The future of competition policy and its implications for Australian agriculture

Speakers: 
Mr Rod Sims, Chairman
Conference: 
Australian Farm Institute Conference, Melbourne
13 November 2014

Addressing the Australian Farm Institute Conference in Melbourne, ACCC Chairman Rod Sims explains how Australian agriculture can benefit from better competition policy. Mr Sims comments on the 'national champions' argument and advocates important changes to collective bargaining. He also calls on the egg industry to review free range claims following a recent Federal Court decision.

Transcript: 

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Introduction

Thank you for the invitation to speak today.

While I will not claim to have a deep connection to the land, I used to visit my grandfather’s farm in Gellibrand, just outside of Colac, often while growing up.

So I am the son of a farmer’s daughter.

As you know we are in the middle of the first major review of competition policy and law in 20 years. The policy and the law are both crucial.

Competition policy consists of the measures governments take to expose more markets to competition, remove barriers to competition and make markets work better by, for example, improving pricing.

Competition law establishes the rules of the game or the boundaries within which markets can work. These are administered by the Australian Competition and Consumer Commission.

With this in mind today I will cover three topics.

First, how Australian agriculture can benefit from better competition policy and some measures that can make markets work better.

Second, and a related point, I will make some comments on “national champions”.

Third, I would like to explain the balance that competition laws must strike, and to outline some useful changes and some areas where the laws could stay as they are.

Benefitting Australian agriculture by making some markets work better

As part of our submission to the Harper Review, we have proposed reforms in the areas of privatisation, road transport, shipping and water.

We think the farm sector stands to benefit from each of these so I will briefly touch on them.

Privatisation

From the perspective of a competition regulator, there are good and there are bad ways to sell government assets.

For example, privatisation should not be driven by budget goals at the expense of creating a competitive market structure, or putting in place appropriate access or price regulation.

Farmers, other users and consumers will ultimately be the ones paying more, if port sales are not properly managed.

When selling ports we need to ask how we can maximise competition between ports; whether third party access regimes are needed; and whether monopoly port pricing needs to be regulated.

Each of these steps may lower the sale proceeds the government receives, but each will be to the long term benefit of the community.

Road transport

Current road charging mechanisms and structural arrangements fail to promote efficient decisions by road users and funding bodies because of three main disconnects:

  • First, the prices faced by road users do not reflect the economic costs of using roads, sometimes by a very long way
  • Second, there is no link between the prices charged to road users and the revenues received by road providers, and
  • Third, decisions about funding for investment in roads are often made via political processes rather than by an independent assessment of the relative costs and benefits of a proposed investment.

I recently read a news article that illustrated this problem.

Last month, a regional NSW council decided not to join a proposed scheme that would have allowed larger trucks on its roads during the upcoming grain harvest, with a significant concern being inadequate funds to compensate for additional road maintenance.

Road reform that addresses the three disconnects would see the council having the financial incentive and ability to provide access to vehicles carrying heavier loads, thus reducing supply chain costs and increasing returns to producers and their rural communities.

Road reform can likewise improve the landside connections to ports.

We should take the opportunity to engage in structural reform of road provision and charging.

Those of you who run diesel trucks in your businesses know that you already pay a road user charge.

Road user charges would not impose an additional burden but could be implemented through replacing some of the excise on fuel. We believe these reforms could lead to considerable productivity benefits, which would be shared by the agricultural sector.

Shipping

About 99 per cent of Australian imports and exports are transported by sea and coastal shipping is a potential alternative to road or rail for domestic freight.

Policies which restrict competition in the shipping industry should be reviewed and abolished where appropriate.

Restrictions on coastal shipping are one example.

The current exemptions from cartel laws for liner shipping are another.

Water

The water sector has gone through a series of reforms and water markets now exist in many areas throughout Australia.

The development of these markets has helped many farmers make better use of the available water and mitigate drought.

However, there is scope for further reforms to better define the types of rights available, and to extend the reach of water trading in a range of ways; for example, in more rural areas, between rural and urban regions, and between different water users.

I have only briefly touched on each of these areas. Since they all directly affect the farm sector I would urge you to engage strongly with this reform agenda, and to push for other reforms that can improve how markets work to your benefit.

