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Africa’s free trade pact could deal blow to cartels

By Macharia Kamau | March 10th 2020

President Uhuru Kenyatta signs three agreements, including the Kigali Declaration for the launch of the African Continental Free Trade Area during the10th Extraordinary session of the African Union Heads of State and Government Summit.

Local regulators have for long grappled with firms that have grown too big for oversight and whose success has at times been detrimental to consumers.

Some have tended to abuse their dominance by locking out new entrants while dictating prices and other industry issues for consumers who do not have alternatives.

Cartels, too, some aided by monopolies and government agencies, have proved a hard nut to crack for regulators, not just locally but regionally.

A recent study by the World Bank blamed the cartels and monopolistic behaviour by large firms dealing in food as being directly responsible for keeping more than 270,000 people in absolute poverty.

This is just one industry, and the numbers could rise sharply when anti-competitive behaviour is evaluated in other sectors.

Opening markets

Successful implementation of the Africa Continental Free Trade Area (AfCFTA) could deal a major blow to the cartels and monopolies that have resisted regulators in the past, according to a report by the United Nations Economic Commission for Africa (Uneca) and TradeMark East Africa (TMEA).

The report notes that AfCFTA’s opening up of markets will enable other firms from across the borders to bring in formidable competition to monopolies or duopolies that have a firm hold on East Africa’s economies.

The report published last week noted that East Africans stand to be major beneficiaries of the break-up of anti-competitive behaviour perfected by local firms and multinationals.

Such firms, it noted, have had a stranglehold on key industries and markets to the extent that they solely determine prices of products while fighting off competitors.

Cartels and monopolies usually fight back to frustrate efforts to make organisations such as the AfCFTA successful and it is not unthinkable that they can frustrate the same governments that will play critical roles in implementing the treaty.

“Ultimately, however, it is the citizens of East Africa who will be the principal beneficiaries of the AfCFTA,” said the Uneca and TMEA report.

“They (East Africans) currently suffer the effects of anti-competitive practices… (there are) several instances of anti-competitive behaviour in sectors such as telecommunications, beer, cement and foodstuff.”

“Through the reduction of import prices, the harmonisation of competition laws and the strengthening of regulatory rules, the AfCFTA can improve the protection of consumers and achieve a major reduction in the prices of common consumer goods and services,” it said.

The report noted that cement prices are 183 per cent higher, on average, than global prices, with consumers paying Sh250 billion more every year for the product compared to other regions due to a lack of competition.

It noted that a single operator holds over half the market share in both the telecommunications and transport sectors.

Other industries affected by anti-competitive behaviour include the beer sub-sector, which is controlled by four multinational players across Africa. They could “collude across national and regional markets to control both the market for the final product and the markets for agricultural inputs”.

The scenarios are all too familiar for Kenyans, who at times have to contend with one strong player across the industries who dictates prices as well as influences industry issues, including policy through strong lobbying aided by its deep purse.

“Certainly, higher price mark-ups have consistently been observed in African sectors with a high degree of market concentration (oligopolies), a low elasticity of demand (because of the lack of substitutes), and a prevalence of anti-competitive practices (cartels and collusive agreements),” said the report.

“By opening up domestic markets to more competition through trade, the AfCFTA may go some way to addressing these concerns.” The report warns that protectionist measures meant to cushion local industries and jobs will frustrate regional blocks across Africa.

Among the areas of action will be implementation of competition laws as well as putting in place necessary laws to support local implementation of AfCFTA.

“The benefits from AfCFTA may also be diminished in the presence of monopolies, oligopolies and cartels. It is, therefore, important that the AfCFTA Protocol on Competition is effective and ensures strong cooperation between national and regional authorities,” said the report.

The challenge will be addressing the diversity of competition regimes across African countries.

In the East Africa region, only a few countries,  such as Kenya and Tanzania, have both competition laws and operational competition authorities.

Other countries have enacted competition laws but have not yet established a competition authority… (others) do not have any competition legislation at all.

In a 2016 report, the World Bank noted that tackling anti-competitive behaviour could bring about a 10 per cent reduction in prices of staples - lifting 270,000 people in Kenya above the poverty line.

It said Kenyan laws, and those of other African jurisdictions, are too lenient on players who exhibit anti-competitive and cartel-like behaviour.

“Despite their harm, fines allowed and imposed for cartels in Africa are not high enough to deter their formation. In Kenya, the maximum fine possible is approximately $100,000 (Sh10 million), and in the East African Community, it is Sh1 million ($10,000),” said the World Bank.

“Although the maximum fine imposed for cartels in South Africa is Sh11.6 billion on average, fines are only nine per cent of excess profits compared to 26 per cent in the European Union. Practical implementation of key anti-cartel enforcement  tools needs to be strengthened as well.”

Take advantage

African countries are set to start trading within AfCFTA in July. Currently, 54 out of the 55 African Union member States have signed up for AfCFTA, promising to create the single largest trade bloc in the world with 1.3 billion people and a Sh250 trillion market.

Kenya is stepping up production of clothing and food processing to take advantage of the huge market.

“What we have done is to develop a national export strategy, which has identified products that we can competitively produce in Kenya and the different markets for those goods and services. Our focus areas, especially in manufacturing is textiles and apparels; a second area is agro-processing,” said Trade Cabinet Secretary Betty Maina.

“We are also looking at improving logistics. It is one thing to produce goods in one part of the country but if you cannot get them to the market because of lack of infrastructure, you will lose that market.”

Local firms are also gearing up to grow their presence in the region.

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