Parliamentary Hearings, Portfolio Committee on Trade & Industry

Makro’s Views on the Liquor Bill now before Parliament

Summary of our evidence
Section 27 of the Bill imposes an inappropriate and contentious three-tier structure, arbitrarily and selectively, upon the liquor industry. It has the effect of severely curtailing historic trading patterns/rights of all existing/future bottle store owners. They will no longer be able to import liquor direct, or able sell to other licenced persons
This intervention is selective, illogical, unfair, and not neutral vis-à-vis other industries. Forbidding one licensee from selling liquor to another, is practically unenforceable, and would lead to bad law
If the Minister is dissatisfied with the imperfections of our industry structure or conduct, then he must refer it to the Monopolies Commission, which has competence and expertise to deal with these issues
Unintended consequences of the three-tier structure, are that it imposes an unwanted middleman upon the value chain, thus distorting targeted investment, price structure, profitability and level of employment. The consumer will have to foot the bill
No law may limit any right entrenched in the Bill of Rights
If the Minister deems it necessary to limit a right, Judge Cameron of the Constitutional Court ruled that adequate motivation such as justification, need or reason, be submitted
We respectfully submit that organised industry had forewarned DTI, unsuccessfully, of such a risk in the aborted Liquor Bill of 1998. We believe that there are again grounds for at least two constitutional challenges, in the Bill now before you
The first challenge in our view, respectfully, concerns the National Government again infringing upon the rights of the provinces. Read Section 5 A, where the Constitution clearly says Liquor licences are Functional areas of exclusive provincial competence.
The second challenge in our view, respectfully, concerns the National Government infringing upon Section 22 rights of the citizen, under the Chapter 2 Bill of Rights, where the Constitution clearly enshrines the individual’s Freedom of trade , occupation and profession
We have no evidence, and we believe DTI has no cost vs benefit data either, to support their contention that Black economic empowerment is dependent upon usurping historic rights of the affected liquor retailers, or manufacturers, in the value chain
In this connection the Portfolio Committee should find it instructive to note that the Bill before you now contains rigidities and impediments in the three-tier structure, which were not present in the challenged Liquor Bill 1998 that was passed by Parliament during 2000.
We understand the commercial imperative of Black economic empowerment and Makro fully supports this philosophy.
We believe that the imposition of an unbending and controversial three-tier structure upon our industry is a blunt instrument. BEE can be promoted far more effectively with an industry specific charter. In this connection the examples in the petroleum, banking and other industries are good examples.
We sincerely believe that Section 27, and particularly 27 (1) b are inimical to the best interests of the present and future stakeholders of our industry, and we urge the Portfolio Committee to delete it in its entirety from this Bill.

Parliamentary hearings, Portfolio Committee on Trade and Industry
Makro’s views on the Liquor Bill now before to Parliament

Makro is a chain of large warehouse club outlets. The stores are situated in South Africa and Zimbabwe. They trade in food, liquor, and general merchandise, with commercially affiliated customers.
We are grateful for the opportunity to address this Committee, and to explain to the Portfolio Committee some of our serious concerns with certain sections of the Liquor Bill before you.

Your attention is drawn to Section 4, read in association with Section 27

1 Section 4 (2) says: A person who imports liquor may sell it only if it is a registered person
Section 27 says :
(1) ‘A registered seller of liquor for consumption -
(a) may buy liquor only from-
(i) a registered distributor; or
(ii) a registered manufacturer with terms and conditions of registration permitting it to sell liquor under Section 25 (5) to registered sellers of liquor for consumption.
(iii) holder of an import permit certificate issued in terms of section 16 of the Liquor Products Act.
(b) may not sell liquor to any person other than for the purpose of
Section 27 (2) (b) provides for a provincial liquor authority to permit such affected parties to sell liquor to a registered seller of liquor for consumption .Unfortunately this leads to great uncertainty. Furthermore, there is the risk of litigation should a provincial liquor authority be seen as acting arbitrarily or failing to apply their administrative powers in an unbiased/consistent and in a just manner.
There is also an unfortunate ambiguity in interpretation between Sections 4 and 27

In a nutshell, Makro or any registered seller of liquor to the consuming public through sub-section (iii), would seem to be precluded from importing liquor for own sale, and will only be permitted to buy liquor from a distributor or a manufacturer, and will only be permitted to sell liquor to the consuming public.

