Increasing efficiencies in supply chains

Mr Rod Sims, Chairman
ABARES Outlook Conference, Canberra
2 March 2016

At the ABARES Outlook Conference in Canberra, Chairman Rod Sims previews the ACCC's new increased focus on agriculture issues. As part of the session on increasing efficiencies in supply chains, Mr Sims also discusses the regulation of monopoly infrastructure and issues relevant to the agricultural sector.


Check against delivery

Thank you to ABARES for the invitation. I am, of course, delighted to be here, but I am sure some of you are thinking ‘you are not Mick Keogh, where is the ACCC’s new Agriculture Commissioner?’

As most of you know, the Government last week appointed Mick as the ACCC’s first Agriculture Commissioner. Mick’s expertise in the sector will be of great benefit to the ACCC and we look forward to working with him.

While this event came a little too early for Mick to speak as the ACCC’s new Commissioner, I am sure you will hear from him soon in his new capacity. However, I do want to make the point that agriculture is a focus for the entire agency, including myself and other commissioners, and Mick will not be alone in driving our agriculture work.

Agriculture issues will be a priority for the ACCC in coming years and today I will preview some of our plans.

Indeed, the session theme ‘increasing efficiencies in supply chains’ ties in extremely well with our agriculture work in particular, and the ACCC’s broad objective of ‘making markets work’.

Today I will discuss:

  1. the ACCC’s current role in agriculture across our regulatory, competition and consumer protection functions

  2. our new increased focus on agriculture issues, and

  3. the regulation of monopoly infrastructure and how this may affect agriculture markets.

Our current agriculture role

At the ACCC, we are no stranger to the farm sector as we interact with agriculture markets across much of our existing work.

In our regulatory work, we make decisions about water, including enforcing water market rules and water charge rules under the Water Act.

Through the Port Terminal Access (Bulk Wheat) Code of Conduct, the ACCC regulates the conduct of bulk wheat port terminal operators.

We also administer the Horticulture Code, which is under review, and the Food and Grocery Code.

Through the collective bargaining authorisation process, the ACCC has a long record of strengthening the position of growers across a range of sectors including dairy, poultry, vegetables and seafood.

We also assess mergers to determine whether they would have the effect, or be likely to have the effect, of substantially lessening competition in a market, and we undertake enforcement action.

I will spend some time on recent activity in both of these areas.

Merger reviews of special interest to farmers

Mergers or acquisitions that involve buyers of primary produce are of most interest to the farm sector.

As part of our merger reviews, we look at the impact of a merger on farmers’ options for selling their produce, and whether the merger is likely to create a firm which can reduce farm gate prices below the competitive level.

Getting to the bottom of these issues requires us to weigh many strong, and often conflicting, perspectives. In providing us with views, some people will draw on experiences from their local areas whereas others will insist that a broader view is appropriate.

In our review of Murray Goulburn’s proposal to acquire Warrnambool Cheese & Butter, many stakeholders argued that close competition between the two had a meaningful impact on raw milk prices paid to farmers in south west Victoria. Others approached the issue from an industry-wide perspective, arguing that local raw milk supply is a tiny part of the global market where the companies really compete, and the ACCC should not worry so much about those farmers.

A similar story emerged in our consultation for JBS Swift’s takeover of Primo. Some people were concerned about JBS’s overall position as one of the largest processors in Australia. Others focused on competition between JBS and Primo on a different geographic level; and on this point, there were diverse views about the distances for economically transporting cattle.

Some people warn us not to miss the forest for the trees; others will say we absolutely should pay attention to the trees! Of course, it is natural for stakeholders to bring their own perspective, no matter what the industry.

The challenge for us is to have a dialogue where we and industry are focused on the same things. This helps us make a decision about the merger based on an accurate picture of the competing firms, the alternatives available to producers, and the critical influences on competition. No doubt, Mick and our new Agriculture Unit will help us do this better in future.

Enforcement action to protect legitimate claims

Another key role is our enforcement of the competition and consumer protection provisions contained in the Competition and Consumer Act 2010 (the Act).

Over many years, we have taken enforcement actions that have involved or affected the agriculture sector.

Actions that come to mind involve labelling and promotional claims.

False or misleading credence claims, including claims about country of origin, can be particularly detrimental to farm businesses.

Misleading claims harm consumers and the businesses that are legitimately investing and trading on the quality or unique nature of their produce.

For example, in the past, we took action against a trader for falsely claiming their meat originated from King Island, Tasmania;[1] a region renowned for quality.

