On 13 February 2020, the Minister of Trade, Industry and Competition (South Africa) brought the long-awaited buyer-power and price discrimination provisions into effect. These provisions were introduced through a suite of amendments made to the Competition Act (the “Act”) in early 2019. They may be summarized as follows:
- the price discrimination provisions prohibit dominant sellers from discriminating in the prices they charge to small and medium businesses, and firms owned or controlled by historically disadvantaged persons (referred to in the regulations, explained below, as “the designated class”), if the effect is to impede the ability of such firms to participate effectively, and
- the buyer power provisions prohibit dominant buyers in certain sectors from requiring or imposing unfair prices or trading conditions on sellers in the designated class.
In conjunction with bringing these provisions into effect, the Minister has also published the final regulations to assist with the interpretation of these provisions.
We have summarized the main features of these regulations below, and the impact that they will have on dominant firms’ conduct in the market towards small and medium sized businesses, as well as businesses owned or controlled by historically disadvantaged persons.
Price Discrimination Regulations
- Critically, the regulations provide that in order to establish a contravention, the differential in price must impede the effective participation of “a firm or firms” in the designated class of purchasers. An effect on all or a substantial number of buyers in the designated class does not appear to be required, although practical enforcement by the authorities may focus on conduct that impedes participation by a number of firms.
- The factors for determining when price discrimination is likely to impede effective participation by firms in the designated class include:
- The extent of the difference in respect of price or other factors outlined in section 9(1)(c) of the Act relative to other purchasers in the same market or in markets in which the purchaser in the designated class is a potential competitor;
- The significance of the input in the cost structure of the purchaser in the designated class of purchaser or as a driver of sales in the downstream market for the purchaser in the designated class of purchaser;
- The duration and timing of the price differential;
- The likelihood that the differential treatment would result in the purchaser in the designated class of purchaser facing decreased demand for its goods or services in the downstream market; and
- The likelihood that the differential treatment would result in decreased investment by the purchaser in the designated class.
- The regulations suggest that firms owned or controlled by historically disadvantaged persons should only qualify for protection under the relevant section if they purchase less than 20% of the relevant goods or services supplied by the dominant seller. This provision seeks to filter out complaints by large firms owned or controlled by historically disadvantaged persons, focusing the section’s scope on protecting smaller firms with limited negotiating power.
Buyer power regulations
- As with the price discrimination regulations, the buyer power regulations appear to set a low threshold for the effect required to establish a contravention. The language setting out the elements of a contravention refer to the effect on “the supplier”, rather than suppliers in the designated class in the aggregate.
- The buyer power regulations suggest application of the relevant prohibition only to dominant buyers in the following industries:
- Agro-processing, which is defined as “the processing of raw materials and intermediate products derived from the agricultural sector, including agriculture, forestry and fisheries”.
- Grocery wholesale and retail, which is defined as, “the wholesale or retail of food, pet food, drinks, cleaning products, toiletries and household goods”.
- Ecommerce and online services sector, which is defined as, “the online sale of goods or services to businesses or consumers”. ‘Ecommerce’ is defined as including “the sale, or facilitation of sale, of goods supplied by third party businesses” and ‘online services’ is defined to include “(a) the provision or facilitation of a service using contracted individuals or other businesses to supply the service that forms the basis for an online sale; and (b) online e-commerce market places, online application stores and so-called ‘gig economy’ services”.
- “Price” is broadly defined to include “discounts, rebates, commissions, allowances or credit”, with the net being cast even more broadly by the definition of “trading conditions” to include “any explicit terms contained in contractual arrangements as well as any implied or actual trading terms implemented by the buyer outside of the supply contract”.
- Factors to be taken into account when determining whether a price will be unfair include:
- The prices paid to other suppliers of like goods or services, in particular those outside the designated class, and whether such prices are higher;
- The magnitude of any differences in prices to other suppliers of like goods or services;
- Whether reductions in the existing purchasing price are directly or indirectly required from, or imposed on, the supplier;
- Whether reductions to an existing purchasing price are retrospective, unilateral or unreasonable;
- Whether costs are directly or indirectly imposed on or required from the supplier which reduce the net price received by the supplier; or
- Whether the direct or indirect imposition or requirement of costs is retrospective, unilateral or unreasonable.
- Factors to be taken into account when determining whether a trading condition will be unfair include whether the trading condition:
- unreasonably transfers risks or costs onto a firm in the designated class of suppliers;
- is one-sided, onerous or not proportionate to the objective of the clause (such as unduly long payment terms); or
- bears no reasonable relation to the objective of the supply agreement.
- Like the price discrimination regulations, the buyer power regulations restrict application of the relevant provisions to firms owned or controlled by historically disadvantaged persons only if such firms supply less than 20% of the dominant buyer’s requirements of the goods or services in question.
The regulations are very slim, but provide important guidance for a novel area of competition law in South Africa. Read with the Competition Commission’s draft guidelines on buyer power and price discrimination, which are likely to be finalized soon, there is sufficient understanding of what Government and the regulators would like to achieve through these provisions whilst, at the same time, leaving sufficient room for organic development of the law through practice and case law.