EDITORIAL: Block-exemption regulations may open door to abuse by companies

Trade, industry and competition minister Ebrahim Patel has in recent years done much to give the competition authorities greater powers to go after big companies. Now he clearly feels the need to do more to boost small companies. But the risks that could come with his latest idea could well outweigh the rewards.

Patel surprised regulators and litigators at the annual competition conference this week when he announced plans for a block exemption that would enable small and medium-sized enterprises to collaborate with each other without the risk of prosecution for collusion under competition laws. What Patel has in mind is smaller businesses combining (don’t say collude!) to use their collective buying power to get the sort of bulk discounts from large suppliers that larger competitors get. They could also combine on researching, developing and producing products that would get them entry into sectors dominated by larger firms.

All of this would help address disadvantages smaller firms have because they lack the scale and clout of larger companies. As Patel sees it, that would enable the growth of SA’s small and medium-sized business sector, boosting economic growth more broadly.

Patel has in recent years tightened competition legislation to give competition authorities more power to go after large companies that abuse their dominant position, as well as to target sectors dominated by just a few large firms, even where there is no evidence of abuse. That’s meant to open  these sectors up to more competition from smaller firms. But with government scrambling for ideas to lift the economy out of its stagnation and create employment, he seems to feel the need to show he is doing something to support small firms, especially small black-owned firms. That’s surely even more imperative in an election year in which President Cyril Ramaphosa’s cabinet supporters, Patel included, need to demonstrate their inclusive-growth credentials.

The minister says his block-exemption idea builds on his experience of granting such exemptions during the Covid-19 and KwaZulu-Natal floods crises and is not unique to SA, with the EU also having such a measure in place. A key driver was a 2021 Competition Commission study, which found that the SA economy is highly concentrated, with many sectors dominated by a handful of large players while smaller players face barriers to entry. The draft block-exemption regulations published on Thursday noted that the Covid pandemic had negatively affected small and medium enterprises, and their share of national income is “comparatively low and declining”.

It’s certainly true that SA needs to grow its small business sector, whose contribution to employment far outweighs its share of GDP, and whose contribution to the economy is far lower than in other countries.

It’s probably true too that smaller firms might benefit from good forms of co-operation, and even that it might help them to know that the competition authorities would not go after them if they did co-operate.

However, Patel’s proposed block-exemption regulations could open up huge avenues for abuse by companies large and small. They could see the formation of new cartels, after all these years in which the competition regulators have been working hard to stamp these out. They could see all sorts of creative corporate structuring by larger companies dressing themselves up as smaller companies to enable collusion on dividing markets or massaging prices. They could end up being very bad for consumers, not to mention creating some thorny issues for competition regulators. And crucially, it’s not clear that the inability of small and medium enterprises to band together without incurring regulators’ wrath is the main reason (or a meaningful reason), for their struggling to grow. Government red tape and dysfunction are probably far greater barriers to entry.

Patel’s team has tried to narrow the scope of the draft exemptions to prevent abuse. The regulations are now open for public comment. They will surely elicit interesting responses and raise red flags. The minister says he will take the comments into account. Let’s see.