Impact of Buyer Power Regulations on Procurement Practices in the time of Covid-19
6 July 2020
The Covid-19 pandemic and associated lockdown have created the toughest economic environment in decades. Businesses big and small are scrambling to sharpen their procurement practices to protect their margins as the economic downturn begins to bite.
In doing so, businesses should be careful not to contravene the recently introduced abuse of buyer power provisions under South Africa’s Competition Act (Act).
In terms of the provisions, it is prohibited for dominant businesses acting as buyers in designated sectors to impose unfair prices or trading conditions on suppliers who are small or medium enterprises (SME’s) or businesses owned by historically disadvantaged individuals (HDI’s). Failure to comply will have serious consequences, as even a first-time offence can attract an administrative penalty of up to 10% of the buyer’s annual turnover in South Africa.
In this article, we highlight a few key points that you should know about the abuse of buyer power provisions:
1. There is no grace period to comply
The Buyer Power Regulations (Regulations) came into effect on 13 February 2020, while the Competition Commission (Commission) published its enforcement guidelines during May 2020. The Covid-19 pandemic’s devastating impact on the economy will result in increased efforts by the Commission to protect HDI and SME suppliers.
2. Applies to specific sectors
The new offence currently only applies to businesses that operate in three broad sectors designated by the Minister of Trade and Industry, namely:
the grocery wholesale and retail sector;
the agro-processing sector; and
the e-commerce and online services sector.
This sectoral focus mirrors the approach taken in other developed competition law jurisdictions, such as the European Union.
3. Not just limited to monopoly buyers
Just because a business is not a monopoly buyer of a product or service, does not mean that a business will not be found to have abused its position of dominance. It is worth noting the Competition Tribunal’s recent decision in The Competition Commission v Babelegi Workwear and Industrial Supplies CC (edited) Case no: CR003Apr20 Babelegi case (the first Covid-19-related excessive pricing judgment), where the Tribunal considered that the Covid-19 pandemic had created economic conditions that were exploited by Babelegi, resulting in an abuse of its market power which amounted to an abuse of dominance. Put differently, it was not Babelegi’s percentage market share that was used to deem it as dominant, as has traditionally been the case. This change in approach by the competition authorities might expose a significantly larger pool of businesses to abuse of buyer power complaints.
4. Focus will be on supply relationships
The Commission will focus on supply relationships for key inputs in the designated sectors. A large grocery retailer who imposes onerous trading terms on a HDI-owned supplier of dairy is therefore more likely to feel the competition authorities’ wrath than a retailer who imposes long payment terms on one of its legal services providers.
5. Scrutiny of trading terms
One-sided or onerous trading terms imposed on relatively substantial HDI-owned suppliers may constitute a contravention of the Act. The Regulations apply to HDI-owned business that supply up to 20% of a business’s requirements for a particular product or service, which, depending on the size of the buyer and the type of product or service, can expose the buyer to complaints from fairly large suppliers.
6. Types of conduct under the spotlight
The Commission, in its recently published Buyer Power Guidelines, has included a list of conduct that it would regard as prima facie evidence of contraventions of the Act. This includes:
in the context of grocery retail and wholesale, if the buyer pays the supplier more than 30 days after delivery, or if the buyer unilaterally changes key terms of the supply agreement, e.g. the terms of delivery, volume of supply, quality requirements, payment terms and price; and
in the e-commerce sector, if the platform owner fails to set out the key terms and conditions, such IP ownership, suspension or termination rights or ranking criteria in plain, intelligible language, if the platform owner requires exclusivity from the supplier or if site rankings are determined based on fees paid by the suppliers to the platform owner.
7. Limiting the loopholes
Businesses can’t avoid compliance with the abuse of buyer power provisions by refusing to do business with SME’s or HDI’s, as avoidance or refusal to trade in order to circumvent the application of the buyer power provisions itself constitutes an offence under the Act.
In light of the introduction of the abuse of buyer power as a standalone offence under the Act, procurement teams should carefully review their practices, including existing supply agreements, to ensure they do not fall afoul of the Act.
The information and views contained in this article does not constitute legal advice. If you do require legal advice, please contact us on hello@lighthouse.law.
