Dr. Davies and Mr. Tolo and honourable Members of Parliament, I am here today to present to you the response of the dti to issues that were raised at the joint public hearing on the Liquor Bill, convened on the 13^th and 14^th May 2003. I would like to take this opportunity to respond to some of the concerns raised, to highlight the issues that the dti wishes to take on board, but also to clarify misconceptions about the Bill. I would also like to thank all parties that made submission at the Joint Hearings. Some very valuable points of a more technical nature have been raised, which will assist the dti in producing a better law.

The main areas of contention appear to be the three tier system, the treatment of the sorghum beer industry, concerns about some of the public interest issues, their phrasing and practical implications, as well as the ability of the Bill to effectively deal with matters of concern at the retail level, particularly the formalisation of the still largely illegal shebeen industry.

In addressing these issues, it is important to remind ourselves of the primary objectives of the Liquor policy, which are the joint responsibility of national and provincial government. The two primary objectives are to restructure the liquor industry and to address the socio-economic costs of alcohol abuse. This included, amongst others, the introduction of a simplified procedure for entry into the liquor trade; the promotion of participation by communities and local government in the establishment and control of liquor outlets; the provision for severe and enforceable penal provisions for transgressors; and the promotion of public education programmes and social responsibility programmes.

As the Committee reminded various industry players at the hearings, the Liquor Bill seeks to regulate manufacture, distribution and retail of a potentially harmful substance, namely liquor, with a view to minimizing its negative social effects. This must be the starting point of any discussion. I am not aware of any jurisdiction around the world that does not regulate the liquor industry for this very reason. And we are all familiar with the impact of the abuse and excessive consumption of liquor on our communities.

For this reason, the heart of the Bill deals with public interest prohibitions, which do not seek to prevent anyone from enjoying a drink, but rather to limit its undesirable effects, particularly on youth and vulnerable groups. I am disturbed by the apparent outrage expressed by industry players, claiming that government is reverting to paternalistic apartheid policies that treated alcohol consumption as immoral. Honourable committee members, the term "paternalistic" is a euphemism for the policy approach adopted by apartheid government and what it set out to achieve. Let me remind the industry what that the apartheid government used liquor as an instrument of social control, the exclusion of blacks from participation in the industry and even from consuming liquor, and as a means of exploitation, enticing people into employment. This, honourable members, is the legacy we are left with. And this is the history of the liquor industry. I have not heard any member of the industry acknowledge any responsibility for the past or for the present, the ravages of excessive alcohol consumption on our society, a society with one the highest incidences of fetal alcohol syndrome.

This is our second attempt to pass this legislation. In the meantime, it is business as usual, with all its social consequences. Honourable members, have any of the industry representatives that made presentations to you last week convinced you that they have dealt with their own history and with the part they played in the developmental challenges that we, as the State, face today? It is the role of the State to protect the public and the vulnerable. The cost of abuse of liquor has been and remains immense to society and to the generations of people who bear the scars of abuse. The State makes no apology for dealing with issues of equity and development in this Bill or in any other area.

I would like to thank the Committee and civil society groups for constantly reminding us of the obligations of the state in terms of addressing the past and for dealing with the pressing social issues that we face in our communities. Allow me to take this opportunity to deal with some of the issues you raised in greater detail.

Concerns were expressed about the practicality of setting minimum distances between schools and retailers. We would like to propose that rather than specifying a minimum distance, a provision be added to norms and standards to require a provincial licensing authority to consider the proximity of the licensee to schools and churches in adjudicating on a license application.

Another concern was the prohibition relating to employment was not as extensive as in the Liquor Act, 1998. A further comment was also received from the Law Society. In view of the above, the dti is proposing the rephrasing of section 8(2) to approximate the following: "An employer may not supply liquor to an employee for his or her own consumption as wages or remuneration, as an inducement to employment or as a supplement thereto or deduct from wages or remuneration the cost of liquor supplied or purchased on behalf of an employee."

We are currently still reviewing options to refine the definition of concoctions. In addition, we have noted the concerns raised about the prohibition on liquor in sports grounds and intend to change the provision to reflect that alcohol may be brought into the sports ground and consumed on it if a license has been obtained.

