High charges and market concentration are harming growth
High mobile data charges
The issue of high charges periodically comes up, this time
under the #DataMustFall
banner, which states 1GB
of data costs R11 in India, R22 in Nigeria, R32 in Namibia, but R150 in South Africa. At the hearings MTN’s chief financial officer
Sandile Ntsele disingenuously blustered about the US
dollar being the “common denominator”, and not converting rands to the
Nigerian naira.
“We don’t have a situation where
the South African rand can trade with the Nigerian naira. What you have is that
the common denominator being the US dollar. Now, the dollar price depends very
much on what the exchange rate between the two countries is.”
Data (and imported telecommunications infrastructure) is
priced and paid for in dollars, after buying dollars in local currency. The Nigerian naira is worth US$0.0031, and R1
is worth US$0.073 (1 naira is ZAR 4 cents – it’s practically worthless). Ntsele did not elucidate how cross exchange
rates in dollar terms – the “common denominator” – of the nearly worthless naira
makes MTN’s Nigerian data cheaper
than in SA with the latter’s stronger currency.
If Ntsele’s confusing argument does not make sense it’s
because it was not meant to – it was a red herring, and I hope Parliamentarians
did not accept it.
Networks waffle about cost structures that determine high
charges, but are reluctant to reveal details – Vodacom refused during
Parliament’s 2009 hearings into “excessive and exorbitant” mobile termination
rates. But except for networks saying
they are spending billions on expansion and upgrades, there is little public information
why SA’s data costs, according to Research
ICT Africa’ (RIA) submission[1] to the portfolio
committee, are placed 16th cheapest out of 47 African countries.
SA banking industry highly concentrated
But if networks make such easy targets, and “grilled” to
politicians hearts’ content, why do the same politicians give the other de facto cartel – how else to describe
members of the club known as The Banking Association South Africa, especially the
“big four”, a free pass?
South Africa’s “world-class” banks and financial sector are
deemed to be one of SA’s jewels in the crown, and the “amorphous market” is
extremely sensitive to any criticism of or questions about it. A recent example was the political and market
fallout after a certain minister made a controversial and baseless statement,
which the president repudiated. However, as I describe below, there has always
been this sensitivity about the sector, including during more stable political times.
Why are banks shown deference bordering on the
religious?
It’s common cause bank charges in South Africa are among the
highest in the world, which they deny of course. Fees (non-interest revenue) are a significant
contributor to profits, soaring to over R53bn
in 2015 from R38bn in 2010 – 41% in five years! But The Banking Association SA’s homepage
states inter alia, “despite being a concentrated sector, it is still very competitive”.
In his paper Market
Structure and Competition in the South African Banking Sector Munacinga
Simatele (2015, Procedia Economic and
Finance, Elsevier) found the industry’s concentration ratio is over
80%. This is in the oligarchy to
monopoly range (100% is a complete monopoly).
Simatele wrote that although the high level of concentration
did not reduce competition, it is “puzzling the industry exhibits relatively
high transactions fees in the larger banks” (the big four or five retail banks). His findings and our daily experience brings
into question the Association’s oxymoronic statement.
The Centre for Competition Regulation and Economic
Development’s (CCRED) Quarterly
Review February 19, 2016 states six banks – Standard Bank, Absa, First
National Bank, Nedbank, Capitec and Investec – account for over 90% of all
retail deposits.
“SA’s retail bank’s market power
is derived from various factors including barriers to entry of small
banks. Barriers to entry and expansion
include regulations and scale economies and financial backing. The rivalry
Capitec provided illustrates the benefits of competition as bank charges came
down substantially.”
CCRED states established retail banks take advantage of
mechanisms like the lack of transparency and complexity of fee structures to
prevent customers from switching. And the
regulatory environment makes it difficult for new entrants and growth of small
and medium-sized retail banks.
A highly regulated environment acts as a “moat” to start-ups
“In
addition to the R250 million required as capital, the Reserve Bank scrutinises the
directors, business plan, products, risk management policies, corporate
governance, internal auditing, external auditors, anti-money laundering
measures and IT capabilities. While these are standard requirements in most countries,
it is significant only one banking licence (Finbond Mutual Bank) has been
issued in South Africa in the last 15 years. Capitec was able to benefit from
accessing the licence held by PSG.
