New laws against abuse of big buying power could bring new Capitecs
Amendments to Competition Act should help temper the big players' tendency to undercut small players
In his 2020 state of the nation address, President Cyril Ramaphosa highlighted a number of government strategies geared towards improving SA’s economic trajectory. Among these were plans to restore Eskom’s operational capabilities, remove bureaucratic hindrances hampering business start-ups, invest in commuter rail and other essential infrastructure, and support the tourism industry through improved security.
As expected, inclusive economic growth was placed at the top of the government’s agenda, with the president noting that far-reaching economic reforms, including those set out in the economic policy paper released by the Treasury in August 2019, would be forthcoming.
With the publication of the economic policy paper coinciding with the competition authorities’ 13th annual competition law, economics & policy conference in Pretoria, the pressing need to prioritise inclusive economic development was reaffirmed by the government. In response to the slow progress made to date, renewed emphasis has been placed on the necessity of devising alternative, and in some cases novel, strategies for bringing small & medium enterprises (SMEs) and historically disadvantaged individuals (HDIs) into the economic fold.
The Treasury has noted that large and old firms continue to dominate the economy as well as employment dynamics. Its view is that barriers to entry and sustainable growth need to be tackled through, among others, effectively communicated incentive programmes, accessible development finance and, importantly, new legislation and policy addressing competition and market structure issues.
The potential welfare gains to be made by opening up historically concentrated markets to new entrants are vast. Capitec’s entry as an effective competitor in the retail banking market is cited by the Treasury as a case in point. In addition to extending financial services to the previously unbanked, Capitec’s disruption of the structure of the retail banking market has generated consumer savings of almost R20bn per annum.
Competition policy is certainly poised to be a key driver of economic reform, with ambitious strides being made since 2019 in the form of widespread amendments to the Competition Act. The first wave of amendments took effect in July 2019, developing the approach of SA competition law to abusive conduct by firms that are dominant in their respective markets such that it will now be easier for the Competition Commission to launch abuse-of-dominance proceedings against such firms.
With a dearth of successful prosecutions for this prior to the amendments, the commission has, unsurprisingly, welcomed the amendments. Dominant entities, on the other hand, may find the amendments less palatable as the commission is likely to have a greater appetite to prosecute abuses by dominant firms.
The first wave of amendments also imposes more onerous requirements on dominant firms in respect of the prohibition of excessive prices. They provide cost benchmarks for the predatory pricing prohibition, and codify the practice of engaging in margin squeeze into SA competition law. This was followed on February 13 — the date of the state of the nation address and the second anniversary of the Competition Amendment Act being signed into law — by a much-anticipated second wave of amendments to the act. These are most noteworthy for bringing about significant changes to the current prohibition against price discrimination (by introducing protections for SMEs and entities controlled by historically disadvantaged individuals, as well as ushering in buyer power considerations for the grocery, retail, agroprocessing and online intermediary services sectors, which until now have not been recognised in express terms.
Both the price discrimination amendments and those relating to buyer power show significant potential for advancing the Treasury’s aspiration of opening up historically concentrated markets to SMEs and HDI-owned firms. The economic inclusion of SMEs and HDI-owned firms speaks to one of the primary objectives of the Competition Act, which is to provide an opportunity for all South Africans to participate fairly in the national economy. With an alignment of objectives, the competition authorities are expected to play an integral role in the Treasury’s drive for greater economic inclusion. The commission understands what is at stake, with commissioner Tembinkosi Bonakele having pointed out that inclusivity is not just a social imperative but also a platform for more competitive and dynamic markets, greater economic growth and increased employment.
This sentiment is echoed by the Treasury, which noted in its recent economic policy paper that SMEs contribute more than 50% of all employment opportunities in SA, and more than 45% of the country’s GDP, yet stand only a 37% chance of surviving their first four years and a mere 9% chance of surviving their first 10. Among the challenges contributing to these statistics are a high regulatory burden, labour market rigidities, limited access to finance and poor bargaining power. Each of these hurdles requires tailored responses from public institutions. The recent amendments to the Competition Act aim to tackle the bargaining power asymmetries that may play a role in stifling SME sustainability and development.
The new amendments are accompanied by regulations that provide detail on the application of the prohibitions against price discrimination and abuse of buyer power by dominant firms. The commission has also released draft guidelines on the interpretation of the newly crafted prohibitions, which are intended to level the playing field for SMEs and HDI-owned firms when negotiating prices with dominant suppliers and help them avoid paying disproportionately higher prices than those charged to firms with greater bargaining power (price discrimination); as well as protect SME and HDI-owned suppliers from large buyers that seek to impose unfair prices or other trading conditions on them (abuse of buyer power).
The draft guidelines provide an indication of how the commission will interpret the prohibitions, providing some guidance to firms seeking to comply with the requirements of the Competition Act and informing those seeking to lodge or defend price discrimination or abuse-of-buyer-power complaints.
With the new amendments taking imminent effect, and the draft guidelines in the process of being finalised, this will be an interesting space to watch. Having welcomed the amendments and proactively published draft guidelines on their interpretation, the commission will be under considerable pressure to translate economic aspirations into tangible change. Whether the amendments will be an effective tool for the commission to achieve this change remains to be seen.
• McKerrow is associate designate, and Tzarevski senior associate, in the competition and antitrust practice at Baker McKenzie Johannesburg.