Minister of Trade, Industry and Competition, Ebrahim Patel, speaking at the 16th Annual Competition Law, Economics and Policy Conference, announced a proposed new block exemption for SMMEs, for the purpose of stimulating growth and participation of SMMEs in the economy following Covid-19. These proposed Regulations are open for comment until the end of September 2022.
The purpose of the Regulations is to exempt some categories of agreements or practices of SMMEs from the application of section 4(1) and 5(1) of the Competition Act to enable collaboration between SMMEs that would otherwise contravene the Act.
Section 4(1) of the Act regulates horizontal restrictive practices; that is, prohibited practices among firms in a horizontal relationship (in other words, competitors). Section 5(1) of the Act, on the other hand, regulates vertical restrictive practices; that is, prohibited practices among firms in a vertical relationship (this includes a firm and its suppliers and distributor relationships, for example).
The following categories of agreements and practices would be specifically permitted for SMMEs for a period of 5 years from publication of the final Regulation:
- R&D agreements, including outsourcing to third parties and cooperation agreements to conduct R&D;
- Production agreements which do not result in the removal of a competitor from the market;
- Joint purchasing agreements, including collective purchasing by subsets of firms in the market;
- Joint selling prices of goods and services by a subset of firms in the market;
- Commercialisation agreements, which include cooperation between firms to the selling, distribution and promotions of products in the market;
- Standardisation agreements, which include setting the technical or quality requirements for current or future products, production processes, services or methods in the market; and
- Collective negotiations with large buyers or suppliers on the terms and/or conditions for purchasing or supply of goods and services in the market.
Importantly, all of the above explicitly exclude the fixing of selling prices of goods or services to end consumers in the market; and any permitted agreement or practice must be inclusive of the majority of SMMEs.
Firms seeking to apply the Regulations, and thus benefit from the exemptions, will have to notify the Competition Commission and the Department of Trade, Industry and Competition of the agreement or practice within 30 business days of implementation; and must keep minutes of meetings held and written records of any agreement or practices falling within the scope of the Regulations.
In its current form, this draft raises some issues for careful consideration.
While the regulations explicitly does not allow the fixing of prices to end-consumers, it is likely that end-consumers will be prejudiced by anti-competitive prices. The Regulations would effectively allow SMMEs to sell to intermediaries or business-customers at anti-competitive prices; and, when these intermediaries or business-customers eventually on-sell to other commercial retailers and/or end-consumers directly, prices will undoubtedly filter down and ultimately affect the poor and the broader economy in South Africa.
There are also some industries, like brokerage, which are dominated by SMMEs. Therefore, the new Regulations will entirely change the way certain industries conduct business in South Africa.
The Regulations also pose a risk insofar as they may be used by business to segment different business units into SMMEs, for the purpose of circumventing the Act. Alternatively, it may lead to the creation of new SMME vehicles for the purpose of circumventing the Act.
It is also unclear how practically it might be monitored if the majority of the SMME’s in the market participated in the practice.
The Regulations are currently open for comment until the end of September 2022.
If you would like to discuss how these new Regulations might impact your business, please feel free to reach out to Marianne Wagener.