Competition in Australia faces big challenges

Speakers: 
Mr Rod Sims, Chair
Conference: 
UniSA & ACCC Competition Law & Economics Workshop, 15 October 2021
15 October 2021

ACCC Chair Rod Sims spoke at this year’s Annual Competition Law & Economics Workshop, hosted by UniSA and the ACCC, where he discussed significant challenges facing competition law and policy in Australia.

Transcript: 

Introduction

I would like to add my welcome to everyone today. I am pleased that this important event is back on the calendar after being a casualty of the pandemic in 2020. It is just a shame we cannot meet in person.

Despite the challenges of the pandemic and extended lockdowns in many parts of the country, there has been and continues to be a lot of good things going on in the area of competition and consumer law.

While some areas of our work were curtailed as the pandemic took off early last year, other areas experienced an explosion. First, the ACCC received the equivalent of a year’s worth of applications for authorisation within a 6 week period from businesses seeking to cooperate to deal with the issues related to the pandemic. Second, we had a flood of consumer issues to deal with.

I think the speed and flexibility of our response to these unprecedented circumstances reflects well both on our law and the agency.

Recognition must also be given to businesses and their advisors who, even when faced with uncertainty and the need for urgent action, remained cognisant of their competition and consumer law responsibilities and worked with us to ensure competition and consumers were protected.

Today I want to briefly discuss what I see as the three main competition issues we all need to confront and solve.

  1. Merger law reform, of course
  2. The need to prove the future in competition cases
  3. A role for ex ante regulation in digital platforms.

The key points running across these three topics include the importance of having the right regulatory settings for establishing and preventing a substantial lessening of competition, and the presence of parallels outside Australia that we can look to in considering appropriate approaches here.

1. Merger law reform

Last month we started a debate about the need for merger law reform.

I am delighted to see that debate has started well. We are hearing a range of views both for and against various elements of our proposals and about the need for reform. Events like this workshop play an important part in continuing the discussion.

A common theme coming through in the commentary from the advisors in particular has been, “why change the system when it is working well?” My response to this is: “For whom is it working well? For big business? What about the economy?”

As the agency charged with administering merger law, we do not consider it is working well.

There are always macro and micro approaches we can take when considering competition issues.

I’ve spoken before about the macro challenges. Australia’s economy is getting more concentrated over time and, in my view, is already too concentrated. You will recall concentration was an important topic of discussion when Carl Shapiro attended this conference in 2016.

Concerns about increasing concentration are not specific to Australia. These concerns are being raised in a number of other countries around the world.

Concentration is very important in merger control. We all know that greater industry concentration can harm productivity, innovation and consumers.

Of course there are exceptions. Some economists have written thoughtful articles showing circumstances where greater concentration is not harmful; it could even be beneficial. But sometimes people forget that these are the exceptions, not the rule.

Merger control is critical to protecting and promoting competition. It is the gatekeeper, protecting us from the effects of increases in concentration.

If we are serious about protecting competition in this country, we must ensure our merger control regime works as effectively as possible, and that it is consistent with international best practice.

Currently we are an outlier compared with other advanced economies around the world in terms of our approach to merger control.

There are also micro challenges when we look at recent cases and the day to day of merger reviews.

Increasingly we are having difficulty getting the information we need to conduct our merger assessments. We are also put under inappropriate time pressure, and we face threats to complete. We are also hearing of more mergers only shortly before they are to complete.

Indeed, ACCC Commissioners observe that the approach of companies to Australia’s merger processes is sometimes contemptuous.

We should also expect Australia’s merger control regime to be capable of preventing the formation of monopolies, or near monopolies. However, as an example, that is what resulted after the ACCC was unable to stop Pacific National from purchasing the Acacia Ridge intermodal terminal from Aurizon, which had also closed down its competing interstate rail operations when the deal with Pacific National was announced. In addition, while the ACCC’s Federal Court litigation was on foot, Aurizon entered into an agreement for Pacific National to operate the terminal which was the subject of the litigation.

Australians are now worse off as a consequence of Aurizon selling to its only competitor rather than one of the available new entrants.

