The Competition Amendment Act was signed into law on 13 February 2019. The Act’s aim is to ‘open up new opportunities for many South Africans to enter various sectors of the economy and compete on an equal footing’. This sentiment is the spirit throughout the Act and the draft regulations that are undergoing an extensive comment process.
The Act requires that the Minister make regulations in relation to the new provisions that restrict purchases by firms considered dominant in designated sectors (the Buyer Power provisions). The draft regulations have yet to be signed into law.
The Buyer Power provisions prohibit a dominant firm in a designated sector to directly or indirectly, require from or impose on a supplier that is a small and medium business or a firm controlled or owned by historically disadvantaged persons (the ‘designated class’), unfair prices or other trading conditions. Furthermore, the dominant firm has to be in a position to demonstrate, if it did not purchase from a small and medium business or a firm controlled or owned by historically disadvantaged persons, that it did not avoid such a purchase to avoid the Buyer Power provisions.
When will prices or terms be unfair?
The concept of unfairness of pricing or trading conditions does not otherwise appear in the Competition Act. As such, the draft regulations on buyer power attempt to set out factors and benchmarks for determining whether prices and other trading conditions imposed are unfair. Unfortunately, the first set of draft regulations do not leave firms much the wiser as to when their pricing will be unfair. The draft regulations attempt to set out factors when a price will be unfair itself and when it will be unfair relative to other pricing. The draft regulations state that a price will be deemed to be unfair if it is inferior relative to other suppliers outside the designated class and there is no reasonable rationale for the difference.
The draft regulations treat unfair trading terms with more specificity and provide the following factors or examples of when purchase trading terms will be unfair:
- It unreasonably transfers risk or costs into the firm in the designated class of suppliers;
- It is said to be one-sided, onerous or not the objective of the clause in the regulations;
- It bears no reasonable relation to the objective of the supply agreement.
The regulations also include trading conditions that have been found to be unfair in other jurisdictions and which may be given due consideration by the commission. They include the following:
- Trading without a contract;
- Imposing costs onto the supplier that are not spelt out in a clear and unambiguous manner;
- Unilateral changes in the supply terms of a material nature to the detriment of the supplier;
- Retrospectively changing supply terms of a material nature to the detriment of the supplier;
- Excessively long payment terms;
- An unreasonable transfer of the buyer’s costs of promotion and marketing onto the supplier;
- Transfer of the buyer’s risks of wastage or shrinkage onto the supplier where it is not due to the supplier’s negligence or fault.
What sectors will be subject to buyer power rules?
The draft regulations have proposed the following extremely broad ‘sectors’ to which the buyer power rules will apply:
- The food and grocery wholesale and retail supply chain;
- The apparel retail supply chain;
- Online trading platforms;
- The construction supply chain;
- The financial and insurance supply chain;
- The private healthcare supply chain.
What about big suppliers who are HDP owned?
The Bill is specific that it is not only small and medium business owned by historically disadvantaged persons that need protection. It is, however, important to exclude big corporations that are controlled or owned by historically disadvantaged persons in appropriate circumstances to avoid abuse of the provisions. The draft regulations propose that the buyer power rules should not apply to suppliers controlled and owned by historically disadvantaged persons that sell a material and significant share of the input to the dominant buyer, which provides them with countervailing power. The possibility of setting a percentage threshold of total sales to the dominant buyer is also being considered.
What should you be doing?
- Get involved, be heard
The proposed sectors are too broad. Bargaining and pushing down supplier pricing should be restricted only in very limited circumstances. Reach out to your industry association or business organisations and find out if you can participate in their comment processes. This could include attending workshops that the Minister is running with business stakeholders.
- Figure out where you are a dominant purchaser
The Buyer Power provisions only apply to dominant firms in a relevant market. Dominance and relevant markets have a very specific meaning in competition law. Seek expert competition law advice to understand where you are at risk.
- Get to know your customer and supplier base
Now it really matters if your customers or suppliers are small or medium businesses or owned or controlled by historically disadvantaged individuals. Get to know who you are dealing with so you can make the necessary changes to your procurement and pricing policies with the assistance of competition lawyers and economists where needed.
- Consider the impact of all your conduct on small or medium businesses or those owned or controlled by historically disadvantaged individuals
As a dominant firm, think about how you can do more to help small or medium businesses or firms owned or controlled by historically disadvantaged individuals to participate effectively in markets. Try wherever you can to give them an equal chance. Don’t exclude anyone from tenders on the basis of their size or ownership.