Businesses going after South Africa’s R900 billion economy should be worried
The Competition Commission has published a report on South Africa’s rural and township economy, which signals the government’s increasing focus on the sector and potential regulations to come.
The report provides an overview of the economic dynamics of the country’s informal sector to inform future policy and regulation.
South Africa’s rural and township economy is estimated at R900 billion, largely informal and untaxed, presenting huge opportunities for any business that can tap into it.
However, the commission’s report identified several barriers to entry for small businesses in the sector, sowing the seeds of potential regulatory interventions. This includes possible enforcement action.
Werksmans Attorneys’ head of regulatory, Ahmore Burger-Smidt, said the report could have far-reaching consequences for any business working in rural economies.
She said the commission’s report is “explicitly forward-looking” and could be used as a basis for future policy or enforcement shifts.
“For any organisation with a presence in or connection to township and rural markets, the report warrants careful attention,” she said.
“The report provides the commission with a rich empirical foundation, a clear analytical framework, and an evident appetite for follow-through.”
She outlined that one of the commission’s first priorities is to address the administrative red tape that prevents many businesses from starting in rural economies.
The report argued that these administrative barriers prevent many small businesses from becoming legitimate, providing a competitive advantage to large companies with industry experience.
Without following the correct administrative and regulatory steps, small businesses remain in the informal sector.
The informal sector encompasses businesses that are not formally registered and often avoid paying taxes or complying with industry standards.
South Africa’s government has brought in several initiatives in the past to streamline the process of formally registering businesses, but the commission argues that more needs to be done.
Burger-Smidt said the Competition Commission intends to engage with several stakeholders, including municipalities, the South African Local Government Association, and the Department of Small Business Development.
These engagements would centre around “identifying the regulatory burdens which can be simplified, standardised or better supported.”
A warning for big businesses
The Competition Commission’s report found that small businesses in township economies face severe challenges in procuring their retail goods.
While larger businesses and national chains have sophisticated logistics networks to keep wholesale costs low, small businesses in townships or rural areas lack access to wholesalers.
This means that small businesses face higher costs, less reliable supply, and a weaker bargaining position than their larger counterparts.
The result from this procurement imbalance could be an anti-competitive business environment, which favours large retail chains.
The report found these procurement challenges in several industries, including agriculture, hospitality, and retail services.
The high cost of goods for small businesses also leads them to make smaller purchases, further weakening their bargaining power, the Competition Commission’s report found.
“These procurement asymmetries translate into higher procurement costs for township and rural businesses and narrower product ranges for the consumers who shop at smaller outlets,” Burger-Smidt said.
She said these findings are far more than theoretical and could be the basis for enforcement action or policy changes.
“The report does not shy away from the possibility of enforcement action,” she said.
“It identifies specific categories of conduct, exclusionary access to retail channels, discriminatory procurement conditions, and supply arrangements that disadvantage smaller firms, that may form the basis for market conduct investigations.”
“The Commission has now signalled that it would be looking into prioritising procurement and upstream access and even making provision for competition conditions aimed at addressing service delivery and infrastructure.”
While the Competition Commission has not explicitly stated its next move, Burger-Smidt said businesses should be prepared for action.
“Whether the practical impact will be felt primarily through enforcement, through policy reform, or through a combination of both, the direction of travel is unmistakable,” she said.
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