Levelling the playing field? February 2019
By DARYL DINGLEY AND ELISHA BHUGWANDEEN, Published in Competition Law
On 21 December 2018, the Minister of Economic Development published draft Price Discrimination Regulations and Buyer Power Regulations (collectively, the Regulations) for public comment (Government Gazette No. 42133). The swift publication of the Regulations, following the passing of the Competition Amendment Bill 2018 late last year, is a clear indication of government's intention to ensure that proposed amendments to the Competition Act (89 of 1998) are effected as soon as possible.
From the outset, the primary purpose of the Bill has been made abundantly clear – to address the high levels of economic concentration and the skewed ownership profile of the South African economy. The Regulations seek to advance these objectives. However, concerns have been raised as to whether the methods being used to do so are appropriate in the current unstable economic and political climate.
Overall, the Regulations indicate the general approach to determine the appropriate factors and benchmarks to give effect to the amendments proposed to the abuse of dominance sections of the Act. A short summary of some of the key aspects of the Regulations is set out below.
The Buyer Power Regulations:
- Proposed s8(4)(a) of the Bill provides that it is prohibited for a dominant firm in a sector designated by the Minister 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 (HDPs), unfair prices or other trading conditions.
- The Buyer Power Regulations state that the purpose of s8(4) is to protect the public interest by making it an offence for a firm with buyer power to unfairly exploit suppliers that are small and medium businesses or firms controlled or owned by HDPs (collectively, the designated class of suppliers) in specific sectors of the economy. In so doing, the purpose is not to protect firms in the designated class from competing to supply large customers on the merits, but rather to ensure that they are equitably treated in gaining access to customers and markets.
- The Buyer Power Regulations: list a number of elements that must each be satisfied in order to establish an offence in terms of this section (that is, the purchasing firm and the transaction with the supplier must lie within a sector designated by the Minister; the buyer firm must be dominant, the supplier must be a small or medium business; and the price or trading condition, imposed on the supplier by the buyer firm, must be unfair, either in itself or relative to other suppliers);
- set out factors that are relevant to the consideration of buyer power in relation to a class of suppliers (for example, the dependency of the suppliers on the particular buyer, realistic alternatives available to such suppliers, the nature of supply negotiations between the buyer and suppliers etc.); and
- provide further detail regarding factors and benchmarks that may be relevant to considering when a price or trading condition may be deemed unfair (for example, relationship-specific costs to supply the particular buyer, the performance of the firm, unilateral changes in the supply terms that are detrimental to the supplier, trading without a contract, excessively long payment terms etc.)
- Importantly, the Buyer Power Regulations also list sectors identified in other jurisdictions or raised in the course of debates on the need for a buyer power provision in the Act. These include: 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; and the private healthcare supply chain. In this regard, public comments are invited as to whether buyer power exploitation exists in these sectors or can be anticipated to arise in future; whether there are other sectors that also fulfil such criteria; and what the optimal scope is of sectors for the initial implementation of the buyer power provision.
The Price Discrimination Regulations:
- Proposed s9(1)(a)(ii) of the Bill provides that an action by a dominant firm is prohibited price discrimination if it is likely to have the effect of impeding the ability of small and medium businesses or firms controlled or owned by HDPs, to participate effectively. The Price Discrimination Regulations indicate that the purpose of this section is not to guarantee that every firm in the designated class remains in business, regardless of its business acumen and efficiency, but rather to ensure that there are a large and growing number of enterprises in this class. The Price Discrimination Regulations:
- list a number of elements which relate to price discrimination that must each be satisfied in order to establish an offence in terms of this section (that is the selling firm must be dominant; the discrimination is in respect of equivalent transactions; the differential treatment does not make reasonable allowance for differences in the cost based on differing places or methods of supply, or constitute an act of good faith to meet a competitor's price, or is a legitimate response to changes in market conditions; and the differential in price must casually impede the effective participation of the designated class of purchasers);
- provide an indication of instances where effective participation in a market may be impeded (for example the price differential must place the firm in the designated class at a competitive disadvantage in the broad markets in which they participate and the impact is not trivial or immaterial); and
- set out factors and benchmarks that may be relevant as to whether the price differential itself has impeded participation (for example the extent of the difference in price relative to other firms in the same market downstream; the importance of the input in the cost structure of production; the actual performance of the firm in the designated class etc.)
Overall, the Regulations are complex and wide-ranging. The implications of these provisions for businesses across South Africa will have to be carefully considered from a legal, economic and practical perspective. Striking a balance between the noble objectives of the Bill and the practical implications of these provisions will be essential. Many small businesses may attempt to raise complaints against dominant firms and, until the competition authorities begin to thoroughly interpret the Regulations, establish precedent and provide pragmatic guidance, such complaints could lead to expensive protracted litigation, strained resources and even possible constitutional challenges.
Furthermore, the Regulations are drafted in very broad terms – the language is unclear and wide-ranging, and regrettably reads more like general guidelines than detailed factors and benchmarks. The commentary process (which ended on 31 January 2019) and forum sessions, which the Ministry intends hosting with firms that may be impacted by the proposed amendments, will be crucial in ensuring that the Regulations clarify sufficiently the practical implementation of these significant proposed amendments.
Dingley is a Partner and Bhugwandeen a Professional Support Lawyer at Webber Wentzel.