Developments across African jurisdictions are placing dominant buyers in the crosshairs of regulators. Most notably, buyer power provisions have been introduced to the South African competition regime, while legislative reforms in Kenya are underway in order to further regulate the unfair treatment of suppliers by buyers. Once these reforms are fully operational, the regulation of issues arising from buyer power will have a major impact on businesses operating in key sectors within these jurisdictions.
In South Africa, buyer power provisions were introduced as part of a comprehensive package of reforms set out in the South African Competition Amendment Act, which was signed into law in February 2019. While the vast majority of these reforms were brought into effect in July 2019, the buyer power provisions require implementing regulations before becoming operational. The draft buyer power regulations (the Regulations) and draft buyer power guidelines (the Guidelines) were published for consultation in December 2018 and October 2019 respectively.
According to the buyer power provisions, a dominant business in a designated sector is prohibited from imposing unfair prices or other trading conditions on a supplier that is a small and medium business or a firm controlled or owned by historically disadvantaged persons. In terms of the Regulations, it is proposed that the designated sectors include the food and grocery wholesale and retail supply chain; the apparel retail supply chain; online trading platforms; the construction supply chain; the financial and insurance supply chain and the private healthcare supply chain.
The Regulations state that a price will be deemed to be unfair if it is inferior relative to other suppliers and there is no reasonable rationale for the difference. Moreover, the Regulations identify key traits of unfair trading terms including unreasonable transfer of risk or costs, one-sided and onerous contractual terms and disproportionality in light of the objectives of a supply agreement. Some indicative unfair conditions include:
- trading without a contract;
- imposing costs onto the supplier that are not spelt out in a clear and unambiguous manner;
- unilateral and retrospective changes in the supply terms of a material nature to the detriment of the supplier;
- excessively long payment terms;
- an unreasonable transfer of the buyer’s promotion/marketing costs onto the supplier; and
- transfer of the buyer’s risks of wastage or shrinkage onto the supplier where it is not due to the supplier’s negligence or fault.
The Guidelines seek to provide guidance on the manner in which the buyer power provisions will be applied by the South African Competition Commission (SACC). It is notable that the proposed approach appears quite different from a typical competition analysis. For example, as opposed to establishing that a buyer is dominant in a given purchasing market, it would appear that the SACC is asserting that the buyer only needs to be dominant vis-à-vis the supplier in question. As part of this assessment, the suppliers’ financial dependence on a buyer (eg. a patent inability to quickly or easily replace the supplier should it become necessary) will be taken into account.
The introduction of regulation of buyer power in South Africa coincides with similar moves elsewhere in Africa. While the abuse of buyer power is already prohibited in Kenya, there are legislative reforms underway to significantly increase obligations on dominant buyers.
Abuse of buyer power was introduced as a criminal offence in Kenya in 2016. Although implementation rules were prepared by the Competition Authority of Kenya (CAK), they have not yet come into force. Recent and widespread financial distress experienced by a number of large retailers in the Kenyan market revealed huge debts owed to suppliers. This has resulted in renewed corrective legislative efforts through the Competition Act (Amendment) Bill 2019 (the 2019 Bill), currently before the Kenyan Parliament. While the targeted conduct in the 2019 Bill is similar to the Regulations, the proposed Kenyan provisions are not limited to certain sectors or certain class of suppliers.
The 2019 Bill represents a comprehensive package of reforms to the existing buyer power provisions of the Kenyan Competition Act. For example, it is proposed that the CAK can impose reporting and prudential requirements and binding codes of practice in sectors susceptible to abuse of buyer power.
The 2019 Bill also introduces a comprehensive definition of abusive conduct such as delays in payment of suppliers without justifiable reason, the unilateral termination or threats of termination of a commercial relationship without due notice, the refusal to receive or return any goods without justifiable reason, the transfer of costs or risks to suppliers of goods or services by requiring the suppliers to fund the promotional costs of the goods or services, the transfer of commercial risks that ought to be borne by the buyers, buyers demanding unfavourable preferential terms, price reduction below competitive levels and the bidding up of prices of inputs with the aim of excluding competitors from the market.
Further, the 2019 Bill seeks to prescribe mandatory provisions to be included in a supply agreement such as the payment terms and the payment date, the interest rate payable on late payment, conditions for termination and variation of the contract with reasonable notice and the mechanism for dispute resolution.
The South African and Kenyan developments could encourage similar provisions in other African jurisdictions. It is already notable that some new African regimes have provisions that allow for buyer power to be regulated. For example, both the Angolan and Congolese regimes prohibit the abuse of a state of economic dependence (including the termination of established commercial relationships).
With issues arising from potential abuse of buyer power firmly on the regulatory agenda, buyers need to be aware of these developments when dealing with their suppliers. The emerging buyer power regulation materially increases the complexity for businesses operating in these jurisdictions. Businesses need to implement comprehensive compliance frameworks in order to mitigate material risks arising from infringements.
The Inside Africa team would like to thank Diana Situma, Walker Kontos, for her contribution to this blog post.