Workers at a construction site. The entry at significant scale of
Dangote-linked cement companies in Zambia, South Africa and Tanzania has
drastically reduced prices. FILE PHOTO
There is a
growing body of evidence that collusion between competitors in the
global economy has
led to significant economic harm to consumers, with prices typically going between 15 per cent and 25 per cent higher than would pertain under competition. A lot less is known about the extent of and harm arising from collusion in so-called developing countries, in Africa in particular.
led to significant economic harm to consumers, with prices typically going between 15 per cent and 25 per cent higher than would pertain under competition. A lot less is known about the extent of and harm arising from collusion in so-called developing countries, in Africa in particular.
There are indications that there
is widespread domestic and cross-border collusion in, for example,
southern and East Africa. The related social harm is likely to be very
significant given high barriers to entry and concentration in key
industries, meaning that competitive constraints are lower and the
likelihood of collusion is higher.
Our own research
points to high mark-ups from cartels in the cement and fertiliser
industries in southern and East Africa, involving arrangements that have
extended beyond national borders.
The extent of
corporate collusion raises a range of fundamental questions relating to
the manipulation of markets and capture of the policy agenda by private
companies. In the transition from generally state-led economies to
liberalisation our case studies point to deeper concerns about
widespread cartel conduct.
This has to do with the
fact that private companies, including large transnational corporations
in these industries, have deliberately misrepresented their conduct,
manipulated markets, and influenced the policy agenda to reinforce their
market power. This includes lobbying for regulatory barriers which
limit entry as part of industrial policies which favour established
businesses.
Importantly, the form and extent of
collusion points to limitations of conventional ‘governance fixes’,
namely competition law, to address the conduct. This is the case in
various African countries where our case studies show that companies
have become sophisticated in concealing the coordinated arrangements
(including through secretive information exchange) while presenting a
façade of competition. Competition authorities are now widely
established in most countries on the continent, but they are constrained
in terms of resources and capabilities to deter and uncover secret
collusion and the elite interests which underpin it. The remainder of
this article highlights some of the key insights from our research in
relation to each case study.
The cement cartel in South Africa had effects which stretched
across neighbouring countries in the Southern African Customs Union
(SACU) area. A marketing agreement and several exemptions, which came
into effect in 1971, laid the basis for the firms to coordinate
distribution, supply and prices in the ‘local’ SACU market. The
agreement was endorsed by the apartheid government as part of its
policies to support mining activities.
In South
Africa’s transition to democracy and open markets in the 1990s, the
government withdrew its exemption of the legal cartel to usher in
competition. This was in line with the shift in the balance of power in
the prevailing political settlement at the time.
Unknown
to the new government, the companies came together to reform the cartel
a few years later, now under a secret agreement to manipulate the
market. This occurred even as the firms publicly lent support to the
government’s objective of increasing competition and building housing
and infrastructure for the previously marginalised black population.
Furthermore,
the cartel continued despite the introduction of a new competition law
and independent authority in the late 1990s, with powers to uncover and
prosecute restrictive practices. This raises questions about the ability
of governance institutions to address market power where it is deeply
entrenched and reinforced by a legacy of elite ties and control of
access to key markets and resources.
The private cartel
lasted until 2009. While the businesses portrayed a sense of
competition, they had rigged markets to maintain agreed market positions
and extract rents, including through the exchange of detailed
information which reduced the need to meet regularly (and risk
detection).
The private cartel, in fact, led to substantial profits and prices soaring well above those enjoyed during the period of state-sanctioned coordination. Under the legal cartel, the firms were subject to scrutiny and had to justify their prices which played a role in disciplining the companies’ behaviour.
The private cartel, in fact, led to substantial profits and prices soaring well above those enjoyed during the period of state-sanctioned coordination. Under the legal cartel, the firms were subject to scrutiny and had to justify their prices which played a role in disciplining the companies’ behaviour.
Companies
were required to make commitments to maintain a ‘reasonable’ level of
prices and make investments, while the government ensured adequate
returns to the firms. This is in contrast to the period after the legal
cartel, where the new government had expected, under the new neoliberal
economic policy paradigm, that firms would compete, and that competition
would undermine rents. In reality, this was certainly not the case.
The
outcomes in the cement sector point to the fact that policy failures,
including the inability to make markets more inclusive, can be shaped by
the nature of elite alliances, rather than simply market failures or
weak institutions. In the fertiliser industry, this is illustrated in
the role that transnational corporations have played in distorting
normatively developmental agricultural policies for profit (such as
local inputs subsidy programmes), while fronting as ‘partners’ of
government in making markets work.
The various
initiatives for increasing fertiliser supply to improve agricultural
output and food security in Africa have been narrowly framed in terms of
market failures in transport and local retail markets.
This
has diverted attention from analysis of the conduct of the main
companies. It is no secret that there has been extensive collusion
between leading global producers in the production and trading of
fertiliser (especially for potash and phosphoric products).
However, there is no mention of the need to address this in donor-sponsored strategies for a green revolution in Africa! These arrangements have harmed developing countries in particular, and undermined the objective of increasing access to fertiliser.
However, there is no mention of the need to address this in donor-sponsored strategies for a green revolution in Africa! These arrangements have harmed developing countries in particular, and undermined the objective of increasing access to fertiliser.
