Competition-for-the-Market Approaches

1. Introduction

Competition-for-the-market is a regulatory approach used where ordinary competition within a market is difficult or inefficient. This is particularly important in electricity, water, transport, telecommunications and other network industries.

In electricity, transmission and distribution networks often have natural-monopoly characteristics. Building several competing electricity grids over the same geographical area may be wasteful and expensive. Instead of allowing many companies to build duplicate networks, the government or regulator can organise a competitive process to determine which company receives the right to provide the service or operate the infrastructure.

Thus, companies compete for the right to serve the market, rather than competing continuously inside the market.

2. Competition in the Market vs Competition for the Market

There is an important distinction.

Competition in the market means several suppliers continuously compete for customers. For example, different electricity retailers may compete through prices and service quality.

Competition for the market occurs when a regulator selects one supplier, or a limited number of suppliers, through a tender, concession or procurement process.

The successful company may then receive an exclusive or limited-term operating right.

This model can be useful where duplication of infrastructure would be inefficient.

3. Application to Electricity

Electricity networks require major investment in:

transmission lines;

substations;

distribution networks;

transformers;

smart meters;

grid-management systems; and

other network infrastructure.

Competition-for-the-market can allow private companies or public entities to compete for construction, operation or management contracts.

For example, a government could invite companies to compete for a long-term contract to construct and operate a particular electricity network. Bidders could compete on price, technical quality, reliability, investment and service standards.

4. Main Advantages

A. Lower Costs

Competitive tendering can encourage bidders to offer efficient prices because several companies compete for the contract.

B. Better Quality

Tender conditions can require minimum standards for reliability, maintenance, safety and customer service.

C. Investment

A long-term concession may provide sufficient certainty for companies to invest in expensive infrastructure.

D. Reduced Duplication

Instead of building several competing electricity networks, one regulated network can be selected through a competitive process.

E. Innovation

Tender documents can encourage innovative technologies such as smart grids, storage and digital monitoring.

5. Main Competition Risks

Competition-for-the-market does not automatically guarantee good competition.

Bid rigging can occur if companies secretly agree which bidder will win.

Unrealistic bids may occur when a company submits an artificially low bid and later seeks higher prices or contract changes.

Long-term contracts may prevent new competitors from entering for many years.

Regulatory capture may arise if the winning company develops excessive influence over the regulator.

There is also a risk that the winning operator may exploit its exclusive position after receiving the contract.

Therefore, tender design, monitoring and contract enforcement are extremely important.

6. South African Legal Framework

Section 217 of the South African Constitution requires organs of state to procure goods and services through a system that is fair, equitable, transparent, competitive and cost-effective.

The Competition Act 89 of 1998 also applies where procurement arrangements involve prohibited agreements, collusive tendering, abuse of dominance or other anti-competitive conduct.

In electricity, these principles operate together with electricity-sector regulation and procurement rules.

7. Important Case Laws

AllPay Consolidated Investment Holdings v SASSA

In AllPay Consolidated Investment Holdings v SASSA, the Constitutional Court emphasised the importance of proper procurement procedures and constitutional procurement principles.

Although the case concerned social grants rather than electricity, it provides an important legal foundation for competitive tendering. A competition-for-the-market process must follow its prescribed rules and must remain fair and transparent.

Competition Commission v Waco Africa

Competition Commission v Waco Africa (Pty) Ltd and Others concerned collusive tendering associated with Eskom procurement.

The case demonstrates the danger of companies coordinating their bids instead of genuinely competing. Competition-for-the-market depends on independent bidding, because the entire competitive process may fail if bidders secretly coordinate prices or contracts.

Competition Commission v Senwes

In Competition Commission v Senwes Ltd, the Constitutional Court examined market power and vertical relationships involving storage infrastructure.

Although it was not an electricity-concession case, it is useful by analogy because it demonstrates that control over important infrastructure can affect competition in related markets.

Competition Commission v Telkom

The Telkom litigation provides another useful infrastructure analogy. The case concerned exclusionary conduct associated with control over telecommunications infrastructure.

Its broader significance is that where one operator receives control over essential infrastructure, regulatory safeguards may be required to prevent that control from being used to restrict competitors.

8. Requirements for Effective Competition-for-the-Market

A strong system should include:

open and transparent tender procedures;

clear technical specifications;

independent evaluation;

protection against collusive bidding;

reasonable contract duration;

transparent pricing rules;

performance and reliability standards;

penalties for non-performance;

periodic regulatory review; and

mechanisms for replacing an underperforming operator.

The objective is to ensure that competition occurs before the concession is awarded and that regulation continues after the winner is selected.

9. Conclusion

Competition-for-the-market is particularly useful in electricity sectors where natural-monopoly infrastructure makes continuous infrastructure competition impractical. Instead of duplicating networks, suppliers compete for the right to construct, operate or manage the network.

South African procurement principles and cases such as AllPay, Waco Africa, Senwes and Telkom demonstrate the importance of fair tendering, independent competition, infrastructure access and protection against anti-competitive conduct.

The success of this approach ultimately depends on well-designed tenders, genuine competition between bidders, transparent contracts and strong regulatory supervision.