Enhancing competition policy

Speakers: 
Mr Rod Sims, Chairman
Conference: 
Law Council of Australia, Competition & Consumer Committee AGM
12 September 2014

ACCC Chairman Rod Sims addresses the Law Council of Australia, Competition & Consumer Committee Annual General Meeting in Brisbane. Mr Sims discusses gaps in the law which can damage economic efficiency and also do not reflect international best practice. He also covers merger policy, and the re-emergence of the 'national champions' argument and briefly comments on institutional issues.

Transcript: 

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Introduction

Thank you for the opportunity to speak again on the eve of this great conference.

Before getting into the substance I would like to make a point to the organisers; while everything is usually perfect, I have to point out that the one AFL semi-final is only an hour away. And I do hope there is a TV at the art gallery so we can watch the other semi-final.

Turning to the substance, Australia needs a strong competition policy because it will drive economic efficiency and performance, and so economic growth, as the Hilmer reforms did 20 years ago.

As we all know a strong competition policy requires two things. First, exposing as many sectors as possible to competition and appropriate incentives, including pricing; and second, having sensible competition law boundaries around where the profit motive might otherwise take you in terms of anti-competitive behaviour.

I have always loved the debates we have in Australia on competition policy. These debates expose widely differing economic philosophies.

For example, there is always a large and small business divide. Those large companies with market power want more sectors exposed to competition, but usually seek weaker competition laws; those without market power usually want the reverse.

We at the ACCC argue for exposing more sectors to competition, and for effective competition laws, to drive economic efficiency and performance. Our submission to the Harper review devoted equal time to both limbs of competition policy.

We highlighted, for example, the need for reform in roads and shipping; the former raises some difficult issues, the latter largely does not.

We also highlighted some constant problems, such as the pitfalls that arise when you privatise to maximise sale proceeds rather than economic efficiency. Contrary to some, we believe it is the role of the competition regulator to make these points and so to be a forceful advocate for competition and economic efficiency.

Hopefully now everyone can see the folly of, for example, selling Sydney Airport with the first right to develop the second Sydney airport. We must avoid such mistakes in the future.

This evening I want to focus on some issues confronting the Harper Panel on Australia’s competition law. The Harper Panel is now well into formulating its draft report, so I do not seek to influence this; but there are some points that I feel I need to make to this audience.

First, I will discuss the areas where our laws have gaps which can damage economic efficiency and also do not reflect international best practice.

Second, I will discuss merger policy, and the re-emergence of the old “national champions” argument which, if followed, can significantly damage the international competitiveness of many sectors in our economy.

Third, I will comment briefly on some institutional issues.

The main areas where our laws are behind international best practice and can damage economic efficiency

My focus today is on three areas: Section 46, facilitating practices or price signalling, and market studies.

Section 46

The three options we have put forward have generated an amazing debate. Indeed, some critics have prefaced their strident views with the observation that competition policy should not seek to protect inefficient companies to the detriment of consumers. This is self-evidently true; indeed in competition circles it amounts to citing a belief in motherhood.

In a strange twist, the debate has cast the ACCC as actually opposing motherhood.

In last Wednesday’s Australian Financial Review (AFR) it was said that the ACCC’s “…proposed changes to competition laws…would prevent larger companies taking action that hurts…smaller businesses” (page 34, 3 September 2014).

In last Thursday’s AFR our suggestions were said to “…make big business liable for the financial losses of their smaller rivals” (page 10, 4 September).

These statements are not correct. Such outcomes are visibly not the purpose of the ACCC’s proposals; nor would our proposals have this effect.

Indeed, the ACCC would be at the forefront opposing any laws that sought these outcomes.

Let me be very clear where the ACCC stands in this debate: we are for competition.

We do not seek to protect the inefficient and the uncompetitive, whatever their size or market position.

We do not want to protect those with established market power from efficient and innovative challenger firms; neither do we seek to protect smaller firms that are unable to compete on their merits.

I feel I am forced to use a sporting analogy to get our point across.

If Hawthorn, currently a strong team for those unfortunate people who do not follow AFL, were playing Melbourne, currently not so strong, the umpire would never seek to step in to avoid the obvious outcome. Let the competition occur on its merits.