There are also
collusive arrangements that have operated between fertiliser importers
in South Africa and Zambia, for example. In South Africa, producers and
importers which previously enjoyed state support (also linked to the
production of chemicals and explosives for mining), colluded to raise
prices and divide markets in local supplies, and exports to Southern
African countries.
An
illegal cartel arrangement lasted from 1996 to 2005 until it was
uncovered by the competition authority. The main firms settled the cases
with the authority, in exchange for reduced monetary fines, no doubt
less than the economic harm caused.
The conduct was
concealed in the workings of the industry association, which, amongst
other things, facilitated the exchange of detailed information to
maintain the cartel agreement while presenting themselves as maintaining
standards and quality in the market (and promoting consumer wellbeing).
In Zambia, a local importer colluded with a South African company (previously involved in the South African cartel) to rig tenders for supplying the government subsidy programme as well as to allocate markets and agree prices.
In Zambia, a local importer colluded with a South African company (previously involved in the South African cartel) to rig tenders for supplying the government subsidy programme as well as to allocate markets and agree prices.
The local investigation
which uncovered the conduct was concluded by Zambia’s Competition and
Consumer Protection Commission (CCPC) in 2013, with fines being levied
for conduct which was estimated to have cost government around $20
million. The companies were also linked to fraudulent relations with
government procurement officials around tenders for the subsidy.
These
arrangements provide important insights into the factors that have
contributed to the real market dynamics involved, including the role of
local and business elites. First, companies have clearly manipulated
supplies and controlled local markets through lobbying for regulations
that protect their interests, and corruption.
Second,
government actors have contributed to shaping the market outcomes that
harm consumers. For example, problems with the fertiliser subsidy
programme in Zambia related to the ties between local (government)
interests and the businesses, including in skewing tenders to ensure
that preferred companies win (and no doubt share the rents).
Third,
the experience with subsidy programmes generally points to the fact
that while companies have positioned themselves as partners of
government in supporting smallholder farmers, in particular, the market
outcomes are not reflective of competition. Instead they point to
further entrenchment of market positions and rents to the exclusion of
other local suppliers.
In Tanzania, this pattern is
illustrated in the investment made by a global fertiliser giant in the
Southern Africa Growth Corridor Initiative (SAGCOT) which was expected
to reduce the costs of importing fertiliser.
Instead,
the programme has meant that the fertiliser giant has cornered the local
market, leveraging the fertiliser terminal facilities which ultimately
only it can access to supply emerging smallholder farmers.
The
(high) level of prices relative to regional equivalents suggests that
the benefits have not accrued to the local market. Control of key
infrastructure by private interests, often with the support of
governments – for example, the fertiliser giant is understood to have
received favourable terms in accessing land for the terminal – has
served to lock out rivals without matching scale and influence.
The
powerful regional and transnational interests in fertiliser and cement
remained relatively unchallenged even after the coordinated arrangements
and collusion had been uncovered. It was not until the entry of
significant regional rivals in both industries that there appeared to be
a return to more competitive and pro-developmental outcomes.
For
example, the entry of Export Trading Group (ETG, a Kenyan company) in
regional fertiliser markets has disrupted existing arrangements, and
contributed to a reduction in prices in some countries and additional
investments, even as the fertiliser giant has bought up other challenger
firms to retain its market position.
In cement, the
entry at significant scale of Dangote-linked cement companies in Zambia,
South Africa and Tanzania has drastically reduced prices from around
2015. This impact has extended beyond country borders through exports of
cheap cement into high-priced markets such as Malawi, pointing to the
importance of trade policies which strengthen the integration of the
region and industrial policies (with appropriate conditionalities) that
attract large scale investment and players with the capabilities to
undermine incumbents.
Meaningful policies to improve
economic outcomes for the marginalised poor in African countries need to
encompass strategies for fostering local rivalry and the introduction
of challenger firms. Such entry of local rivalry has disrupted the
distribution of benefits and power which has sustained rents for
insiders.
In turn, incumbents have subsequently had to
make investments in capacity and improved logistics to enable them to
compete rather than simply handicapping rivals and manipulating the
policy agenda in their favour.
More importantly, the
case studies in our research suggest a need to recognise the critical
role that insider and business interests have played in skewing outcomes
in many key industries. This requires an emphasis on understanding how
collusion, and markets, have worked in practice and whose interests have
been served.
A critical understanding of the
underlying arrangements and balance of power in key markets is an
important part in explaining the outcomes observed and how these
consumer harming practices can be avoided or minimised in future. It
also requires recognition of the limited role that competition
authorities can play in undermining arrangements between political and
business elites which may have existed for many years.
These
arrangements may be entrenched in the workings of markets and
reinforced by the sharing of rents and quid pro quos such as investment
spending which in effect has strengthened the position of incumbents.
The
fact that the coordinated arrangements have stretched across national
borders means cross-border enforcement by regional economic community
competition authorities is critical in fostering cooperation between
countries to identify collusion.
It is evident that
arrangements that on the surface appear to be domestic agreements
between companies, often mask extensive regional cartels which not only
substantially harm millions of vulnerable consumers in major economic
sectors.
In small, concentrated markets with high
barriers, the harmful effects of collusion in terms of economic
development are likely to exceed any efficiencies that may arise from
coordination, particularly where those rents are only shared by a
handful of insiders.
This article was first published in the Review of African Political Economy
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