Engineering News: Incoming competition regulations could improve bargaining power of agri SMMEs

Law firm Cliffe Dekker Hofmeyr (CDH) says the incoming Draft Block Exemption Regulations (BER) for small, medium-sized and microenterprises (SMMEs) holds opportunities for small agricultural businesses to enter into joint procurement arrangements or buyer groups, and enjoy discounted procurement rates.

Trade, Industry and Competition Minister Ebrahim Patel in August 2022 published the draft regulations for public comment. The regulations are aimed at exempting certain categories of agreements or practices of SMMEs from the application of Sections 4(1) and 5(1) of the Competition Act, thereby enabling collaboration between SMMEs that would otherwise contravene the Act.

“The draft BER assists in creating certainty that SMME firms will not be prosecuted for contraventions of the Competition Act in circumstances where broader economic considerations, such as their effective participation in the economy, are deemed more important,” CDH notes.

Section 4(1) of the Competition Act prohibits outright competing firms from colluding to fix a buying or selling price or other trading conditions; and collusive tendering and dividing markets by allocating customers, suppliers, territories or specific types of goods and services.

The regulations propose the exemption of seven categories of agreements or practices of SMMEs, including research and development agreements; production agreements – for production of a good or the provision of a service, or toll manufacturing by one firm to another; joint purchasing agreements, which may include collective purchasing by a subset of firms in a market; and joint selling prices of goods or services to and through intermediaries or other business customers, by a subset of firms in a market.

CDH competition director Andries le Grange explains that the agricultural SMMEs who qualify for these exemptions, as per the draft BER, are medium-sized businesses employing between 51 and 250 people, with a yearly turnover of about R35-million; small businesses employing between 11 and 50 people, with a yearly turnover of about R17-million; and micro-sized businesses employing between zero and ten people, with a turnover of about R7-million a year.

Le Grange says joint purchasing or joint procurement involves buyers cooperating to source all or part of their requirements for products that are either production components which they transform, or goods which they resell.

In turn, buying groups involve procuring products as a group, which enables negotiation to receive products at a discounted rate, and selling products at a competitive rate to consumers in the market.

The benefits of these arrangements include the ability to negotiate bulk price discounts and offering the product or service, in turn, to customers at a discounted rate, particularly as SMMEs often have weak bargaining positions.

Le Grange highlights that the aim of the regulations is to help get small businesses on their feet or give them a leg-up in the market.

Le Grange explains further that the courts have often found a joint purchasing agreement to not have collusive outcomes, and yet it is prohibited in terms of the Competition Act. Therefore, there is room to characterise arrangements as conduct which does not contravene Sections 4 or 5 of the Act.

Although the regulations provide some relief for SMMEs, firms that do not fall within the threshold requirements for SMMEs do not qualify for the exemption. Notably, the exempted agreement must be inclusive of the majority of SMMEs in a market, Le Grange explains.

He adds that, before the publication of the draft BER, there was not much South African jurisprudence which shed light on the circumstances in which joint procurement would result in a contravention of the Competition Act.

Moreover, Le Grange suggests that other firms that are part of buyer groups should carefully consider whether their arrangements are compliant with the law or not.

He says many larger firms may feel at risk once these regulations come into effect; however, they have the opportunity to help facilitate buyer group or joint procurement arrangements for SMMEs as part of their upliftment efforts instead.

Commenting on the publication of the draft BER for public comment last year, the Small Business Institute stressed that the proposed exemptions should be accompanied by vigilant monitoring and that business associations should form part of the economic competition watchdog to stop market abuse from happening.

The institute called for sectoral business associations to call out those who abuse exemptions and sanction any anticompetitive conduct through suspension or termination of membership.

Marleny Arnoldi

by Engineering News