Our various proposals to change Section 46 are in essence not aimed at what happens on the playing field, but instead seek to address exclusionary behaviour akin to when one team, with substantial market power, has locked the other in their change rooms and is seeking to win by default.

Currently, we would argue, the key problem with Section 46 is that it would not address this exclusionary behaviour because even companies without market power can have a policy to change locks on a regular basis.

Let me explain.

In our view, the current test in s.46 and the way it has been interpreted has two problems.

First, the purpose/competition limb of the test is directed at the impact of the conduct on individual competitors, rather than the impact of the conduct on the competitive process in the market. I believe this focus drives many incorrect views of what  s.46 is meant to achieve. Hence we have suggested a test of whether the conduct has the purpose, effect or likely effect of substantially lessening competition in a market.

Just as an agreement is scrutinised under the Act for its effect on the competitive process, so too can unilateral conduct by a firm with substantial market power be scrutinised in this way.

This, after all, is economic law; outcomes such as the effect on competition should matter.

To be clear, although it should not be necessary to say this, conduct such as a corporation gaining an advantage through R&D and innovation, or as a result of economies of scale, would not be regarded by the ACCC, or the courts, as a substantial lessening of competition, even if the conduct caused competitors harm or forced them to exit the market. These activities are part of the competitive process

Because the words of the competition limb of s.46 focus on protecting individual competitors, rather than on the competitive process, the words “taking advantage” have had to distinguish what is anti-competitive from what is pro-competitive.

This is a strange situation to an economist and gives rise to the second problem with s.46.

Rather than asking whether the conduct enabled the firm with substantial market power to achieve an exclusionary purpose, thereby damaging the competitive process, court cases can get side tracked into deliberations about what a hypothetical firm in a counterfactual world lacking substantial market power might do.

The problem is well illustrated by cases where the courts have applied the tests in both s.46 and s.45 to particular conduct and found a breach of s.45 but no breach of s.46.

Greenwood J was able to conclude this year that Cement Australia had entered into agreements for the acquisition of excessive amounts of fly ash that had both the purpose and effect of substantially lessening competition. He was, however, unable to conclude that the same conduct had taken advantage of substantial market power because other commercial factors existed which suggested that a profit maximising firm lacking substantial market power may have acted as Cement Australia did.

In this case, because the conduct involved an agreement, it could also be captured by s.45.  This is not the case for purely unilateral conduct; for example, buying up all available land, restricting the supply of essential inputs, predatory pricing, and anti-competitive bundling or loyalty rebates.  Each of these categories of conduct are well recognised world wide as potentially exclusionary.

The ACCC has had investigations into serious exclusionary behaviour where it could not take action because of the current wording and interpretation of s.46. Not pursuing such actions, as other competition regulators can and do overseas, damages our nation’s economic efficiency and performance.

The ACCC’s proposals for the reform of s.46 seek to ensure this section works effectively to prohibit exclusionary conduct by a firm with substantial market power consistent with the approach to unilateral conduct adopted in other major jurisdictions.

The ACCC has proposed three options to fix the widely recognised problems with s.46, but there may be other ways to achieve this.

This issue now rests with Professor Harper and his panel, and we will await their views on this very complex area of the law. We are told the draft report is due in Grand Final week so some of us may take a little time to absorb the Panel’s findings.

Price Signalling

“Facilitating practices” refers to conduct or practices that assist competitors to cooperate rather than compete. It is behaviour that assists firms in concentrated markets to overcome difficulties in coordinating their conduct. Their effect is to move the market away from a competitive outcome and toward a monopoly outcome.

Such an outcome can be just as harmful to competition and consumers as an explicit cartel.

The range of conduct encompassed by the term facilitating practices is potentially broader than information exchange; for example, the adoption of MFN clauses, delivered pricing or RPM.  However, the private exchange of pricing information, particularly future pricing intentions, or other strategically significant information between competitors, probably covers the main form of conduct that is likely to adversely affect competition and is not otherwise captured by the Act.