National champions argument

In my view having governments promote national champions takes us in the opposite direction to reform that makes markets work better.

It is, of course, terrific when companies out compete their rivals and take on the world.

The concern is when they call for restrictions on competition at home so they can better compete on the world stage.

The argument is a contradiction: if you cannot beat your rivals at home how can you hope to do so overseas?

Interventions by governments to restrict competition with the aim of designing an ‘ideal’ market structure are fraught with risks and difficulties.

While the intention may be noble, history tells us that such interventions typically entrench inappropriate market structures and create a dependency on government assistance.

It was pleasing to see the conclusions reached by the Productivity Commission (PC) in its recent inquiry into the costs of doing business in Australia’s dairy manufacturing industry.

Not just because it supported the views expressed in the Harper Review Panel draft report and those of the ACCC on the issue of “national champions”, but also because it addressed concerns about the economic reasoning of those who support the creation of national champions.

A recent study by McKinsey portrayed the New Zealand (NZ) dairy manufacturing industry as an example where ”purposeful redesign of the regulations and incentives that shape a market may be required to unlock Australia’s potential”.[1]

The PC concluded that suggestions we should emulate the structure of NZ dairy manufacturing with a ‘national champion’ in Australia were based on an overly simplistic comparison of the export performance of the two countries; gloss over the arrangements that underpin the NZ dairy industry; and overemphasise the role of plant scale.[2]

More importantly, the PC concluded that the most beneficial dairy industry structure for Australia will be determined by the market place.

It said attempts by governments to ‘second guess’ market outcomes to achieve a particular industry structure are fraught with difficulty and likely to impose net costs on the industry and the community more generally.[3]

And in wheat, calls to exempt CBH in WA from the provisions of the Wheat Port Mandatory Code of Conduct (the Wheat Code), which I will talk about later, which may be driven by a national champions argument, may backfire on farmers. Without effective port access arrangements in place, WA farmers may not have the competition for their grain that they would otherwise have.

Getting the right balance in our competition laws

Our competition laws currently set quite broad boundaries around business behaviour. That is, our Parliament has designed them so that they are not very intrusive.

This is as it should be. Intrusive laws can stifle innovation and competitive rivalry, and all the other benefits we gain from companies and individuals seeking to maximise profits.

There must, however, be some limits to what firms can do otherwise our market economy will not work as it should. For example, we do not want cartels, or agreements or mergers that substantially lessen competition, we do not want misleading or unconscionable conduct, and we do not want firms to misuse their market power.

The Harper Review is currently assessing whether our current competition laws have got the balance right. It has recommended a number of changes, most of which we support, but we are also pushing some further changes.

Today I will address the matters that I think are of most relevance to the farm sector. I will briefly cover:

  • Misuse of market power
  • Unconscionable conduct
  • Some needed improvements to collective bargaining
  • Use of industry codes
  • Market structures and advocacy
  • Credence claims, and where we do not need standards, and
  • Third party access to infrastructure.

Misuse of market power

This part of our Act is misunderstood.

It essentially deals with one competitor misusing its market power against one or more of its competitors or potential competitors.

It is about firms with substantial market power who unlawfully seek to exclude another firm or firms from competing in any market, using their market power.

It is therefore of little if any relevance to a farmer’s day to day dealings with a buyer of their product.

We believe the current misuse of market power provision is poorly targeted and of limited utility. It currently deals with, in essence, damage to individual competitors rather than to the competitive process; it allows firms with substantial market power to do any action if a smaller company can do the same thing, which is a flawed filter for behaviour of concern; and it only captures conduct which has the purpose of damaging a competitor and has no regard to what the effect of the behaviour on competition was.

The Harper Review is seeking to deal with these flaws and has made a good start.

I believe, however, that there are many sections of our Act which are more important for the farm sector, which I will now turn to. In some areas we see that changes are needed; in other areas they are not.

Unconscionable conduct

This section of our Act can be of more relevance to the farm sector as it can cover dealings between suppliers and buyers. In our view no changes are needed to this section; we need to see how case law develops before recommending any further change.

Unconscionable conduct can be commercially and economically damaging.

It can create risks and uncertainty for businesses.