We also took action against a major retailer for allegedly making misleading in-store representations about the country of origin of fresh produce.[2]

Our traditional roles across regulation, competition law and consumer protection will continue as we ramp up our focus on the farm sector.

Our new increased focus on agriculture issues

As many of you will be aware, the ACCC received additional funding through the Government’s Agricultural Competitiveness White Paper to have an increased focus on agriculture markets.

We have since established an Agriculture Enforcement and Engagement Unit; a first for our agency.

The Unit will allow us to build our internal knowledge around the complexities of agriculture supply chains. This will inform the analysis, and ultimately the decision-making, of the ACCC.

The Agriculture Commissioner, along with myself and some other commissioners, will work closely with the Unit to set its direction.

The new Unit will focus on:

  1. investigating potential breaches of the Act and, where appropriate, taking enforcement action
  2. increased engagement with the agriculture sector, and
  3. advocacy on agriculture issues, including through the use of market studies.

I will outline briefly our early plans in each of these areas, starting with our enforcement approach.

New enforcement focus on supply chains

Some may fear that our increased focus on agriculture markets will result in us taking a softer, less rigorous approach to enforcing the law that favours some sectoral interests over others.

I can confirm that the ACCC will continue its rigorous enforcement of the competition and fair trading laws as they apply to agriculture. As with any other sector, our focus will continue to be on the competitive process, rather than protecting certain competitors.

In coming years, we intend to focus our enforcement activities on agricultural supply chains to address anti-competitive conduct or unfair trading practices taking place that breach the Act.

It is important to understand that the Act guides our enforcement action. What some may perceive to be anti-competitive conduct or unfair trading may not be a breach of the law.

Targeted enforcement action, however, can produce tremendous outcomes for markets.

In the area of supermarkets and their dealings with suppliers, we achieved a landmark judgment and outcome in the Coles unconscionable conduct case.

While not specific to the agriculture sector, this matter demonstrates how the ACCC can successfully take enforcement action to improve the operation of a supply chain.

The ACCC has also instituted proceedings in the Federal Court against Woolworths Limited, alleging it engaged in unconscionable conduct in dealings with a large number of its supermarket suppliers. This matter is still before the Court.

The ACCC will closely examine complaints from the agriculture sector and we will take action where we consider a breach of the Act has occurred.

Our new unit will also enable us to be more on the ground, and so be better able to discover breaches of the Act. The extra funding we have received will see more cases involving agriculture before the courts.

New engagement

To get the best results we often use a combination of enforcement and education.

We will be looking to increase our engagement with farmers and other agriculture businesses to ensure they are aware of both their rights and obligations under the law.

Our new Agriculture Unit will enable the ACCC to have a far greater presence in regional Australia.

As part of this increased engagement, we will hold a series of workshops in regional Australia to speak with farmers and agribusinesses about how competition and fair-trading issues affect them.

Such engagement could also lead to more enforcement outcomes.

New advocacy and market studies

As a national regulator, I believe the ACCC has an important role to play as an advocate on competition and consumer protection issues.

Part of our advocacy work in agriculture will involve market studies.

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

Where we have identified issues in a market, a market study can help us to understand the nature of any problems, and then identify what can sensibly be done to improve the working of the market.

These studies will enable the ACCC to improve transparency about how a market operates, by shining a light on particular agricultural supply chains and commercial processes which were not previously well known.

I believe the ACCC, and the wider community, will gain great insights in relation to the working of agricultural supply chains from these studies.

In some situations, the result of a market study can be 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.

With other studies, they will inform our regular enforcement and regulatory work, and offer a competition and fair trading perspective for broader consideration by Government in their development of policy.

We will be making an announcement about our first market study in the very near future.

Access regulation of monopoly infrastructure

The third and final area I would like to cover is access regulation of monopoly infrastructure.

This is an area of concern to the ACCC because natural monopoly infrastructure can act as a bottleneck, hindering competition and efficient investment in upstream and downstream markets along the value chain.

Monopolistic pricing can also lead to inefficient investment decisions and distort supply and demand.

This issue is particularly relevant to the agriculture sector, which relies so much on infrastructure including rail and ports.

Incentives to innovate

Consider the example of a collective of Australian grain growers who export to international markets.

The growers’ crop is transported via rail to port, and the port owner is often a monopolist. The growers are considering an investment to improve productivity.

The initial outlay is significant, but the economic incentive is clear, so the investment looks appealing to the collective of growers.

In the absence of regulation, the port owner will have the incentive and the market power necessary to extract any economic gains from the growers’ investment.

After the growers have made the investment, the port owner can raise their port access charges by the cost saving the growers achieved with the investment.