The issue raised in almost all submissions at the hearings was the three-tier system. Let me restate the rationale for the introduction of vertical separation between the three tiers. The primary reason was to ensure proper control over the industry at all levels. A second reason was to deal with the persistent and historical anti-competitive conduct by dominant industry players. The third reason was to promote black economic empowerment, in view of the political history of the sector and the policies of the previous government with regard to the involvement of the historically disadvantaged in the industry.

In order to arrive at an understanding for the rationale for the proposed three-tier system, we must review the history of the South African liquor industry, and its major players. Today, liquor manufacturing remains a highly concentrated industry tier. SAB still controls 96.6% of the South African beer market, while other industry players, such as Distell, have significant market shares.

The current high levels of concentration have their roots in the policies adopted by the apartheid government. In 1982, the previous government created monopolies by carving the industry into two major exclusive sectors for the benefit of specific entities. SAB was granted a 100% beer monopoly, while Cape Wine and Spirits Institute was granted the hard liquor monopoly. Twenty years later, the market structure that was artificially created in the 1980s and the respective market shares have hardly changed. SAB would argue that their dominance is the result of their efficiency and ability to serve their customers. However, this contention has never been tested, as there is no other significant player in the market nor have conditions ever existed prior to the provisions contemplated in this bill to allow for new market entrants that will ensure a level playing field and greater levels of competition.

In yesterday’s business day there was an assertion that there are indeed monopolies in the South African Liquor industry. It then went on to describe the salient features of a benevolent monopolist:

• Their products are usually of good quality;
• They control the whole supply chain from production through what are often invisible wholesale structures, directly to the public or, when the product type and market require it, through small retailers;
• There is frequently a good product differentiation achieved by the creation of what looks like strong brand competition and the purpose of this process (some call it charade) is to entrench the monopoly’s dominance by imposing a cluster of products, so leaving little room for competition;
• Large sums are devoted to marketing and to enhancing the public image of the monopolist;
• Its approach to society appears benign and highly visible, achieved by sponsoring or subsidizing socially acceptable activities (sport, health projects, high-profile emergency relief programmes);
• It will very often enjoy excellent relations with government or with specific departments, and it appears to behave like a model corporate citizen;
• It is moderate with its price increases which it usually keeps below the inflation rate unless extraordinary circumstances dictate differently, and it makes sure consumers know how generous it is;
• It is a big employer and usually enjoys excellent relations with its people – this promotes strong loyalty;
• It is often leading edge on issues such as progressive employment policies, social programmes et cetera;
• It is efficient and its client support service is usually of excellent quality.

In charaterising the benevolent monopolist, this article raises a critical issue, namely the power of a distribution network, especially in keeping out potential competition at the manufacturing level. In the case of the liquor industry, distribution capacity has contributed to maintaining dominance at the manufacturing level, by foreclosing the market to potential new entrants. In this context, the three-tier system seeks to promote the entry of new participants, at all levels of the industry, but also at the manufacturing level, where the greatest concentration currently exists.

Despite assertions to the contrary by some of the largest players in the industry, the Minister of Trade and Industry has been pragmatic, recognizing that requiring the wholesale divestiture of distribution networks and other assets may not be in the interest of the industry and could stifle market innovation at the expense of efficiency and consumers in the longer term. For this reason, a flexible three-tier system was adopted, which imposed a vertical separation between the three tiers in respect of ownership and the sale and purchase of liquor, but which allowed the Minister to grant a special dispensation to manufacturers with terms and conditions as part of their registration. This has, however, been opposed by those industry players who stand to benefit from such discretion. At this point, it would also merit to mention that the sorghum beer industry would similarly benefit from Ministerial discretion. The Minister could, upon application, consider the specific characteristics of the product and allow the industry to directly distribute. Thus, no special dispensation for the sorghum beer is required.

What also emerged from the hearings last week were some of the misconceptions that exist about the respective roles of empowerment and competition issues in BEE legislation, the Competition Act and the Liquor Bill. It was stated in a number of submissions that empowerment issues belong only in BEE legislation and that competition issues must be dealt with exclusively in competition law. The underlying question here relates to the relationship between framework and industry-specific legislation.

