By Nqobile Dludla

JOHANNESBURG (Reuters) - South African authorities should introduce regulatory 'sandboxes', or controlled testing grounds, to spur innovation in the country's growing digital platform sector, tech investor Naspers and research firm MISTRA said on Tuesday.

A "sandbox" allows testing of new services in the market, but within a controlled regulatory environment without having to undergo a costly and lengthy full authorization process first.

In recent years, e-commerce and digital services such as fintech have expanded rapidly across South Africa to meet soaring demand driven by the pandemic's lockdowns.

But the pace of digital transformation in South Africa is still relatively slow, while the regulatory environment is still evolving to fully address the complexities of the digital economy, Phuthi Mahanyele-Dabengwa, CEO of Naspers South Africa said at the co-launch of a research report.

Naspers partnered with the Mapungubwe Institute for Strategic Reflection (MISTRA) on research into digital platform businesses in South Africa.

The companies said in the report that from a regulatory standpoint, policymakers are grappling with the need to balance innovation and customer protection.

"Regulatory frameworks governing the (digital) platform economy are still evolving, with ongoing debates around issues such as taxation, labour rights, and licensing," the report found.

Tax loopholes used by foreign online retailers such as Shein and Temu and potential regulatory arbitrage in digital financial services can "create an uneven playing field, potentially disadvantaging both local and incumbent platform," the report added.

To address challenges in the sector, the report recommended that regulators create "regulatory sandboxes to enable small and fledgling platforms to operate in a controlled environment with concessions that encourage growth and innovation."

The report also encouraged a collaborative approach between digital companies and regulatory bodies to keep regulations aligned with emerging market trends and innovations.

Other recommendations, including incentives for local producers to sell products on e-commerce platforms and fast-tracking digital infrastructure, could help the sector potentially contribute as much as 91.4 billion rand ($5 billion) to the economy by 2035, the companies said.

($1 = 17.7375 rand)

(Reporting by Nqobile Dludla, Editing by William Maclean)