Small Business Institute’s submission to the DTIC on the draft block exemption regulations for small, micro and medium-sized businesses, 2022

 

 

The SBI submitted it’s comments on the draft block exemption regulations for small, micro and medium-sized businesses on 30 September 2022 to the Department of Trade, Industry and Competition (the dtic), the submission can be read below.

INTRODUCTION: THE ROLE OF SMMES IN THE ECONOMY

The Small Business Institute (SBI), a chamber and business forum organisation and a member of Business Unity South Africa, exists to positively influence the environment for small, micro, and medium enterprises (SMMEs) in South Africa. We are an 80-year-old nonprofit organisation representing SMMEs. We are driving chamber formation in townships, towns, and cities and villages and keeping a strong voice in the public square to positively influence the legislative, regulatory and policy environment policymakers about the issues of small business development. The SBI is a participant in the President’s Public Private Growth Initiative. We envision a country where SMMEs are supported by thoughtful, evidence-based policy that limits obstacles to their success and sustainability and the private sector works to eliminate structural obstacles to competition, access to markets and effective entry into supply chains.

The SBI welcomes the introduction of the Draft Block Exemption Regulations for Small, Micro and Medium-Sized Businesses, 2022 (hereafter referred to as Draft BER) as well as the opportunity to comment as part of the ongoing public consultation. We believe the introduction of the BER is an invaluable and timely regulatory intervention to promote the segment’s recovery and growth in a post-Covid 19 market economy. In our view, SMME cooperation can lead to extensive economic benefits and efficiency gains, particularly if they combine complementary activities, skills, or assets.

Furthermore, SMME cooperation can be a balancing instrument for SMMEs to grow and penetrate sectors dominated by large firms and anticompetitive state-owned enterprises. On this basis, SMMEs stand to benefit from economies of scale, pooling know-how, sharing risks and saving costs. This has widespread pro-competitive and economy-wide effects resulting in improved production technology and innovation, improved product quality, and
ultimately, total welfare.

We are in support of the government’s ‘helping hand’ as it is in the public interest to do so because of the devastating effects the Covid-19 lockdowns had on small business. As the study conducted by the Competition Commission indicates, SMMEs were hard hit by the national lockdown. Not only were SMMEs threatened by the sudden economic shock induced by the pandemic, but many were also forced to close down. Support for SMMEs through secondary legislation/regulation is not unique to South Africa. According to a 2022 UN Conference on Trade and Development report, governments in emerging market and developing economies have attempted to assist SMMEs through a combination of measures to assist them to retain/gain market access and to enhance their competitiveness post Covid-19 crisis. These include direct financial support, debt-based support, and advisory support.

Historical examples listed in the report show how Indonesia’s competition law “exempted entrepreneurs categorised as engaging in small scale business, while in China, exemption is granted to agreements entered into or implemented which have as an objective improving operational efficiency for SMEs”. In addition, the report shows how Malaysia introduced a ‘safe harbour’ threshold that presumes agreements or conduct entered by MSMEs with market shares below 20 per cent are unlikely to distort competition in the market. It is well established that, by their very nature small businesses aren’t positioned to form anticompetitive cartels that might grow to the point of being able to abuse their dominant power under the watchful eye of the commission and other sectoral watchdogs. For this reason, we consider it sufficient justification to introduce the BER as SMMEs have a significant role as engines of socio-economic development and improving the country’s competitive landscape too. In what follows, we detail our comments on the draft BER.

SBI SUBMISSIONS ON THE DRAFT BER FOR SMALL, MICRO AND MEDIUM-SIZED
BUSINESSES

1. It is noted in Section 4 that the regulations seek to complement the ERRP and ‘other initiatives.’ To avoid ambiguity, our suggestion is that the statement ought to align the regulations to the National Development Plan (NDP). SMMEs, as envisioned in the NDP, will be catalysts for accelerated growth and generate an estimated 90 percent of jobs in South Africa by 2030. With SMME output expected to grow substantially, it is vital that policy measures targeted to SMMEs are anchored in a whole-of-government approach.

2. In terms of Section 9.2, our recommendation is the provision reads “Production agreements for joint production of goods or the provision of [a] an intermediary service necessary for the production of a product, or toll manufacturing by one firm for another (standalone or on a reciprocal basis) which do not result in the removal of a
competitor from the market.