1.1 The selling of liquor by one licensee to another is an historic, ordinary and regular business pursuit conducted by the largest number of bottle stores. Examples of typical longstanding business practices the Bill seeks to ban are :
A restaurant, or club, or a pub are short of a brand, or they do not stock a certain brand, and conveniently buy their needs from the nearest bottle store.
A number of stores form a syndicate, and jointly buy/import large quantities of a brand at a special price. On receipt of the stock, the leader bottle store invoices (a legal requirement) each member and delivers to each participant his share.
Large bottle stores often consolidate wines bought from various small wineries, into one container, and transport it very economically to sell at low prices to consumers. The consumer benefits, and the small winery benefits.
Consider the injury to many large bottle stores, and to Makro. All of them have incurred considerable capital expenditure to serve, in addition to their regular buying public, a separate group comprised of liquor licensees with different service needs. The latter business segment must now be sacrificed under this Bill, and then down sizing would become unavoidable, leading to loss of investment, loss of income, and also job losses.

Is there anything offensive or wrong with this traditional, innocent and universally accepted pursuit of business? Why select only the business of the liquor licensee, among the scores of other economic subjects, to deprive him of longstanding trading rights?

1.2 Consider the impracticality of Section 27 in our national Liquor Bill:
Most modern bottle stores have a large number of check-out points, the transactions are impersonal and buyers and sellers seldom, if ever, know each other. There is no way of telling that the buyer is a liquor licensee. Such a transaction, says the Bill, would be illegal, and the penalties severe. It is not possible to enforce such an act properly. It is unenforceable, and it is bad law.

1.3 Then there is the important question of constitutionality. Our Constitution clearly entrusts the provinces with Liquor licences under Schedule 5 A, Functional areas of exclusive provincial legislative competence. Is it proper for DTI to make yet another effort to try and curtail the right of the Provinces, through Section 27? In this regard, it was refreshing to note that DTI had at last abandoned trying to regulate the licensing and conditions of grocers’ wine licences, at national level. That subject was altogether dropped from the new Bill.

The Portfolio Committee is reminded of the Constitutional Court’s unanimous verdict in connection with the failed Liquor Bill of 1998, and in particular para 44, when Judge Cameron pronounced:
I conclude that if the exclusive provincial legislative competence regarding ‘liquor licences’ in Schedule 5 applies to all liquor licences, the national government has made out a case in terms of section 44 (2) justifying its intervention in creating a national system of registration for manufacturers and wholesale distributors of liquor and in prohibiting cross-holdings between the three tiers in the liquor trade. No case has however been made out in regard to retail sales of liquor, whether by retailers or by manufacturers, nor for micro-manufacturers whose operations are essentially provincial. The Minister has to this extent failed to establish that Parliament had the competence to enact the Liquor Bill and is therefore unconstitutional.

Again we must ask: Is it proper for DTI to make yet another effort to try and curtail the right of the Provinces, through Section 27? We see no justification, need or reason, for such intervention.

It is instructive to know that the previous Liquor Bill, which was passed by Parliament, did not have these offensive provisions, now contained in the present Bill.
Should Section 27 become law, our industry will again risk the high probability of a constitutional challenge by injured or affected parties.

