By Charl van der Merwe
Global markets are in turmoil and governments around the globe are under increased strain to prevent the spread of the Covid-19 virus whilst maintaining necessary services. A key concern in South Africa and elsewhere has been the availability of key supplies and the capacity of the health care and other infrastructure system to meet the unprecedented demand.
In order to alleviate these concerns, South African Minster of Trade and Industry and Competition (DTIC) has moved to publish Regulations in terms of Section 78 of the South African Competition Act 89 of 1998 (Competition Act):
- exempting industry players in certain sectors from prosecution for conduct in contravention of Sections 4 and 5 (Act) (Block Exemptions); and
- prohibiting excessive pricing (and ensuring sufficient supply) by firms selling key supplies (Pricing Regulations);
Traditionally, exemptions in terms of the Competition Act were granted through application to the Competition Commission, based on the specific grounds as defined in section 10 of the Competition Act. In terms of the Competition Amendment Act, application for a block exemption can also be made directly to the Minister.
Related to the exemption process in terms of the Competition Act, is the powers of the Minister to publish directions under the recent Regulations issued in terms of section 27 (2) of the Disaster Management Act (GN 318 of 18 March 2020). In this regard, Regulation 10(6) provides that the Minister may issue directions to:
- protect consumers from excessive, unfair, unreasonable or unjust pricing of goods and services during the national state of disaster; and
- maintain security and availability of the supply of goods and services during the national state of disaster.
Block Exemptions have been published by the Minster in terms of section 10(10) of the Competition Act which provides that the Minister may, after consultation with the Competition Commission (SACC), issue regulations in terms of section 78, exempting a category of agreements or practices from the application of sections 4 and 5 of the Competition Act.
As at the date of writing, Block Exemptions have been granted to the Healthcare Sector, the Banking Sector and Retail Property Sector.
Health Care Sector
The exemption include a range of industry players, including healthcare facilities, pharmacies, medical suppliers, medical specialist, pathologists and laboratories, and healthcare funders.
Exemptions are fairly novel in South African competition law, although the National Hospital Network (NHN) has for many years now operated under an Exemption in terms of which it is permitted to engage in collective bargaining, global fee negotiations and centralized procurement (The NHN is a non-profit co-operative venture that is controlled by its members, a group of independent private hospitals who run medical establishments such as day clinics, sub-acute facilities and psychiatric facilities). The Exemption was renewed by the SACC for a further 5 year period in November 2018.
The Block Exemption will similarly allow industry players to coordinate on procurement of supplies, transferring equipment and coordinating the use of staff. In effect, the Block Exemption extends and broadens the scope of the exemption enjoyed by the NHN to include state and private healthcare.
While this move is certainly a welcome one to ensure that South Africa is able to effectively deal with the spread of Covid-19, its effect on competition in this market will be most interesting. The health care sector, and particularly large private sector players (Private Health Care), has long been in the cross-hairs of the SACC, with many enforcement actions, heavily contested merger control proceedings and most recently, the market inquiry into the private healthcare sector conducted and concluded by the SACC. Concentration and Coordination has been key to the debate.
Allied to this and according to industry expert, Avias Ngwenya of Nortons Inc, these measures are effectively a forced trail run of the South African Government’s recently proposed and highly criticized National Health Insurance (NHI) which, he believes will test the ability of private healthcare to provide healthcare services to the state.
While the Exemptions will apply only for so long as the state of disaster remains in effect, the effects of these measures on the industry is likely to endure for some time and will reform the debate around the future of health care in South Africa.
The Block Exemption published in favour of the Banking Sector is aimed at exempting category of agreements or practices between Banks, Banking Association of South Africa and/or Payments Association of South Africa from the application of sections 4 and 5 of the Act and promoting cooperation between these industry participants to mitigate damages and to ensure the effective continuance of banking infrastructure. In this regard, industry participants are to coordinate and agree on, inter alia:
- operation of payment systems and the continued availability of notes at ATMs, branches and businesses;
- debtor and credit management to cater for payment holidays and debt relief (including limitations on asset recovery and the extension of further credit terms).
Retail Property Sector
The Block Exemption in respect of the Retail Property Sector applies only to retail landlords and designated retail tenants (required to shut down in terms of the national shut down currently in place) and aims to provide a framework for cooperation between industry participants in respect of payment holidays and rental discounts and limitations on the eviction of tenants. The Block Exemptions also seek to cater for cooperation on limitations to the restrictions placed on tenants to protect their viability during the nation disaster, likely to allow tenants to alter of expand their product or service offerings to fall within the category of businesses or services exempt from the restrictions currently enforced by Government, thereby ensuring alternative income and increased capacity on key products and services.