“There
are also prudential laws that include capital adequacy ratios that have to be maintained. This is
a substantial [opportunity] cost given that [such] capital has to be in liquid
assets that bear little return.
“The
balance in regulation between the clear prudential rationale and the chilling effect on competition [emphasis
added] is contested. Easing regulation enhances competition and promotes
efficiency, while strict regulation brings about stability by providing
incentives and protections that restrict businesses strategies in the interests
of preventing risky behaviour. There is no consensus which competitive
structure optimizes both competition (efficiency) and regulation (stability).
However, it is apparent that neither extreme is ideal.
“The
costs of limiting competition are generally less well understood and there is a
danger that the balance is tilted in
favour of protecting the established position of incumbents under the rationale
of prudential requirements [emphasis added]. Other means of guarding
against risky behaviour such as through closer bank supervision should not be
forgotten.”
A
highly regulated environment acts as gatekeeper to an industry, or profession
(that’s another story), for new entrants.
South Africa’s labour laws, including affirmative action and black
economic empowerment and the proposed minimum wage, limits job creation, particularly in
small business, the traditional job creator.
A highly
regulated financial sector is not unique to South Africa. Goldman Sachs CEO Lloyd Blankfein last year stated regulations acts as
a “moat” around their business and can prevent start-ups from challenging
them.
However,
the key difference between mature, developed economies like US and SA is the
concentration of industries here – banks as Simatele describes, and generally
the oligarchic nature of SA’s economy where few very large companies use
barriers to entry, including wage bargaining practices, to prevent new entrants
(see below).
A presentation by Barruch Ben-Zekry (2007) of the University of
California, Berkeley states US banks have a low level of concentration compared
to the rest of the world (19% for the largest). Benefits of concentration mainly relate to the
stability of banks.
“[But]
high concentration is typically not desirable.
It leads to higher prices, lower outputs and smaller consumer surplus. Firms in highly concentrated markets sustain
high profits for long periods [refer SA banks’ R53bn revenue from fees].
“As
in almost any industry, high concentration leads to low levels of competition,
and higher prices [e.g. bank fees] – this
is no exception [emphasis added].
Higher interest rates are often the by-product of high levels of bank
concentration, which is particularly bad for investors as it makes investment
more risky.”
Another
important difference between SA and other markets, including Africa, is the
amount of red tape to start a business.
Despite government purportedly committed to cutting red tape, according to Shoprite Holdings CEO
Whitey Basson, “red
tape is impeding trade and smothering the small business sector at a cost of
hundreds of thousands of jobs”. SA’s
banking sector is no exception.
Gordhan reverses position on high bank charges
Over three years ago I wrote to Gordhan and asked him to relook
at the matter. He did not reply. His reversal[2] on the charges is another
indication of his ineffective, don’t-rock-the-boat
first tenure as finance minister.
However, after his intervention charges escalated, with new
and higher charges instituted almost simultaneously across the board. The introduction of Mzansi accounts –
entry-level “cheap” accounts (they’re not really) – did not hide the fact
charges were increasing by large increments.
Despite this banks and Treasury claimed “progress” had been made.
The public are captive consumers with little choice. Since 1994 the only new bank entering the
market and overcoming high barriers to entry was start-up
Capitec.
The mechanisms banks use (like complex fee structures) are
similar to those cell phone networks use, particularly before Cell C and Telkom
entered the market. Complex
mobile pricing has always been a bone of contention, and before porting
customers were locked into a service provider forever.
High call termination (interconnect) rates resulted in “South
Africa’s cell phone operators ripping off consumers”. In 2012 SA’s prepaid rates were 360% more
expensive than Namibia, and SA was placed 32nd place out of 46
African countries. After Icasa initially
“failed consumers”, from 1
March 2014 termination rates dropped to 20c a minute for calls to networks
that have more than a 20% market share, and introduced an asymmetric rate of
44c a minute for calls to networks with less than 20% market share.
Fundamental limitations of SA’s economy impedes growth
Excessive bank fees and cell phone charges are only two
manifestations of this structural deficiency – they won’t call it that, though
– inherited from the pre-1994, apartheid-protected way of doing business, which
was part of the deal the ANC made at transition.
