Boosting competition in African markets can enhance growth and lift at least half a million people out of poverty
Boosting competition in consumer markets and key input sectors can help African countries grow faster and alleviate poverty, according to a report launched on 27 July 2016 by the World Bank Group and the African Competition Forum (ACF).
African countries have much to gain by encouraging open and competitive markets, particularly as a means to spur sustainable economic growth and alleviate poverty. Yet in reality, many markets have low levels of competition. More than 70% of African countries rank in the bottom half of countries globally on the perceived intensity of local competition and on the existence of fundamentals for market-based competition. Monopolies, duopolies, and oligopolies are relatively prevalent compared to other regions. In more than 40% of African countries, a single operator holds over half the market share in telecommunications and transport sectors.
This lack of competition has drastic costs. Retail prices for 10 key consumer goods – white rice, white flour, butter and milk among them – are at least 24% higher in African cities than in other main cities around the world, even after taking into account demand and transport costs. While these higher prices affect all consumers, the poor are hit the hardest.
A new report, Breaking Down Barriers, estimates the gains from tackling anticompetitive practices and reforming policies to enable competition. For instance, reducing the prices of food staples by just 10%, by tackling cartels and improving regulations that limit competition in food markets could lift 500,000 people in Kenya, South Africa, and Zambia out of poverty and save consumers more than $700 million a year.
At the same time, fundamental market reforms to increase competition in key sectors is critical for competitiveness and economic growth. For example, if countries like Ethiopia, Ghana, Zambia and others were to reform their professional services markets, this could generate nearly half a percentage point in GDP growth from industries which use these services intensively. For a country like Zambia, which had 1.7% GDP growth in 2015, this can be significant. The report also suggests that the impact would be even larger if fundamental reforms were implemented in other services such as electricity, telecommunications, and transport which have higher spillover potential across economies.
“Strengthened competition policy in Africa not only encourages sustainable economic growth and competitiveness across the continent by creating firms and industries that are more productive, it directly impacts poverty by encouraging firms to deliver the best deals to consumers – particularly the poor – protecting them from paying higher prices for essential goods and services,” said Anabel Gonzalez, Senior Director of the World Bank Group’s Trade & Competitiveness Global Practice.
Cartels – agreements among competitors to fix prices, limit production or rig bids – are a serious cause of low competition levels in African countries and have been found to affect products in a variety of sectors, including fertilizers, food, pharmaceuticals, construction materials, and construction services. Evidence reveals that consumers pay 49 percent more on average when firms enter into these agreements.
Competition authorities can take additional steps to strengthen their ability to detect and deter cartels. Setting fines and penalties so that they are higher than the expected profits may help to deter anticompetitive behavior. Although the maximum fine imposed on cartels in South Africa is $116 million, on average, fines are only 9% of a companies’ excess profits. This means cartel members lack incentives to change practices as profits often far outweigh fines. Leniency programs – which allow a cartel member to confess, cooperate with an investigation, and provide evidence in exchange for immunity or reduced penalties – and utilizing whistleblowers, informants, and raids, are all effective strategies that are under-utilized in African countries.
Input markets in Africa also face barriers to competition, according to the report, curbing Africa’s competitiveness. In the telecommunications sector for instance, in the 27 African countries studied in Breaking Down Barriers, more than 50% of the mobile market is held by a single firm. Research from Africa has shown that entry of an additional telecom operator leads to a 57% increase in mobile subscriptions, which can have knock-on effects on the economy’s productivity.
The report provides a special focus on competition enforcement and effective market regulatory environments in cement, fertilizer and telecommunications – sectors that are key to construction and agriculture competitiveness, and to the welfare of less well-off households. For example, in the cement sector, it finds that competition law enforcement, removal of non-tariff barriers, and pro-competition rules to enable entry in limestone and clinker production could save African consumers around $2.5 billion each year.