For example, farmers may be unwilling to invest in new farming equipment to expandproduction if they are concerned the buyer of that product could unilaterally change the terms of their contract after the fact.

Businesses may seek substantial guarantees before entering a contract or commercial arrangement with another party, or limit their commercial dealings to other businesses they know.

If left unchecked, therefore, unconscionable conduct can adversely affect the functioning of markets.

A common concern raised with the ACCC by small business is that of unilateral changes to contracts by a larger business.

The ACCC is currently undertaking ten in-depth unconscionable conduct investigations and has six current proceedings in the Federal Court in which unconscionable conduct is alleged.

Of these, three investigations and three proceedings relate to business-to-business conduct.

It is worth noting for balance though that not all complaints lead to action.

For example, you may have seen reports in June this year that Ausveg had complained to the ACCC about the conduct of Woolworths in their dealings with fresh produce suppliers and the request by Woolworths for their financial contribution to its Jamie Oliver Collectibles Campaign.

The concern was whether suppliers were under pressure to agree.

The ACCC has thoroughly investigated these allegations.

We contacted the 200 suppliers approached by Woolworths to fund its campaign to enquire about the nature and content of their communications with Woolworths.

In the course of the investigation, the ACCC has not received any evidence that suppliers were unfairly pressured.

The ACCC is able to reconsider if other supplier experiences come to light, but the initial allegations have not been supported by our enquiries to date.

I raise this matter for a number of reasons.

It demonstrates that for every matter that the ACCC investigates and pursues action, there are many other matters that are thoroughly investigated but which do not lead to action for a variety of reasons, including the absence of evidence to support the concerns raised.

It is also important to close the public record where an investigation has been referred to in the public domain but not ultimately actioned for absence of evidence. I also raise this matter to underline the importance of witnesses coming forward to inform the ACCC about conduct of concern.

Improvements needed to collective bargaining and notifications

The authorisation and notification provisions of the Act recognise that, in certain circumstances, allowing conduct that might restrict competition in order to enhance efficiency and welfare may be in the public interest.

To deal with imbalances in bargaining power, small businesses, particularly primary producers, may wish to enter into collective bargaining arrangements in their dealings with larger businesses.

Such collective bargaining can generate public benefits by improving the efficiency of the bargaining process and negotiated arrangements.

We believe at least three sets of changes are needed all of which can benefit farmers.

First, there is a need to make collective boycott action possible; this is where, say, farmers could legally collectively withhold their produce from sale until they gain a purchase contract they are satisfied with.

Currently, following a case involving chickens before the Australian Competition Tribunal (the Tribunal) some years ago, we receive very few applications for collective bargaining involving collective boycotts.

Collective boycotts will not always be approved, and some question their utility.

We feel, however, that there should be an opportunity to consider them on a case-by-case basis because in certain circumstances they could improve a collective bargain significantly.

The ACCC believes that collective boycotts would more likely be approved by the ACCC, and not overturned by the Tribunal, if certain safeguards were available.

In particular, the ACCC recommends amendments such that:

  • the ACCC could impose conditions on a notification, rather than having to object outright
  • there is a longer ACCC assessment period, because collective boycotts are more complex to assess, and
  • the ACCC is given a limited ‘stop power’, subject to Tribunal review.

Second, we are conscious that small businesses do not use the simpler and faster notification process to seek protection under the Act as frequently as they use the authorisation process.

We believe this is because of the lack of flexibility of the notification process.

To address this, the ACCC has recommended to the Harper Review the following amendments to the existing provisions:

  • greater flexibility for nomination of participants;
  • greater flexibility in the nomination of counterparties; and
  • greater flexibility in the timeframes for expiration of notifications.

Third, we consider the maximum threshold to notify a collective bargaining arrangement should be reviewed to ensure that it is not restricting participation by small business.

The Harper Review Panel’s draft report did not make many detailed recommendations in this area so we will be pursuing these reforms further with them.

 

The use of industry codes and making them effective

The ACCC believes that, in certain circumstances, industry codes can play an important role. Specific industry sectors may face issues not faced by other sectors. There is no point using general laws to deal with an industry specific problem.