How do you accumulate a corporate cash pile of R725bn? From oligarchic/monopolistic profits that are
up to 50% more than elsewhere and a reluctance to reinvest after you have taken
all you can from the captive economy and consumers.
In a free, that is, open and competitive market, if fees are
high, either there are economy/industry-wide push-factors on costs, or the
largest firms, for example, the established largest four banks and two cell
phone networks, are behaving as a cartel or in a cartel-like manner. Both instances deserve investigation.
I wrote before of SA’s many economic policy
blunders and lack of understanding of a free market system. In this environment government generally appeases
big business – as big
business appeases government, closing the mutually gratifying circle – accepts
their explanations and is reluctant to get tough (as the Nigeria government did
with MTN, say) even when the national interest and well-being of SA’s 55
million people are at stake.
“Equitable and prosperous” SA not achievable without economic transformation
Putting aside the opportunistic timing of Barclay’s move (“we
know our contribution is not enough to resolve the problem for every student” –
a Band-Aid on a gangrenous wound), Ramos displays the deluded and schizoid
thinking of her ilk – SA politicians and big business.
They allegedly fail to understand (thereby absolving
themselves) that the economic “problems” of SA – the meta-message
of university and social unrest – is the direct result of an economy that
cannot grow and develop into an equitable
and prosperous one because of the deficiencies I’ve been writing
about. Lipton
(edited extract):
“Why is growth so weak? The South African economy is reeling (in
addition to external shocks) from the effects of misfortunes and home-grown
problems, and something that developed with the evolution of the economy. This involves (crucial structural) issues
that are very familiar to you: those included and successful in the advanced
economy – large businesses, banks and unionised workers – maintain entry
barriers against potential competitors – small and medium-sized enterprises and
the unemployed [the excluded]. The
result is a huge part of the labour force is left on the outside, undereducated
and with no opportunities for advancement.
“At
the same time, the private sector – supported
by government regulation – has
created privileged markets working against the interests of consumers. They
also damage competitiveness by keeping business costs high.
“In
the finance sector, there are only a few retail banks in operation, and their
fees are high. Small enterprises have trouble accessing banking services,
though there has been some improvement of late. Barriers to entry into the
industry favour existing institutions.”
Rightly
so South Africa is obsessed with state capture and the well-known and politically connected
family and group of companies allegedly behind it – we talk of nothing else; it’s so
exhausting.
But
the more extensive and insidious economic capture – one that is contributing to
dooming the country to economic and social mediocrity (SA is the most unequal society in the world) – referred to above is
considered, in our upside-down world, by its economically included defenders to
be perfectly legal, ethical, normal and acceptable.
I support aggressive, nonpartisan investigations into mobile
network and bank charges and the market concentration of industries. The Competition Amendment Act that came into
effect on 1 May 2016 that provides for criminal liability of individuals,
including directors and managers, who act in contravention of the Act, is an
overdue step in the right direction.
But SA’s history and the politicisation, including the successful
lobbying by pressure groups, of the economy indicate it may be too little too
late, though. So don’t expect resolution
soon on excessive cell phone and banks charges, and the urgently needed transformation
of the economy.
*
[1]
Endnote: Note RIA and
#DataMustFall – links provided – have different costs for 1GB of data in
Nigeria and Namibia. SA networks all
charge around R150. RIA’s schedule is in
USD, and #DataMustFall priced in rands.
However, RIA lists 1GB of data in SA as $5.30, or R73 at a rate of
exchange of 1 USD/R13.70 in late September 2016 when they submitted their
report. This does not tie in with their
statement data costs about R150. Either
they are referring to contract prices, or it indicates there is still much
confusion about data prices in South Africa.
[2]
Endnote: The CEOs of the six retail banks and The Banking Association SA
are among the 81 who pledged support for Gordhan. The 81 and their companies are largely a
roll-call of SA’s oligarchs – the included, “privileged markets”. Gordhan’s predecessor and his economic
portfolio colleagues are no better than he at fostering a competitive and
pro-growth economy. But if we believe Bruce Whitfield, people are “rooting for Gordhan” not because he is doing a good
job, but because he’s not corrupt!
Previously published in Politicsweb.
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