The Moorish Wanderer

Monopolies That do no Good to Morocco

Posted in Tiny bit of Politics by Zouhair ABH on April 23, 2011

Moroccan capitalism is quite strange: the rule of law is (usually) ignored, politics matters more than economics, and the invisible hand Adam Smith has been so keen to promote is, in a Moroccan context, holding a sturdy truncheon beating up 80%  of the Moroccan households. And yet, it fails to improve the lives of these 80% the same way it does to the 10-20%. Something is going terribly wrong.

Does it sound extreme? Well, not so much when one considers the economic structure of our private sector: private businesses that contribute most to the economy are not small businesses, nor do they innovate one way or the other. Instead, they are a curious mix of direct inheritance of colonial influence, i.e. large monopolistic companies in vital sectors, and hastily privatized public companies (many of whom were nationalized French property after 1956) abusing their dominant position (and benefiting from close political connections). Let us consider the following numbers to buttress this claim: following each company’s financial statements, the top 10 businesses (following their respective non-consolidated Net Income and EBITDA) in Morocco contribute to 10% of private Gross National Income in 2009. In contrast, they contribute only 3.65% of total private GDP (that is 3.17% of total GDP in 2009).

ISIN Company Private GNI Private GDP
MA0000011488 ITISSALAT AL-MAGHRIB 3,79% 1,57%
MA0000011926 ATTIJARIWAFA BANK 2,19% 0,76%
MA0000011512 DOUJA PROM ADDOHA 1,27% 0,13%
MA0000012031 LESIEUR CRISTAL 0,67% 0,05%
MA0000010597 LAFARGE CIMENTS 0,64% 0,31%
MA0000011835 BMCE BANK 0,61% 0,11%
MA0000011058 MANAGEM 0,29% 0,00%
MA0000011884 BCP 0,27% 0,19%
MA0000011850 DELTA HOLDING S.A 0,21% 0,04%
MA0000010969 AUTO HALL 0,06% 0,19%
ONA (Unconsolidated) 0,02% 0,30%

© Moorish Wanderer

This marked discrepancy between generated income and actual contribution to wealth creation is typical in monopolistic economies; even though there is no need to dwell on the sub-optimality of monopolies, it is worth noting that theory and evidence do confirm the salient characteristics of such market structure: monopolist agents enjoy high profits (or higher compared to those they would expect in a more competitive economy) but their own position compromises a number of exchanges, thus destroying value in the long run. This rather simple argument should not be disparaged, as it strikes a blow to the myth surrounding large companies in Morocco: their economic model does not serve the common consumer, nor does the economy benefit from in the way it is being advertised.

In fact, the argument goes beyond the criticism of private monopolies: it also claims that they do no good to the economy – either because their destroy value, or when they do create it, it is rather distributed in dividends to an already wealthy elite rather than invested to the greater (and mutually beneficial) good of the whole economy: short-sightedness, greed, rapaciousness and corruption are, unfortunately, the trademark of Moroccan capitalism. But then again, are we really in a monopolistic economy? Indeed, the top ten companies contribute a relatively substantial amount to the national economy, but that might just be due to their intrinsic structure; They might be, in their respective sectors, the only companies large enough to capture large scores of their markets. But such hypothesis also assume that in their respective markets too, these companies are monopolies, or shall we say, in an mitigated version of colluding oligopolies; Fortunately, there are some interesting tools designed to determine precisely whether these companies, and some of their competitors are indeed monopolies. Once the claim is verified, the second argument, that of the discriminating dividend policy should conclude to the need of breaking up these monopolies, and get competition going on, to the economy’s and the consumers’ benefit.

We shall put aside the Lerner Index, mainly because it is such a precise tool that we cannot put it to use; this index assumes a perfect knowledge of consumer elasticity, an assumption challenged by the multiple pricing these companies have on their respective sets of products, and by the difficulty to convene a clear pricing rule. Subsequently, we shall use another tool -that proved reliable as far as The United States Federal anti-trust authorities like the DoJ and the FTC use it to measure market concentration; the Herfindahl Index is going to be the starting point of our investigation.

The index is relatively simple to build; it basically sums the square of each company’s market share, thus giving additional weight to the larger companies; Consider IAM and its competitors as an example; Following the regulatory body ANRT’s figures, on all IT sub-sectors, the three main operators (or shall we say, the only three operators) have it all: they can price the market by discriminating the low and high types, they charge the highest possible fees (and accordingly, capture all consumer surplus) and their profits and income levels defy all senses of economic rationality. Regarding the landlines segment, this ANRT study says that:

Sur la téléphonie Fixe : Malgré des tarifs en moyenne 50% plus élevés que ceux pratiqués en France, la dépense par salarié au Maroc (2 932DHm/an/salarié) reste comparable à un pays comme la France (2 500DHm/an/salarié).” (p. 15)

To put things in perspective, the European Union’s standards consider the French fee levels in landlines (and more generally speaking, in IT) as too high; The Moroccan consumer (whether business or private) is, in effect, paying 50% more than possibly the most expansive market in the EU or the OECD only shows how strong market power is in the telecommunications sector. As a matter of fact, a group of bloggers did put on-line a collective post denouncing the abusive charged fees in mobile lines and internet access, let alone the mediocre quality of provided services. ANRT even recognizes that, over some segments, there is oligopoly (with very high concentration); where our respective analysis diverge, is that Internet Service Providers market is considered ‘open’ perhaps because of the more diverse set of offers (but seems to overlook the supply concentration nonetheless).

