Time to scrutinise state aid’s distorting effect on fair competition
A regulatory framework is needed to level the playing field between commercialised SOEs and their private rivals
Developed and developing countries recognise the need for competition between business enterprises. Those benefiting most from competition are consumers, who get products and services at competitive prices. In addition, competition stimulates innovation and growth — the more competition there is between business enterprises, the more they will try to create new products and services or improve existing ones, all of which benefits consumers.
Competition between business enterprises is therefore at the core of a healthy growing economy and as such must be nurtured, protected and encouraged. In SA this is achieved by the Competition Act, which has done a creditable job since its inception in 1998. The Competition Commission established in terms of the act has uncovered many cartels and imposed the necessary penalties. Businesses that were abusing their dominant positions within markets have been brought to book. The act and the actions that have been taken by the authorities under its terms can therefore be hailed as a success story.
Nevertheless, one issue remains a great challenge to free and fair competition in SA and should be of concern to private competitors of state-owned enterprises (SOEs): the various benefits commercialised SOEs enjoy because of their state ownership. These take a number of forms, including monopoly powers, credit guarantees, exemption from bankruptcy, tax exemptions and direct subsidies. It seems that the role of these enterprises as market participants was not carefully considered when the Competition Act was contemplated.
Because the discriminatory policies of apartheid have created an enduring inequality gap in postapartheid SA, the government has to be involved in the economy if this is to be addressed. It does so by using SOEs as vehicles to achieve its developmental goals, create employment and provide the pivotal services and goods needed for socioeconomic development. As a result, SOEs as active market participants rely on the financial support of the state. They may do so purely because of their crucial government mandates, regardless of financial mismanagement, poor corporate governance and deep-seated corruption.
However, the government’s financial aid to commercialised SOEs could also qualify as a state-initiated constraint on competition, as it results in an uneven playing field between these enterprises and their private competitors. This creates warped incentives, since SOEs will not compete efficiently if they know that they are always protected by a state-sponsored safety net.
In my recent doctoral study I argued that the time has come in SA for state aid to commercialised SOEs to be subjected to increased scrutiny, to bring about a level playing field between them and their private competitors. I looked into whether a state aid control model, based on the EU state aid rules, could help address the potential distortion of free and fair competition arising from state financial aid, and proposed a customised regulatory model as a possible legislative solution to the threat posed by unlimited and potentially distortive state aid to free and fair competition, the wider economy and the developmental goals of the government.
This regulatory model provides for an active role by the Competition Commission in state aid decisions since its principal responsibility is to be the guardian of competition in the country. The prospect of such a mechanism was alluded to three years ago by Competition Commission commissioner Tembinkosi Bonakele, when he stated that there should be a clear competition policy for SOEs to address the question of bailouts, among other issues.
In light of the recent downgrade of SA’s credit rating by Moody’s Investors Service, it has become even more urgent to give serious consideration to such a regulatory framework for SOEs, since continuous bailouts over the years undoubtedly played a role in Moody’s decision. The ratings agency warned the government about this in 2018, and on March 27 this year it downgraded the country’s long-term foreign and local currency debt ratings, and retained a negative outlook. All three big credit ratings agencies (the other two being Fitch and S&P Global Ratings) now rate SA as subinvestment grade.
Based on the findings of my study I believe that in addition to addressing the potential distortive effects of state aid to commercialised SOEs may have on the competitive process, a regulatory model could also help address the issues the ratings agencies have identified.
• Dr Afrika, a former lecturer at the universities of the Free State, Johannesburg and Stellenbosch, is working in Australia. This article is based on her doctoral research in mercantile law at Stellenbosch University.