We have an effective Franchise Code, and the Government has now strengthened it by providing penalties for breaching the code, and has improved our audit powers to detect breaches.

The Horticulture Code is, we believe, defective and presently of little use. We have for some time been recommending a number of fundamental changes, mainly to improve the coverage of the code.

Discussions are continuing on a Grocery Code to cover dealings between the two major supermarket chains and their suppliers.

There may be other areas where an industry code could be an appropriate way to deal with an industry specific issue.

In our submission to the Harper Review we have recommended that industry codes be considered, where appropriate, but that they be drafted so that their provisions are meaningful, enforceable and auditable, and with penalties for breaches.

Competition advocacy and market studies

The ACCC does not believe competition issues should only be reviewed every 20 years.

Specific problems can arise in certain sectors and there needs to be a mechanism to address them, or determine that the problems are not substantial.

The ACCC has recommended that it have an explicit advocacy and market studies function to do this, just as overseas competition agencies do.

The Harper Panel is recommending a new institution have this responsibility.

Whichever way this goes we urge that this capacity exist somewhere so that as  problems arise they can be assessed and any necessary action taken.

Credence claims and where we do not need standards.

It is important, for consumers and competition, that when making promotional claims about food products, the ‘what’, ‘where’ and ‘how’ must be accurate. We have made credence claims a priority and we have taken a string of enforcement actions.

  • On the ‘what’ is in it, Saskia Beer’s Barossa Farm Produce acknowledged that the labelling and promotion of ‘The Black-Pig’ smallgoods was likely to have breached the Australian Consumer Law. They represented that the pork used in ‘The Black-Pig’ products was from heritage Berkshire pigs or other black pig breeds and that the pigs were free range, when this was not the case.
  • On the ‘where’ it is from, Basfoods recently paid penalties following the issue of three infringement notices by the ACCC, and provided an undertaking. This resolved the ACCC’s concerns, among other things, that Basfoods had represented that its ‘honey’ product was from Victoria, when it was from Turkey.
  • On the ‘how’ it is made, recently the Federal Court handed down a $300,000 penalty against Pirovic Enterprises Pty Ltd after finding, by consent, that its 'free range' egg representations were false or misleading.

The ACCC is writing to egg industry participants this week drawing their attention to the Pirovic decision.

We are encouraging them to consider whether they should review the words and images used on their free range egg cartons and any advertising claims about their free range eggs.

Some have expressed concern that there is no government standard that producers need to meet to be a free range producer. We see no need for any standard.

In the Pirovic case the court ruled that free range means the birds can and do go outside on most days. It is up to producers to determine how to meet this common sense definition.

Any prescriptive standard beyond this would likely have requirements that are not relevant to what consumers understand free range to mean.

Access to essential infrastructure

The ACCC believes that a competitive and fair supply chain benefits from ensuring access to essential infrastructure.

An example of this work of particular relevance for farmers is the wheat port mandatory code of conduct.

The Wheat Code allows grain marketers to get access to bulk ports, operated by their vertically-integrated rivals, to allow them to export.

Absent the Wheat Code, the port operators will have an incentive to use their market power to restrict their rivals’ ability to compete.

During the Wheat Code’s development, there was a lot of public debate about the appropriateness of port access regulation in bulk wheat.

There was a suggestion that port access regulation was inappropriate and constituted an attempt to bring back the single desk.

In fact, the Wheat Code is pro-market and a necessary part of the move away from the old system of the single desk and regional infrastructure monopolies, towards a situation where there are multiple grain exporters.

More exporters competing to buy farmers’ grain is good news for farmers and, without the necessary port access regulation in the form of the code, farmers would be worse off.

Conclusion

To conclude, the Harper Review is a crucial opportunity to improve the effective functioning of markets to benefit farmers. I urge you to take full advantage of this opportunity.

Thank you for your time today.

[1] McKinsey Australia, Compete to Prosper: Improving Australia’s global competiveness, July 2014, page 45.

[2] Productivity Commission 2014, Relative Costs of Doing Business In Australia: Dairy Product Manufacturing, Research Report, Canberra, page 2

[3] Productivity Commission 2014, Relative Costs of Doing Business In Australia: Dairy Product Manufacturing, Research Report, Canberra, page 8