The current prohibitions against anti-competitive information exchange under the Act are, of course, limited to the banking sector.  Like other prohibitions under the Act, these prohibitions should apply equally across the economy, except where the conduct has been authorised on public benefit grounds.  This would bring us more into line with competition law in Europe, which prohibits “concerted practices” which are anti-competitive by object or effect.

We note and welcome the Law Council’s willingness to consider some form of broad facilitating practices legislation, albeit in a very different form to what we have now.

Market Studies

Market studies are widely used by competition agencies around the world to enable them to develop a sophisticated understanding of how well competition and markets are working in particular sectors.

When agencies suspect a market is not working well for competition and consumers the studies help them understand if this is the case and then identify what can sensibly be done to improve the working of the market, such as removing unnecessary impediments to competition.  One example of such an impediment was the removal of restrictive covenants in shopping centre leases that came out of the 2008 Grocery Inquiry.

Importantly, these studies also enable agencies to give a market the ‘all clear’; that is, to recognise that the market is working satisfactorily and that there is no need for intervention.

The International Competition Network reports that more than 40 ICN members use such studies, particularly our more experienced counterparts such as the highly regarded United States Federal Trade Commission, the UK Competition and Markets Authority, and DG Competition at the European Commission.

When a market study identifies problems or outstanding issues, agencies may undertake targeted compliance, education or enforcement action to address the outstanding issues. They can also make recommendations to governments.

There is, we believe, a gap in Australia’s competition debate and focus. We see the ACCC as an advocate for competition, just as our counterpart agencies are in their countries.

We play that role now in many ways; for example, our submissions to various inquires, and our entry into the debates on privatisation and “national champions”.

Reinforcing that role with an explicit market studies function would enhance Australia’s competition culture and bring Australia into line with global best practice.

Merger law and the unfortunate re-emergence of the old 'national champions' argument

One of the problems of being involved in competition policy for very many years is that you get to see some of the same issues continually re-emerge. The arguments in favour of supporting national champions is one such example.

A desire for Australian firms to be successful globally does not mean that protecting firms from competition at home is justified. Australia already has a relatively high level of market concentration in many sectors so great caution needs to be exercised to prevent further consolidation for the wrong reasons.

Michael Porter’s warnings about the risks of policies which protect firms from competition in domestic markets actually lowering national productivity and reducing the competitiveness of firms overseas is still just as relevant as it was in the 1990s.

Preserving domestic competition is important for promoting the global competitiveness of traded products, both because domestic rivalry sharpens global competitiveness and because products which are not traded internationally may be inputs into traded goods.

Promoting national champions, of course, takes us in the opposite direction to micro economic reform.

The majority of submissions to the Harper Review which advocate for national champions at the expense of domestic competition appear to be based on the sole example of the attempted Murray Goulburn/Warrnambool Cheese and Butter acquisition. Here the ACCC identified preliminary concerns in domestic markets for the acquisition of raw milk, and Murray Goulburn argued that the merger would result in increased global competitiveness.

Section 50 has no ‘offset’ which enables a merger that results in a substantial lessening of competition in a domestic market being cleared on the basis of improved efficiencies for the merged entity which may allow it to compete more effectively in a global market.

What is being lost in the national champions arguments, however, is that despite the transaction raising concerns under section 50, that does not mean that there is a problem with section 50 or the ACCC’s approach. Mergers can be authorised if the merger results in a net public benefit.

Murray Goulburn took the appropriate option of applying to the Australian Competition Tribunal for merger authorisation. It is unfortunate that this application was withdrawn before the matter was heard and determined by the Tribunal on the merits of this important issue.

There is a real risk that the current debate is blurring the important distinction between industry policy and merger policy. Comparisons have been drawn between the scale of dairy processors in Australia and New Zealand. In the case of Fonterra, the NZ government initiated industry policy via legislation, combined with regulation of Fonterra’s pricing in domestic markets, to allow Fonterra to grow through acquisition.

It is simply wrong to judge the effectiveness of the Australian merger control policy against individual and deliberate industry policy initiatives in another country.