We have ended up with a 2 to 1 (plus a partial competitor in SCT) in the nationally important interstate rail haulage market, with the near monopolist controlling the critical infrastructure which any new entrant would need to access.

When a company sells its assets, it is not surprising that the highest bidder is often the one that has the most to gain from market power or the raising of barriers to its rivals. In Pacific National-Aurizon, we saw Aurizon’s interstate intermodal business shut down because Pacific National was prepared to pay a high price for the terminal alone, despite there being alternative bidders who were prepared to purchase that business as a going concern as well as the terminal.

Fortunately, Aurizon’s intrastate Queensland intermodal business was prevented from shutting down, despite Aurizon threatening to close it down if the ACCC opposed its acquisition by Pacific National. This was because the ACCC obtained a court order requiring Aurizon to continue operating the business while the litigation played out. Before the litigation was heard by the Court, this intrastate business was sold to Linfox, thereby ensuring a competitor to Pacific National remained in this market.

We can debate the ins and outs of the ACCC’s litigation strategy and case management. Indeed, the ACCC reflects on these experiences, to see what we can learn and improve upon.

The fundamental issue, however, is that our merger test and the approach taken by the courts currently requires the ACCC to prove what is likely to happen in the future, rather than considering the overall interference to the competitive process which will be caused by the acquisition of a key player by its closest competitor.

2. The need to prove the future in competition cases

As well as applying to mergers, the “substantial lessening of competition” test is the key legal test for most other forms of anti-competitive conduct which are prohibited by the Competition and Consumer Act (other than cartel conduct and resale price maintenance).

A particular challenge with the test is that the ACCC is required to prove the likely future state of competition with and without the anti-competitive conduct to the civil standard of proof. While that may sound appropriate, the problem in my view is the way this test is now applied by the courts.

Reflecting again on the Pacific National case, the ACCC was in effect required to prove that there was a possibility that new entry would occur in the future absent the proposed acquisition. It was not enough to demonstrate that the competitive process would be disrupted by the entrenchment of Pacific National’s position as a consequence of the heightened higher barriers to entry.

The issue arises in other competition cases too, particularly where the likely effect on competition is being assessed over a longer time frame.

This issue is one of the key grounds on which the ACCC has appealed to the Full Federal Court in the NSW Ports case. In that case, the primary judge, Justice Jagot, who we are very fortunate to have here today to deliver the judicial address, dismissed the ACCC’s case that the compensation provisions agreed between the NSW Government and NSW Ports at the time Port Botany and Port Kembla were privatised did not have the purpose or the likely effect of substantially lessening competition.

As part of the privatisation, the NSW Government agreed to pay compensation to NSW Ports, the successful bidder for the container terminal at Port Botany, if a competing container terminal is established at Newcastle while Port Botany still has capacity. These provisions apply for 50 years from when the agreement was made in 2013.

On the issue of the likely effect of the compensation provisions, Justice Jagot found that the ACCC had not established that, as at the time the agreements were entered into, it was likely that a container terminal would be established at Newcastle, at least not while Port Botany has capacity.

In essence, the ACCC had to prove that, at the time of the privatisations, that a container terminal at the Port of Newcastle would be viable in the next 20 or 30 years.

As former ACCC Commissioner Roger Featherston has recently written in an op-ed for the Australian Financial Review, requiring the ACCC to prove that a container terminal would be viable, before all the groundwork for a business case has been done and when circumstances concerning coal exports are changing rapidly, highlights the inappropriateness of the existing legal test, because it is being confined to what is currently known and provable about future developments.

The ACCC’s view is that the assessment of substantial lessening of competition should focus on the disruption to the competitive process caused by the alleged anti-competitive conduct (or merger), rather than requiring evidence to establish future events which might occur without the conduct or merger.

The ACCC’s appeal in the NSW Ports case will provide an opportunity for the Full Federal Court to consider this issue further.

In my view, the effectiveness of our competition laws is at stake.

3. Do we need ex ante regulation of monopoly, duopoly platforms?

It is no exaggeration to say that the most hotly debated issue in competition law around the world is whether we need ex ante regulation of particular digital platforms. The ACCC is in the thick of this debate.