As well as showcasing the benefits of competition in particular sectors, the report highlights Africa’s important progress by creating more effective competition authorities and regulators, and outlines areas of focus to encourage vigorous competition in key markets in the region. The number of African countries and regional blocs like EAC, COMESA and ECOWAS with competition laws has jumped from 13 to 32 in the last 15 years. Competition authorities operate in 25 of those jurisdictions and budgets for those authorities increased by 39% between 2009 and 2014. However, the report suggests that there is room to prioritize resources and use the powers and tools available more effectively to continue raising the relevance of competition policy within the broader development agenda in Africa.
“There have been a notable number of countries adopting competition laws in Africa, and this bodes well for growth and development. However, while the benefits of competition are already clearly observable in Africa, there is still considerable effort required to ensure effective implementation of competition laws and policies across the continent. Collaboration among competition authorities in Africa, bilaterally and through the Africa Competition Forum, and with development partners is key to facilitate capacity building of younger authorities, systematize information on competition challenges and opportunities, and address cross-border competition issues that affect the region,” noted Tembinkosi Bonakele, Chairperson of the African Competition Forum and Commissioner of the South Africa Competition Commission.
“In the past few years, several countries have stepped up their enforcement capacity and implementation of competition laws. For example, Egypt, Kenya, South Africa and Zambia have taken recent actions to block uncompetitive agreements in a variety of sectors,” explains Martha Martinez Licetti, the report’s co-author and Lead Economist for the Trade & Competitiveness Global Practice at the World Bank Group. “Looking to the future, there is a need to prioritize resources and use the powers and tools available to competition authorities more effectively in order to continue raising the relevance of competition policy within the broader development agenda.”
Gains from opening competition in fertilizer, cement and telecommunications markets can be substantial
One strategy for promoting competition is to focus on key sectors that are especially important to the growth of African economies. Breaking Down Barriers highlights three sectors – cement, fertilizer, and telecommunications – that directly affect the competitiveness of African producers but lack a level playing field.
The cement sector plays a critical role in the construction of infrastructure and housing;
Nine pan-regional firms account for the majority of the continent’s cement capacity;
In 18 countries, one supplier holds more than half the market;
Cement prices in Africa are, on average, 183% higher than world prices;
Competition law enforcement, removal of non-tariff barriers, and pro-competition rules could save African consumers from overpaying for cement by $2.5 billion per each year.
The fertilizer sector is crucial for agricultural production;
Only 28% of African countries have the ability to produce their own fertilizers, the rest must import;
Global export cartels increase the prices of potassium fertilizers in Sub-Saharan Africa by 29%;
In 58% of the countries studied in Breaking Down Barriers, one supplier controls over half the market.
Removal of regulatory restrictions that inhibit entry, competitive public procurement of fertilizer, and market intelligence to detect anticompetitive practices will allow African farmers to benefit from competition.
Telecommunications shape connectivity within countries and with the global economy, for both families and businesses;
As of 2015, Sub-Saharan African countries had the highest final prices for mobile broadband services in the world and internet use is 2nd lowest among regions;
African mobile and wireless markets are highly concentrated. In 27 countries, one player has more than 50 percent market share.
Monopolies are still present in Africa: 11 in international gateway services and six in wireless internet services.
Fostering non-distortive state participation and regulating access to key inputs to provide telecom services will benefit African economies.
Regional cooperation is another way authorities can boost competition. Supply chains and business arrangements often cross borders, so the greater reach of regional organizations could help them address issues that go beyond the powers of national authorities.
“There is scope for national and regional competition authorities to increase their impact by taking a regional perspective. This report brings home the importance of strong cooperation between agencies involved in implementing competition policy, says Klaus Tilmes, Director of the Trade & Competitiveness Global Practice at the World Bank Group. “We hope this analysis will raise awareness of the achievements made in Africa, stimulate debate on how to address the remaining challenges, and reinforce the case for strengthening competition policy across the region.”
» Download: Breaking Down Barriers: Unlocking Africa’s Potential through Vigorous Competition Policy (PDF, 5.95 MB)