It is also worth noting that of the four mergers opposed by the ACCC last financial year, none involved trade exposed sectors which is where national champions claims are raised. On the clearance side of the ledger, there are a number of examples in recent years where clearance has been granted to mergers where competition from imports would provide an effective competitive constraint even though the merger would have led to a significant reduction in the number of domestic competitors.

Section 50 therefore already allows the ACCC to take into account the impact of globalisation and the changing nature of constraints imposed in dynamic markets, and we do.

The increasing calls for national champions is similarly occurring in other parts of the world. I want to share with you a recent article in the Global Competition Review to highlight the slippery slope that can emerge when protectionist sentiment is used to override competition law. The now-former French industry Minister, Arnaud Montebourg, who had been calling for more mergers in the telecoms sector to address the ‘destructive spiral’ of price war, had been openly critical of the French competition authority. In his criticism of the regulator, he colourfully said “You are against cartels and I organise them. You are appointed and I am elected. So, who is right? Clearly me!”.

My final comments on mergers relate to two other longstanding issues; timeliness and access to file.

We agree that the average length of our public reviews has increased in recent years. It is inappropriate, however, to compare the length of time taken when public reviews were done in a majority of merger assessments, as in 2009-10, with the current position where over 80% of mergers are pre assessed. It is not a like for like comparison.

And setting up front time constraints when there is no upfront requirement on the parties to supply information is a logical contradiction.

On access to file I hear constantly that the ACCC should do this as this is what the European Commission (EC) does. This ignores the EC’s formal merger system and the fact that the EC’s competition regulator is the ultimate decision maker.

Introducing aspects of a formal regime into our informal system will not work. It will destroy the timeliness and flexibility of the informal system that many prefer. Merger parties cannot have it both ways but this, I fear, is what many are now seeking.

The solution, I think, is to consider whether there are process changes that can be made to the formal system to provide an alternative path. Such a formal system, however, must have upfront information requirements and the burden of proof on the parties to satisfy the ACCC, and the Tribunal should the parties wish to seek a review of the ACCC’s first instance decision.

In essence, this is how formal merger clearance systems operate in all major jurisdictions, for good reason.

Comment on some suggested institutional changes

The terms of reference of the Harper Review ask whether the structure and powers of the competition institutions remain appropriate.

This will be a vital part of the Review and debate. A particularly challenging issue for the Harper Panel will be how to ensure competition reform is self-sustaining. I hope our suggestion of a market studies power for the ACCC is part of this mix.

Only about 15 out of 300 submissions commented on the ACCC’s structure, with about half of those supporting the existing arrangements. Eight of the submissions also discuss the need for additional oversight mechanisms including the Law Council of Australia (Competition & Consumer committee) and Business Council of Australia.

I’d like to make a couple of comments in relation to these suggestions.

First, I’d emphasise that the ACCC is an investigative body. It’s the courts, not the ACCC, which determine whether the competition or consumer law has been breached. Compared to many of our counterparts overseas, who are first instance decision makers, and can impose penalties, the courts already provide a large and completely appropriate, check and balance.

 Second, the ACCC already has many additional accountability mechanisms. Without wanting to bore everyone, the list includes:

  • our Service Charter which sets out a process for complaints over the conduct of the ACCC
  • the Commonwealth Ombudsman
  • Freedom of information obligations
  • the Australian National Audit Office
  • inquiries or reviews initiated by Ministers
  • Parliamentary oversight (including Senate Estimates)
  • the Office of Legal Services Coordination (including model litigant obligations); and
  • Ministerial statements of expectation to the heads of agencies, and corresponding Statements of Intent from the agencies.

In my mind there is a significant question as to whether we want to add more “red tape”.

Third, whenever we take on large companies, your clients, we are always massively out spent. We are necessarily resource constrained, and indeed the legal fees that we can pay are capped significantly below commercial rates. Large firms defending their actions face no such constraints.

In terms of the ACCC’s actions and processes it is clearly impossible, and inappropriate, for the ACCC to please everyone all of the time. Being criticised, almost always for not doing enough, comes with our role and we accept this.

Imposing more red tape on the ACCC will, I think, only increase such criticism.

Thank you for your time, and now let the AFL semi-final begin.