2 Secondly, we wish to deal with Section 27 in a broader context

2.1 The DTI has introduced the American three-tier structure into our liquor legislation.
After the lifting of prohibition in the USA in 1933, there was no formal liquor industry. Huge quantities of banned liquor were imported from Canada. On legalising the sale of liquor, the rigid three-tier was immediately enforced on the new fledgling industry. Today this structure has become entrenched only in some States. However, it is considered contentious, inefficient, antiquated and cumbersome by most Americans in the business.
Such a foreign structure, selectively forced upon our mature liquor industry, would compel the industry to introduce an unwanted and expensive middleman into the value chain. The unintended consequences of such a middleman were not properly considered by DTI. The consumer will pay more. Volumes will decline, leading to less excise income, and an impact on jobs. Cost of policing will also become a factor. There is also no guarantee whatsoever, that such a regime would result in removing barriers to entry/concentration of economic power, thus paving the way for a large number of previously disadvantaged persons to enter the wholesale segment of the liquor business.

2.2 We are aware of the fact that certain players in our industry consider the imposition of a three-tier structure an instrument to break down the so-called liquor monopolies. We are also aware of Government’s philosophy, that such a structure would encourage Black Economic Empowerment. Makro, for the record, fully subscribes to the prudent
objective of an economy that is shared, and more fully representative of the nation’s racial composition. However, let us consider that:

The liquor industry’s distribution chain merely moves full containers from factory to warehouse to retailer
just like
The grocery industry’s distribution chain which merely moves full containers from factory to warehouse to retailer
just like
The sugar industry’s distribution chain which merely moves full containers from factory to warehouse to retailer

It would be spurious to assert that a three-tier structure is appropriate for our industry, arguing that liquor is a so-called potentially harmful substance. The business of moving containers of any merchandise in the distribution chain has a neutral character. If there is anything harmful that has to be contained in the liquor industry, then the remedy against abuse should be sought, more properly, at the public level.

What we fail to understand is why the prejudice, and why the selectivity of the process, or intervention. It is not evenhanded.

2.3 If Section 27, on the other hand, was inserted for the purpose of breaking down monopolies, then we must urge that there is a better way. In this connection, we must tell you that there is ample evidence showing that the national and provincial authorities want to use the Liquor Act to intervene. This should be a matter for the Competition Commission. It has the skills and competence to deal with any restrictive practices or imperfections of industry structure and conduct. Leave such issues out of the Bill, please.

2.4 We are alarmed at the prospect that several aggrieved parties would again
consider mounting a Constitutional challenge. They would challenge that Section 27 of this Liquor Bill, infringes their Section 22 protection, under the Chapter 2 Bill of Rights, of The Constitution, which reads:
Freedom of trade, occupation and profession
Every citizen has the right to choose their trade, occupation or profession freely. The practice of trade, occupation or profession may be regulated by law.
The question that does arise is whether such regulation in only one branch of South Africa’s industry, is fair, equitable or neutral. In this context it is instructive to read Section 36 (1) of The Constitution:
The rights in the Bill of Rights may be limited only in terms of law of general application to the extent that the limitation is reasonable and justifiable in an open and democratic society …….
No law may limit any right entrenched in the Bill of Rights

2.5 We are not convinced that the limitations which Section 27 with its unbending three- tier structure, wishes to impose on our Bill of Rights, are necessary, reasonable or justifiable.

3 Black economic empowerment and industry specific charters
There are already several examples of industries with an individually high degree of
concentration of economic power, who have co-operated constructively with the
Government. The mining, petroleum and banking sectors are fine examples where such charters have been successfully negotiated.

4 This is further motivation for our earnest request to the Portfolio Committee to delete Section 27 from the Bill, or at least the onerous Section 27 (1) (b)
It is surprising that the sensible and more elegant route of a charter for the liquor industry has not been considered, and we urge the Portfolio Committee to encourage DTI, to follow this route. Now is the time to sanitize the Bill, and ensure that we do not see an inappropriate three-tier implant on an efficient industry, in addition to the spectre of yet another round of court challenges.

5 We sincerely believe that Section 27, and in particular the burdensome Section 27 (1) (b),
are detrimental to the best interests of the present and all future stakeholders of our industry, and we urge the Portfolio Committee to delete them from this Bill.

G E Owens
Chief Executive Officer of Makro SA
10 April 2003