We observe the following market structure for all 4 main telecommunications sector: 3G, land-line, mobile line and internet. We retain the number of subscribers so as to measure the impact of concentration on consumers’ welfare:

ITSPs 3G Mobile Land Internet
IAM

44%

50%

34%

57%

Meditel

21%

33%

5%

16%

Wana/Inwi

34%

17%

66%

26%

 HHI Index    0.359            0.388      0.547       0.426  

 © Moorish Wanderer

(March 2011 Figures) We note the unusually high concentration in the HHI index (a 0.25 is usually considered a fairly high concentration index level) and that is not mainly due to the number of providers (indeed, with three competitors, the lowest HHI level would be 0.33, and all sub-sectors are way above that threshold. This also contradicts even the ANRT claim about ISP market to be fairly competitive. Before I conclude on that particular sector, let us consider the kind of concentration each sector embodies: land and internet sectors are even more concentrated than 3G and Mobile; Save for infrastructure issues, the main reason for this peculiarity is the concentration of low-types consumers. I should perhaps delineate this distinction between Low types and High types; it has to do with each consumer’s valuation; A Moroccan consumer subscribing to a mobile service is usually a high-valuation type, while pre-paid users place a lower valuation (due to a lower income effect) on the same service; I suspect marketing departments at IAM or Meditel (or even Wana/Inwi) understood that, and so charge high fees to the low types (thus the weird and discriminating fee structures)

I posted some months ago on the market structure of banking sector too; Again, the claim can be re-verified: though Banking HHI is lower (0.23) compared to the IT sector, it is still too high for a real competitive market (even more so on some banking segments, specifically the real-estate loans and their returns) and enable us to draw similar conclusions on the banking market structure: too concentrated, an oligopoly where each company prices like a monopolist.

The trouble with this oligopolistic structure (and both examples apply with similar outcomes to the retail distribution and consumption sectors) is that is sucks up nearly all consumer surplus to the monopolies’ own benefits (typically, this surplus transfer is simply a high price, high enough to dwarf any consumer feeling that any utility from consuming that good. The official argument -regarding this economic structure- is that these companies need to accumulate profit. They need to save cash, maximize their profit, expand and grow, so as to invest their cash and income in new plants, new infrastructure, expand their productive capacities, and thus, create jobs and expand, in turns, the consumers’ revenues. This tickle-down theory does not apply in our case. Let us consider the level of dividend distributed to the shareholders, and more importantly, the concentration and characteristics of these shareholders. The results are the last bullet argument that monopolies, in Morocco transfer value from the working people to a few, effete elite.

Between 2004 and 2010, Ittisalat Al Maghrib distributed about 91.66% of its net income to its shareholders. Indeed, the Moroccan government owns 30% shares – which allows for a MAD 3.1 Billion revenue in 2010, but also allows Vivendi to take back a dividend of MAD 4.6 Billion, and a needless drain on Morocco’s foreign reserves. The bottom line is that the remaining shareholders owning 17% have little to say over management decision or future investment (The Moroccan government is most likely to be in the same position in their relationship with Vivendi group or indeed the top-management officers).

Addoha, the behemoth real estate developer has an even more concentrated shareholding: tycoon Anas Sefrioui owns 56% of the firm, while the company itself distributes 40% of its net income. The real estate sector is quite special when compared to IT or banking, especially with respect to the booming industry in Morocco (a boom that might, if not already so, develop into a bubble) that explains how Addoha manages to create and 25.41% operational return on sales (20.43% including inventory turnover)

Revenue distribution in Morocco rather confirms the earlier theory about wealth concentration: in 1985, 10% wealthiest households owned 31.77% of GNI. In 2007, 33% of the corresponding GNI, even though GNI grew 4 times, 5 times when adjusted for inflation between 1985 and 2007; The top 10% outranges the lowest 10% revenues by a factor of 1 to 25. This concentration goes even higher when percentiles are computed; Even with the conservative estimate of a uniform distribution over the 10% wealthiest, the revenue gap is too high, and clearly does not explain how the total wealth creation contributed to more concentration in revenues (and not, as the story goes, bridge the income gap).

In these circumstances, any serious policy claiming to deal with poverty or income dispersion has to proceed by double tap: first by putting together a direct intervention in revenue distribution by means of progressive fiscal policy, and second by taking on the monopoly powers, thus insuring a fairer distribution of, and an increased size of the pie.

Tagged with: ,

4 Responses

Subscribe to comments with RSS.

  1. MoMo said, on April 27, 2011 at 02:22

    Great article. I have a question: Is there a way to detect if there is a collusion in a oligopoly market? I mean just by reviewing financial statements and public information.

    • Zouhair Baghough said, on April 27, 2011 at 10:47

      Hi

      It’s always possible to detect collusion, even if company bosses do not actually meet and discuss cooperative price setting; one competitor could look at price levels and adapt accordingly. There is collusion but it is not wilful. Operational Margin in the branch or the average fee charge are usually reliable indicators to judge whether a collusion is going on.

      I shouldn’t wonder, Moroccan capitalism is so opaque with its croynism and family ties. A real mafia!

      thanks for stopping by !

  2. fawzi said, on April 27, 2011 at 14:22

    You omitted one monopoly (the worst actually): The one on religion.

    • Zouhair Baghough said, on April 27, 2011 at 21:00

      yeah. The Habous is one opaque economic sector; billions that are not used for the greater glory of God or to the benefit of the meek…


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: