In his 2020 State of the Nation Address (SONA), President Cyril Ramaphosa highlighted a number of government strategies geared towards improving the country's economic trajectory. Among these were plans to restore Eskom's operational capabilities, to remove bureaucratic hindrances currently hampering business start-ups, to invest in commuter rail and other essential infrastructure, and to support the tourism industry through improved security. As expected, President Ramaphosa placed inclusive economic growth at the top of government's agenda, noting that far-reaching economic reform measures, including those set out in National Treasury's (Treasury) economic policy paper released in August last year, would be forthcoming.
With the publication of the economic policy paper coinciding with the competition authorities' Thirteenth Annual Competition Law, Economics & Policy Conference, hosted in Pretoria, the pressing need to prioritise inclusive economic development was reaffirmed by 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 and medium enterprises (SMEs) and historically disadvantaged individuals (HDIs) into the economic fold.
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 addressed through, inter alia, the provision of 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 Treasury as a case in point. In addition to extending financial services to the previously unbanked, Capitec's disruption of the prior structure of the retail banking market has generated consumer savings nearing R20 billion per annum.
Competition policy is certainly poised to be a key driver of economic reform, with ambitious strides being made since last year in the form of widespread amendments to the Competition Act. The first wave of amendments took effect in July 2019, developing the approach of South African 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 (Commission) to launch abuse of dominance proceedings against such firms. With a dearth of successful abuse of dominance prosecutions 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 will likely have an increased appetite to prosecute abuses by dominant firms.
The first wave of amendments also impose more onerous requirements on dominant firms in respect of the prohibition against charging excessive prices. They provide cost benchmarks in respect of the predatory pricing prohibition, and codify the practice of engaging in margin squeeze into South African competition law. This was followed, on 13 February 2020 - the date of the 2020 SONA and the two-year anniversary of the day on which the Competition Amendment Bill was signed into law - by a much-anticipated second wave of amendments to the Competition Act. The recent amendments are most noteworthy for bringing about significant changes to the current prohibition against price discrimination (by introducing protections for small and medium-sized firms and entities controlled by historically disadvantaged persons), as well as ushering in buyer power considerations for the grocery retail, agro-processing and online intermediary services sectors which have, until now, not been recognised in express terms.
Both the price discrimination amendments and those relating to buyer power show significant potential for advancing 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 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.
The sentiment is echoed by Treasury, which noted in its recent economic policy paper that SMEs contribute over 50% of all employment opportunities in South Africa, and more than 45% of the country's GDP, but, concerningly, stand only a 37% chance of surviving their first four years, and a mere 9% chance of surviving their first ten. Amongst 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 address the bargaining power asymmetries that may play a role in stifling SME sustainability and development.
The new amendments are accompanied by regulations which detail the application of the prohibitions against price discrimination and the abuse of buyer power by dominant firms. Additionally, the Commission has released draft guidelines on the interpretation of the newly crafted prohibitions. The prohibitions are intended to level the playing field for SMEs and HDI-owned firms when negotiating prices with dominant suppliers and 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 who 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 also 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 stages of finalisation, 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 or not the amendments will be an effective tool for the Commission to achieve this change remains to be seen.
By Angelo Tzarevski, senior associate, and Ryan McKerrow, associate designate, Competition and Antitrust Practice, Johannesburg.