The Block Exemptions in respect of the Banking and Retail Sectors provide welcome relief to small businesses who have been hard hit by the restrictions put in place both locally and internationally. This is a key object and concern of the government and, in particular the DTIC who have placed small and medium business at the centre of competition policy in an effort to ensure greater participation by historically disadvantaged individuals in South Africa. This has been evident through the amendments to the Competition Act and recent conditions which have been imposed on large international mergers. The DTIC is, therefore, intent to ensure that these efforts are not effectively nullified by the emergency measures put in place to prevent the spread of the Covid-19.
Block Exemptions have not been widely utilised in South Africa. To the extent that the measures introduced by the Block Exemptions are effectively implemented, however, the use and application of the process of exemptions under the Competition Act may become a more prominent feature of the South African competition law process. The nature of emergencies are such that they expedite the implementation of historical process which were otherwise untouched or contested as the counterfactual has changed.
It is already evident that more and more industries affected by the Covid-19 will apply for or be granted block exemptions to ensure that they are able to effectively avert the negative effects associated with disruptions caused to the business and economy. Examples of these include the Grocery Retail and/or Fast Moving Consumable Goods Sectors, Security Sector and more.
The Pricing Regulations, most interestingly was published by the Minster in terms of the Combination of the Competition Act, the Consumer Protection Act 61 of 2008(2008) and the Disaster Management Act (2002) and apply only to the ‘key supplies identified in the Pricing Regulations and will remain in effect only for so long as Covid-19 remains a ‘national disaster’.
Section 8(3)(f) of the Competition Act provides that in determining whether a price is an excessive price (for purposes of section 8(1)), it must be determined whether that price is higher than a competitive price and whether such difference is unreasonable, determined by taking into account any regulation published by the Minister in terms of Section 78.
Now, in terms of the Pricing Regulations a price will be considered an excessive price for purposes of Section 8(1) of the Competition Act where, during this period of national disaster, a price increase:
- does not correspond to or is not equivalent to the increase in the costs of providing that goods or service; or
- increases the net margin or mark-up on that good or service above the average margin or mark-up for that good or service in the three month period prior to 1 March 2020.
Notably, Section 8 applies only to dominant firms.
In addition to the above, the Pricing Regulations contain a similar assessment for the consideration of what is termed unconscionable, unfair, unreasonable and unjust price increases in the Consumer Protection Act. While it is likely that what constitutes an excessive price under the Competition Act will also constitute an unreasonable price increase for purposes of the Consumer Protection Act, the opposite may not be true. The Consumer Protection Act is enforced by a different authority in South Africa and case precedent has been quite limited, compared to the competition authorities.
The Pricing Regulations also cover quantities and the restrictions on sale to maintain equitable distribution and curb stockpiling. No mention is made of the Competition Act or Consumer Protection Act in these paragraphs, although they should also be considered in the broader context of competition policy and what the Pricing Regulations seek to achieve. Although South African competition policy is not ordinarily concerned with discrimination at the final consumer level, in terms of the Pricing Regulations, retailers are effectively required to ration the quantity sold, as the normal economic mechanism, whereby suppliers sell to those parts of the demand curve with a sufficient willingness to pay, is suspended.
The penalty provisions of the Pricing Regulations require prosecution in terms of the underling legislation, being the Competition Act and Consumer Protection Act respectively as these sanctions exceed the powers given to the Minister in the Disaster Management Act. The Pricing Regulations state that subject to the further specific provisions of the respective pieces of legislation, a failure to comply with the Pricing Regulations may attract a fine of up to R1 000 000 and/or a 10% of a firms turnover and imprisonment for a period not exceeding 12 months (depending on the applicable legislation). In terms of the Competition Act, only cartel conduct under section 4(1)(b) attracts criminal liability.
The Minister has recently announced that 11 firms are currently under investigation for allegedly contravening the provisions of the Competition Act and/or Consumer Protection Act in a manner prohibited by the Pricing Regulations.
While these rather drastic measures are necessary and the Minster and SACC should be commended for their swift action, the effects of these measures are set to leave a lasting impression on competition law and the precedent arising out of the investigations and subsequent referrals in terms of these Pricing Regulations.
The Disaster Management Act provides that the declaration of a national state of disaster can terminate after the expiry of 3 months or upon notice in the Government Gazette by the Minister before the expiry of 3 months. The Minister can nonetheless extend such a period for one month at a time. Accordingly, the Disaster Management Act offers little certainty on how and when the measures implemented will come to an end.
Temporary measures tend to have a nasty habit of outlasting emergencies.