The growers will be able to predict the port’s pricing behaviour and may opt to withhold or delay their investment, as any gain they make from the project may be wholly offset by increases in port charges.

This sort of monopoly rent extraction has a direct, distortionary impact on the investment behaviour in upstream markets.

The growers’ incentives to innovate or invest in new technologies are curtailed by the prospect of having any gains lost in the form of monopoly rents.

Promoting economic efficiency

It is clear that monopoly infrastructure owners can have a detrimental impact on investment and efficiency. Given this, one might ask why it is not standard practice for such assets to be subject to economic regulation?

The answer relates to the test for regulation used in Part IIIA of the Competition and Consumer Act, known as the National Access Regime.

The focus of this test is on the promotion of a material increase in competition in upstream or downstream markets, where the lack or restriction of access to infrastructure services provided by infrastructure that cannot be economically duplicated would otherwise limit competition in those markets.

It is becoming increasingly apparent that the threat of regulation under the National Access Regime is not acting as an effective deterrent to monopoly pricing and other exercises of market power. The reasons for this are two-fold:

  • First, not all types of monopoly infrastructure services are vertically integrated into related markets, so it is difficult to demonstrate they have an incentive to deny access or set prices in a way that adversely affects competition in another market.
  • Second, supply chain costs incurred from use of monopoly infrastructure can account for a small proportion of the delivered price of a good, so it can again be difficult to demonstrate access will promote a material increase in competition in a related market.

The argument is sometimes made that regulation to address monopolistic pricing is unnecessary, because monopolistic pricing is the simple transfer of economic rents between parties in a supply chain.

However, this argument is ill-conceived. As I have just explained, what is the incentive for either the upstream or downstream markets to be innovative and control costs if any gains are simply transferred to a monopoly infrastructure provider in the middle of the supply chain?

I would note that the regulation of natural monopolies is accepted in other countries; even in the most free market supportive ones like the United States.

I think there would be very few policy makers in Australia who would push for the deregulation of, for example, the poles and wires in the electricity transmission sector in Australia.

Just as Part IIIA is not today relied upon to regulate the electricity sector, nor should it necessarily be relied on to regulate monopoly infrastructure servicing the agricultural sector. Part IIIA was largely envisaged as a regime providing for access to vertically integrated monopolies and in some circumstances provides a useful deterrent to discriminatory conduct.

However, there are some circumstances within the Australian economy where it simply does not work or where its deterrent potential is ineffective.

In these cases, and I think monopoly infrastructure servicing the agricultural sector is one such example, we must seek alternative forms of regulation to address monopolistic pricing and rent transfers which contribute to inefficient economic outcomes.

A live example of this relates to recent and upcoming port privatisations in Australia.

The ACCC has been vocal on privatisations of significant infrastructure such as ports for several years now. While the ACCC generally supports privatisation, it is important that the market structure and regulatory arrangements that will apply post-privatisation are conducive to competition and efficiency.

We had extensive engagement with the Victorian government last year regarding the privatisation of the Port of Melbourne, and I was pleased with the outcome there. I am particularly pleased to hear reports from last week that the Victorian Government has offered to wind back its proposed ‘compensation regime’ to a term of 15 years, a vast improvement on the initial proposal, which was not time-limited. Compensation regimes can hinder the prospects of future competition, entrenching substantial market power held by the lessee.

The last remaining capital city port to be privatised is the Port of Fremantle, which includes the bulk export facilities at Kwinana. This port, WA’s largest general cargo port, was responsible for $28 billion of trade last financial year. Not only does it handle almost all of WA’s container trade it also handles most of WA’s livestock and grain exports. The market structure and regulatory arrangements to be put in place prior to privatisation of the Port of Fremantle should be of importance to all Western Australians, and most particularly, to Western Australian farmers.

I was very concerned to hear press reports about a possible plan to offer the new owner of the Port of Fremantle the right to develop a new port south of Fremantle in the future. As you may be aware, a similar arrangement was entered into over a decade ago in relation to Sydney Airport, Australia’s busiest passenger and cargo airport. This anti-competitive arrangement has curtailed the potential for Sydney to be serviced by two competing airports, to the detriment of passengers and business.

Governments should use privatisation processes as an opportunity to put in place pro-competitive market structures. Failure to do so will come at the cost of an effective ‘tax’ on future generations of farmers, miners and the general community.

Closing remarks

These are just some of the many important issues relevant to the agriculture sector. We will be looking very closely at a range of issues that affect agriculture supply chains over the coming years.

With the new Agriculture Commissioner on board, we look forward to making some more detailed announcements about our activities in the very near future.