This issue comes after the ACCC’s work has seen, for example, the News Media Bargaining Code enacted, a review of our privacy laws started, and the introduction of a Code covering disinformation and misinformation. The latter is gaining more traction as the wide range of harms from social media have been much discussed recently.

In our digital platforms work, across the digital platforms inquiry, several interim reports under our longer term digital platform services inquiry and our ad tech inquiry, we have observed some common competition issues.

Digital markets often feature one or two dominant firms with significant market power, which allows them to impede competition and have a huge influence on the consumers and businesses reliant on their services. In ad-tech and search, this is Google; in app marketplaces, this is Apple and Google; in social media, this is Facebook.

We have found that many of these firms are vertically integrated and there is evidence of considerable anti-competitive self-preferencing where firms favour their own interests over downstream rivals in a number of different ways depending on the market. This may include pre-installation and default first-party services, using algorithms to favour first-party services or using information collected as a service provider to benefit first-party services over rival services.

We have also observed the important role of data, and how access to large amounts of user data can help entrench a strong market position by creating significant barriers to entry and expansion.

There is also a lack of transparency between the platform operator and users in the operation of many digital markets we have studied, with the users being both businesses and consumers. This includes opaque terms and conditions, and opaque communication or dispute resolution processes.

Around the world, there is growing recognition among relevant authorities that existing anti-trust laws have not held up well to the challenges posed by digital markets.

The European Commission’s draft Digital Markets Act proposes to complement the EU’s existing competition rules with sector-specific regulation for platforms which occupy a ‘gatekeeper’ position. This includes both affirmative obligations to promote competition, such as transparency and data sharing requirements, and prohibitions on problematic conduct such as anti-competitive self-preferencing.

Within Europe, Germany has already passed new competition legislation applying ex ante rules to digital firms designated as possessing ‘paramount significance across markets’, and the Bundeskartellamt has already launched investigations into whether to designate Facebook, Google, Amazon and Apple under this scheme.

In the UK, the Government has been consulting on a proposal that would designate particular digital firms with ‘strategic market status.’ These firms would be subject to binding codes of conduct, more stringent merger control and potential pro-competitive interventions, including requiring operational separation of different arms of a business.

Strong action is even on the horizon in the home of the major digital platforms, the United States. A suite of five anti-trust bills has been introduced to the US House of Representatives targeting digital platforms that meet certain user number, revenue and market capitalisation thresholds.

Our counterparts in the Asia Pacific region are also at the forefront of regulatory developments. In Japan, the Transparency and Fairness Act has been in effect since February this year. It aims to improve transparency and fairness for businesses trading on digital platforms, and applies to Google, Amazon, Apple, Yahoo and Japanese e-commerce platform Rakuten.

In South Korea, Google’s and Apple’s app marketplaces have been singled out as a critical issue. Targeted legislation has recently passed parliament which bans Apple and Google from requiring all digital content purchases be made through their proprietary in-app payment systems. This may open this segment of the market to competing payments companies.

Although the ACCC’s existing powers under the Competition and Consumer Act 2010 allow us to take some enforcement action against digital platforms, we are considering whether up front regulation may be needed in addition to enforcement under the existing CCA provisions to address the competition and consumer concerns our digital platforms inquiries have identified.

Sector-specific regulation is not without precedent. Australia has introduced industry specific legislation before where it is needed rather than rely solely on enforcement of the economy wide competition law provisions. For example, the ACCC already administers industry-specific competition and access functions in relation to the telecommunications sector.

As part of the five year digital platform services inquiry, the ACCC will consider whether there is a potential need for wider sector-specific regulation to address the competition and consumer concerns in digital platform markets. If such regulation is found to be necessary, we will also consider how this regulation should be designed to address the harms in a proportionate yet effective way.

Our advice will be provided in a report to the Treasurer in September 2022. Importantly, we will seek industry views on this crucial question, and work closely with the Commonwealth Treasury.

Conclusion

In all sorts of ways I think competition law and policy are again coming together.

The key questions we face are how effectively is our competition law working to ensure our market economy is working for all Australians, and is there a need for significant change.

This is yet another fascinating time for us all with an interest in such issues.

In my view the current issues are as important as the Hilmer Inquiry which started nearly 30 years ago.

Thank you for your time today.