– This regulation is a particularly attractive provision for SMMEs with production constraints or market access barriers in manufacturing due to the high investments in capital. Our recommendation is to clarify that the parties are already active in the same product market to circumvent opportunistic exploitation of the provisions or corporate restructuring by large companies ‘dressing themselves up as smaller companies to enable collusion on diving markets and massaging prices.’

3. While the intention of granting greater contractual freedom to SMMEs is commendable, the statement of “any other similar arrangement” undermines the clarity of the regulations listed in Sections 9.3 and 9.4. The risk here is that, absent of explicit statements and failure to provide guidance for the interpretation of the wording, the regulations can be easily circumvented by unintended consequences such as market allocation agreements, artificial joint selling structures or purely formal supply commitments. To provide for regulatory certainty and enable compliance, our recommendation is to clarify and frame that the provision only relates to joint selling and joint purchasing agreements or alternatively provide definitive guidance on the statement in a clear and concise manner.

4. Section 11 ought to align with the intention of the regulations and ought to read “the scope of these regulations is limited only to agreements and practices specified under paragraph 9 and which have the sole purpose of promoting the competitiveness and growth of SMMES as set out in paragraph 5 and 6.

5. It is noted that in Section 13 the word ‘may’ is used, our suggestion is that it ought to read ‘shall’.

6. While we support the provision highlighted in Section 15, we wish to add the following text in a sub-section 15.1: as part of organisational record management policies, such records shall be kept for 10 years from the date on which the contracting parties entered into force. The agreements concerned must submitted within a period of 20 working days after request, with the information and supporting documentation which the Commission considered necessary to monitor and evaluate the application of the BER.

6.1 For the purpose of transparency and effective monitoring, this Regulation should prescribe that the parties sign a Code of Conduct/Good Practice indicating the contracting parties’ commitment to applying the highest standards of ethical conduct, integrity, and accountability in business activities and operations. Such a memorandum must be kept and should include amongst other information, the policies, procedures, standards of governance as well as all a commitment to abide by the applicable laws, rules and regulations relating to anti-bribery, corruption, and collusive practices that will undermine the spirit and letter of the Draft BER.

6.2 On this basis, the implementation must be subject to regular evaluation and monitoring, ensuring the activities are not implemented contrary to the public interest under the Act. To sanction anti-competitive conduct and concerted practices, the Commission may in exercising its discretion, and taking into consideration any mitigating circumstances, impose financial penalties after an investigation has been completed.

7. Evaluation and outcome indicators must be linked to a success matrix of employment targets, GDP contribution and the number of sustainable SMMEs within the period of review. Evaluations must be conducted the on the basis of success measures. For example, where 20 percent of the SMMEs must have grown by 50 percent in conjunction to their contribution to employment targets and GDP in the reporting period. Our recommendation is to divide the evaluation into an evaluation phase and impact assessment phase after two and five years respectively.

8. Section 17 states that these regulations shall come into effect on the dates of publication in the Government Gazette and shall endure for a period of five years. We implore the minister to consider a longer exemption period — say 10 years — with a review after five years. Not only will this provide regulatory certainty, it will also help provide space and time for SMMEs to fully take advantage of the regulations.

SPECIFIC CONCERNS

9. The proposed provisions do not go far enough in dealing with information exchange as a business practice.

10. The BER fails to bring legal certainty regarding the possibility that the BER agreements may enable firms to divide markets of sales and purchasing raw materials and other inputs. In particular there may be an enabling environment for concerted practices where contracting parties allocate sales by territories, customers or product types or quantities.

11. Deal exclusively with product and service markets overlooking technology and digitalisation and e-commerce.

12. Although the Draft BER has a very broad scope of application, it does not address the implications these undertakings will have for public procurement and bid-rigging.

13. The proposed exemptions must be accompanied by vigilant monitoring, and business associations should form part of the economic competition watchdog to stop abuse. Sectoral business associations must play an active role in calling out those who abuse the exemptions and sanction any anticompetitive conduct through suspension or termination of membership.

CONCLUSION

As indicated in this submission, the SBI stands ready to work with government on a viable plan with fit-for-purpose solutions to advance and accelerate the growth of our country’s micro, small and medium enterprises. We stand ready to engage with government on the issues we raised in this submission.