Buyer power provisions under South Africa’s competition law
24 Aug 2020
Earlier this year, the Competition Commission (“Commission”) published its Buyer Power Enforcement Guidelines to provide further clarity on the new Buyer Power provisions of the Competition Act 89 of 1998 (“the Act”). The rationale behind these new provisions is to combat the country’s slow economic growth and tackle the high entry barriers which impedes the effective participation of small and medium-sized enterprises (“SMEs”) and firms controlled or owned by historically disadvantaged persons (“HDPs”) from actively contributing to the economy. The guidelines indicate the Commission’s policy approach and specific principles that the Commission will follow in assessing whether alleged conduct contravenes the Buyer Power provisions.
What is Buyer Power?
Buyer Power is a form of dominance on the part of a particular buyer. The Buyer Power provisions contained in the Act prohibits dominant firms in certain designated sectors from imposing unfair prices and/or other unfair trading conditions on SME or HDP suppliers.
Is your company contravening the Buyer Power provisions?
Your company may be contravening the Buyer Power provisions if the following questions can be answered in the affirmative:
1. Does your company operate within the designated sectors?
The Buyer Power provisions currently only apply to the following designated sectors:
- the agro-processing sector;
- the grocery wholesale and retail sector; and
- the ecommerce and online services sector.
2. Is your company a dominant firm within a designated sector?
A firm is dominant in a market if:
- it has at least 45% of a specific market (this is a non-rebuttable presumption of dominance);
- it has at least 35%, but less than 45%, of a specific market unless it can show that it does not have market power (which is the power of a firm to control prices or exclude competition);
- it has less than 35% of the specific market, but has market power.
3. Is your company’s supplier from the designated class of suppliers?
In this instance, it is important to note that the designated class of suppliers includes:
- SMEs meeting certain legal thresholds in terms of sector specific employment and turnover; and
- HDPs which supply less than 20% of the dominant firm’s purchases of goods or services.
4. Has your company required or imposed a price of trading condition on the supplier from the designated class?
A price is considered unfair if, inter alia, the prices paid to other suppliers of like goods or services differs, especially if those suppliers are outside of the designated class of suppliers, or any costs are directly or indirectly imposed on or required from the supplier which ultimately reduces the net price received by the supplier.
5. Is the price or trading condition unfair?
There is a non-exhaustive list of factors considered by the Commission, including whether the trading condition unreasonably transfers risks or costs onto a supplier in the designated class; the trading condition is one-sided, onerous or disproportionate; or the trading condition bears no reasonable relation to the objective of the relevant supply agreement.
Do the Buyer Power provisions compel dominant firms to purchase goods or services exclusively from SMEs and HDPs?
No, the Buyer Power provisions do not place dominant firms under an obligation to purchase from SMEs or HDPs only. The purpose of the Buyer Power provisions is to outlaw instances where a dominant firm refuses or avoids purchasing from suppliers from the designated class in order to avoid an obligation not to impose unfair pricing or trading terms. In the event that a dominant firm does not purchase from any suppliers from the designated class, there is a rebuttable presumption that it is engaging in an avoidance strategy.
Are dominant firms required to pay a higher price or give preferential trading terms to SMEs and HDPs?
No, the aim of the Buyer Power provisions is to prevent buyers from exploiting suppliers in the designated class, which may not have the necessary bargaining or negotiating power. In testing whether or not a violation has occurred, one will need to consider if suppliers in the designated class typically receive inferior trading terms or prices relative to the buyer’s other large suppliers, or whether the trading conditions impose an undue burden on suppliers in the designated class.
Can dominant firms negotiate lower prices in exchange for more volume?
Yes, this is unlikely to fall foul of the Buyer Power provisions to the extent that it is not exploitative, as the buyer benefits from lower prices and in turn, the supplier benefits from increased volumes (which may reduce the unit costs of production).
What will the Competition Commission be focusing on during its investigations into complaints of Buyer Power?
It is important to note that there is no grace period for compliance with the Buyer Power provisions. The Commission has indicated that it will be screening lodged complaints and prioritising cases by applying a 3% threshold to the relative price difference for like goods or services and the reduction in net price paid. It will likely initially focus on more material cases that have an impact on a large number of suppliers.
What are the penalties if a dominant firm is found to have contravened the Buyer Power provisions?
Penalties for a first time offence are up to 10% of the dominant firm’s annual turnover, and up to 25% of the dominant firm’s annual turnover for a repeat offence.
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