All countries around the world have economy-wide, framework legislation, such as intellectual property laws, company law, competition law and consumer law that apply equally across all industries and sectors of the economy. Competition law and the BEE Bill fall in this category.

However, all governments impose additional regulation in cases of specific industries, which warrant such special treatment. Examples abound, in South Africa and elsewhere, and include telecommunications, broadcasting, gambling, lotteries, credit, insurance, banking and liquor sectors. In addition, the BEE policy and Bill specifically require that BEE factors form part of the consideration in licenses. The peculiar South African history, in particular in the area of liquor, means that South Africa has a very incidence of alcohol abuse, with all the concomitant social problems, and has a very concentrated industry with a history of anti-competitive conduct. In regulating the liquor industry, we must therefore consider the specific features of the industry and regulate appropriately.

3. Retail Licensing and Norms and Standards

In order to ensure the effective control of liquor, it is important that the retail situation is addressed and that the public interest prohibitions can be enforced at the retail level. However, the Constitutional Court was very clear about the role of national government in retail licensing, an exclusive provincial jurisdiction.

Nevertheless, national government can set norms and standards to ensure economic unity and the harmonization of legislation. It has become clear from the hearings that there is a need to further strengthen the sections of the Bill that deal with norms and standards. In addition, national government will continue its engagements with provincial government to ensure that the objectives of ease of entry and the inclusion of illegal operators are met.

4. Consultation

The Liquor Bill, 2003 does not represent a departure from the policy contained in the 1998 Liquor Bill, nor does it represent a departure from the agreement that was reached between government and industry, but also, more importantly, with other stakeholders, such as churches, public health specialists, NGOs and other civic institutions. All agreed that this industry needed to be regulated and that each transaction in the supply chain would be subject to regulation. The 1998 Bill was subject to a Constitutional court judgement, which the 2003 Bill sought to address in terms of its formulation. Thus the only issues it sought to address were the respective roles of national and provincial government. For this reason, the dti consulted only with provincial government on the 2003 Bill to reach agreement on areas of mutual responsibility. A consequence of this agreement was an understanding that all discussion about public interest issues and about the facilitation of entry at the retail level would be subject to consultation by provincial government. Moreover, it was agreed that a specific role would be sought for local government, but that again this dealt with by provincial government.

However, we all agree that public interest issues need to be a thread throughout this legislation and a challenge lies before this Committee and the dti to find innovative ways of ensuring greater participation by both provincial government and civic organizations in future hearings. This will ensure that the unity of purpose as contained in the objectives of liquor regulation in South Africa is consistent.

Government recognizes that in the liquor industry we have a national asset that has matured, has penetrated into foreign markets and has developed into a global industry. However, success in the global market must be balanced with a competitive and socially responsible industry that recognizes the particular challenges that South Africa faces. The conduct of an international player in the domestic market will surely affect its international reputation. This places an additional responsibility on domestic management to conduct itself in a manner that is appropriate both to meet its domestic obligations and to maintain its international standing.

Negotiations with the liquor industry on the three-tier system go as far back as 1995. The government as part of its commitment to consultation has always considered it necessary to be as inclusive as possible in its decision-making processes. In the past two weeks, honourable members, we have had the opportunity to listen to the points raised by industry. Notwithstanding the amount of time it has taken to reach this point in the passage of Liquor legislation, the dti believes that it appropriate to take the issues raised under consideration and to yet again conduct further discussions with industry. However, this Bill is concerned with matters that go well beyond the issues raised of industry. The opportunity for further discussion does not in any way prejudice government’s prerogative to make policy. Government also remains committed to the objectives of the three-tier system and the structure of the Bill. We therefore request the Committee to provide dti with additional time to refine the proposals contained in the 2003 Liquor Bill and to revert back to the Committee at an appropriate time to ensure that this legislation is passed during this year.

I wish to thank the Committees, both the Portfolio Committee and the Select Committee, for hosting these joint hearings and all the participants who made submissions.