outcomes remain poor as cartel fines are too low in many jurisdictions. The benefits of rivalry and entry are also being eroded by several other factors according to the report. In the cement and fertiliser industries for example, government’s involvement appears to be suppressing competition through exclusive arrangements, bans on entry and cumbersome registration procedures, among other factors. Governments need to implement proactive and flexible regulatory policies to correct market failures, promote innovation, and incentivise firms to compete.
Given the significant resource constraints of authorities in the region, sector prioritisation is important for more effective outcomes. Sector regulators can focus on the design of a regulatory framework while competition authorities provide expertise on competition fundamentals and ex-post enforcement. These arrangements are usually facilitated by memorandums of understanding. In Tanzania for example the water and energy, transport, civil aviation and communication regulators deal with sector related competition issues even though competition law applies to all sectors. Rigorous analysis of competition issues in specific sectors through market enquiries may provide insights into markets without exhausting authority resources.
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NOTES
- Based on World Bank Group and African Competition Forum. (2016). ‘Boosting Competition in African Markets’.
- In North Africa there is a significant presence of Lafarge Holcim with plants in Algeria and Egypt. Dangote’s Obajana plant stands out in West Africa. PPC and Lafarge Holcim are the most prevalent in South East Africa.
- See Mondliwa, P. and Zengeni, T. (2015). ‘Consolidation and entry: Changing dynamics in the regional cement’. CCRED Quarterly Competition Review.
- Ncube, P., Roberts, S. and Vilakazi, T. (2015). Study of Competition in the road freight sector in the SADC region: Case study of fertilizer transport and trading in Zambia, Tanzania and Malawi. CCRED Working Paper No. 2015/3.
- Hawthorne, R., Mondliwa, P., Paremoer, T. and Robb, G. (2016). Competition, barriers to entry and inclusive growth: Telecommunications Sector Study. CCRED Working Paper 2016/2.