Tackling buyer power in South Africa

The Competition Commission has offered some guidance on how the new buyer provisions of the Competition Act will affect businesses – providing insights on how complaints will be screened, how long assessments are likely to take and the thresholds that will apply. 

The buyer provisions are intended to assist small and medium sized enterprises (SMEs) and firms owned and controlled by historically disadvantaged persons (HDP firms).

The Commission has also provided useful risk mitigation guidance for dominant firms.

The buyer provisions are intended to assist small and medium sized enterprises (SMEs) and firms owned and controlled by historically disadvantaged persons (HDP firms).

Under section 8(4) of the Act, a dominant firm in a designated sector is prohibited from imposing unfair prices or trading conditions on SMEs or HDP firms. The Buyer Power Regulations and Buyer Power Guidelines set out a list of factors that must be considered to establish a contravention.

Some of the questions that should be considered at the outset, according to the Commission, are the following 

Does the buyer operate in a designated sector?

Designated sectors are (i) agro-processing; (ii) wholesale and retail grocery; and (iii) e-commerce and online services. The list of designated sectors is likely to expand, but these are the sectors where buyer power concerns have arisen over the years.

If the goods or services are ancillary, or are not core to the designated sector, the buyer power provisions will not apply (e.g. security, cleaning and rental services).

Does the supplier fall within the designated class of suppliers (DCS)? Is the supplier an SME or HDP firm?

To determine if a supplier is a SME firm, thresholds are set out in the SME Qualification Criteria Schedule, relating to the total full-time equivalent of paid employees and the total annual turnover of the supplier firm. To establish if a supplier is an HDP firm, it must be controlled and owned by historically disadvantaged persons, as defined in the Act. However, a complaint can be ruled out if a HDP firm supplies more than 20% of the purchases of the dominant buyer.

Is the buyer dominant, according to the Act?

Dominance traditionally indicated the presence of a large firm in a concentrated market. However, the Buyer Power Regulations and Guidelines state that dominance will not only be determined by the market share thresholds in the Act, but will also include an assessment of buyer power.

The Commission will probe cases where firms may have less than 35% buyer market share, but still have a material market share, typically 15% or more.

Although the assessment of dominance is technical, the Commission will focus on cases where there are indicators of buyer power, for example where trading conditions are unilaterally imposed or suppliers are solely dependent on a dominant buyer.

Importantly, the Commission also noted that a firm’s ability to exert buyer power can be inferred from its conduct, and specifically from its ability to behave independently of suppliers by controlling prices.

Was an unfair price or trading condition required from or imposed on the supplier by the buyer?

The Commission will focus on cases where the price paid to a SME/HDP firm is lower than to firms outside the DCS, and there is no objective justification for it. The Commission will only investigate when there are differences of more than 3% in price, and will also consider whether there was a unilateral and/or retrospective reduction in price. 

If the reduction was not negotiated and was selectively applied to the SME/HDP firm, it is unlikely to be reasonable. The dominant buyer will have to justify why it cut the price and/or imposed costs. It will not be enough to cite changes in market conditions (for example Covid-19 causing additional health and sanitary costs).

Under the Buyer Power Regulations, the factors for determining whether a trading condition may be deemed unfair are whether it:

• unreasonably transfers risk or costs onto an SME/HDP firm;
• is one-sided, onerous or disproportionate to the objective of the clause; or
• bears no reasonable relation to the objective of the supply agreement.

The Commission will also use the provisional list of unfair trading conditions provided in Annex 2 and 3 of the Buyer Power Guidelines as the primary filter for detailed investigations and potential referrals. The provisional lists are not exhaustive and may be supplemented in the future, based on the Commission’s experiences.

Screening unit process

The Commission’s screening unit will be the first port of call for buyer power complaints. It will determine whether the complainant is an SME and/or a HDP firm and whether the buyer operates in a designated sector and has buyer power. If so, the market conduct division will investigate the complaint.

To prevent retaliation against complainants and witnesses, complaints can be lodged anonymously. In its complaint, an SME/HDP firm need not refer to specific provisions of the Act. Complainants may also approach the Competition Tribunal for interim relief, arguing that the dominant buyer’s conduct is detrimental to them and should be stopped immediately.

The Commission recognises that buyer power contraventions will have to be assessed speedily, since SME/HDP firms may be unable to endure lengthy or protracted complaints and litigation. 

In fact, the Buyer Power Guidelines specifically state that the Commission is mindful of the need to prioritise its work in the context of scarce resources and in so doing it is likely to focus on more material cases, including those that impact on a larger number of suppliers. 

To this end, the Commission is developing practice notes and checklists to manage and resolve cases as quickly as possible. Although this is commendable, it remains to be seen how the Commission will deal with assessments in highly complex markets that may need input from industry experts and economic analysis. The current impact of Covid-19 may have also affected the Commission’s resources and capacity.

What are the next steps for dominant buyers or SME/HDP firms?

There is no grace period for compliance by dominant buyers. They need to review their procurement policies and their ongoing and future interactions with SME/HDP suppliers. However, they should not try to avoid doing business with SME/HDP suppliers, as this could also contravene the buyer power provisions of the Act.

SME/HDP firms should keep proper records of their interactions and agreements with dominant buyers. Suppliers should advocate for clear and transparent contracts and become aware of the rights they enjoy under the new provisions.

This article was written by Daryl Dingley  who is a Partner and Kgomotso Mmutle, a Candidate Attorney along with Elisha Bhugwandeen, a Professional Support Lawyer at Webber Wentzel.

All of of the authors are employees of Webber Wentzel.

Featured image: Sebastian Herrmann via Unsplash