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Industry 4.0 gives Competition Commission headaches

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Regulatory body the Competition Commission (CompComm) is facing the dilemma of how to regulate technological innovations brought by the fourth industrial revolution (4IR), without stifling innovation.

The body says SA faces the threat that the wave of digital technologies may result in greater global and domestic inequality.

However, it notes the same disruptive technology forces also provide an opportunity to enhance inclusion in markets which have lacked this to date.

“We need to find means to tip the balance towards beneficial participation rather than exclusion,” the commission says.

The Competition Commission is a statutory body constituted in terms of the Competition Act, No 89 of 1998.

It is empowered by the Competition Act to investigate, control and evaluate restrictive business practices, abuse of dominant positions and mergers, in order to achieve equity and efficiency in the South African economy.

The comments come as the 4IR hype has hit SA. Government recently established a commission to develop a national strategy to respond to the 4IR.

The CompComm says there is global concern that the design of competition legislation, as well as other legislation and regulation, is not adapted to some of the challenges of digital markets.

“South Africa shares these concerns, as our own legislative and regulatory systems have often been modelled on those in more mature jurisdictions which are also facing these challenges.”

Start-up acquisitions

On merger control, it says there is concern that significant acquisitions of start-up companies may not trigger the usual thresholds for merger notification given that these are typically turnover-, or asset-based.

For instance, it says, Facebook/WhatsApp (2015) was not notifiable in SA because WhatsApp did not generate any revenue in the country.

“While South Africa does have the power to investigate small mergers even after they have been completed, these do not need to be notified to the authorities and thus this may raise additional challenge in dynamic digital markets.”

According to the commission, concerns have also been raised across a number of sectors about the fact that the current regulatory framework does not apply to new, disruptive technology, which gives these firms an unfair competitive advantage over regulated incumbents.

For instance, it explains, the current regulatory framework for land transport in SA does not specifically cater for e-hailing firms.

Traditional metered taxis have raised the concern that area restrictions and price regulation applied to their business model is not applied to e-hailing firms, placing the traditional model at a competitive disadvantage.

Similar concerns have been raised by broadcasters, where streaming services such as Netflix are not subject to local content requirements and local procurement practices.

A further area of unfair competition relates to the taxation regime that domestic firms are subject to relative to global digital firms, the commission notes.

It points out that while this issue is not necessarily new, as multinational taxation has been the subject of tax reforms and developments in transfer pricing, the digital economy has thrown up new challenges.

This is in particular where firms are located abroad, and the sales transaction occurs online with no physical movement of goods.

This situation also permits digital firms to exploit tax havens to lower their overall tax rate, enabling them to out-compete domestic digital rivals too, the CompComm says.

“These types of challenges indicate that a process of regulatory review is required if South Africa is to catch up with the shifts to the digital age. Some of these reviews are already under way, such as changes to tax laws as well as the National Land Transport Act,” it notes.

“While the answer in some cases may be to bring the digital firms under the same regulatory regime (eg, in taxation), in other cases, the shifts have revealed the inadequacy of the current regulatory regime and the need to move to a relaxation in regulation (eg, metered taxis). However, this review needs to be a thoughtful process and one which should not be hastily undertaken.”

Behind the curve

Katherine Woodhouse, candidate attorney at Tabacks, comments that the advent of 4IR poses a dilemma for a number of regulatory bodies in SA and abroad.

“Profanity to some and the embodiment of progress to others, the fourth industrial revolution is making its presence known in regulatory spheres, with the question now being faced by the regulatory bodies being the extent to which they should be regulating the fourth industrial revolution and the companies and markets that come from it.”

On regulating the tech environment, Woodhouse says the CompComm is arguably behind the curve.

She points out that technology changes quickly and regulators need to ensure they keep up.

“But, encouragingly, the space in which technology-related regulation currently sits, fosters innovation. What the Competition Commission does need to address is the position of the established tech-companies which, depending on leadership, have the potential to either assist tech start-ups or squash them.

“The notion of creating a regulatory environment which fosters communal economic growth in the technology sector is one that seems to appeal to the Competition Commission. However, whether they will be able to implement regulations that see competitors working together in such a manner remains to be seen.”

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