Addressing the CEDA State of the Nation Conference in Canberra, Rod Sims says the Harper Review provides an ideal opportunity to reinvigorate Australia’s competition culture.
Mr Sims explains that effective competition policy depends on using competition and other incentives to boost productivity, effective competition laws and creating processes and institutions that continually foster competition.
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Good afternoon, and thank you for the invitation to speak at such an important event. The timing is impeccable, coinciding as it does with submissions to the most significant review of competition policy for over 20 years.
I tend to think of competition policy a bit like defence: it requires eternal vigilance and strong proponents. There will always be those with a large interest in its absence, to the detriment of the many.
Australia’s low productivity, calls for Australia to create “national champions”, or to allow industries to consolidate in response to low investment returns, and the privatisation of assets in ways that hinder future competition to maximise one-off gains, all suggest that Australia has lost a lot of the pro competitive culture that it gained from the 1990s National Competition Policy.
Clearly we need ‘Hilmer Mark 2’, as the current Harper review is styled.
Effective competition policy involves three things. First, opening up as many sectors as possible to competition and allowing price mechanisms to play their crucial role in signalling to businesses how to meet consumers’ needs at the lowest cost.
Second, it’s about having effective competition laws. While the ACCC recognises competition laws must strike a careful balance, and not inhibit healthy competitive behaviour, if competition laws are too weak there are large efficiency and welfare losses from systematically poor conduct.
Third, history has taught us that effective competition policy is also about governments establishing the processes and institutions that continually foster competition and sustain the commitment to reform.
Today I will focus on all three. Before doing so, however, it is worth elaborating on our declining competition culture.
1. Australia has lost a lot of the pro competition culture
I see five examples of our declining pro competition culture.
First, recently Fred Hilmer reflected on the productivity growth that followed his review, making a distinction between what he described as ‘enablers’ and ‘incentives’. To become more productive, firms need enablers such as infrastructure, education, skills, R & D, and technology. But enablers are not enough. Just because individual firms can improve productivity does not mean they will. For this they need incentives, particularly those provided through competition. Fred argues that, in the past decade, Australian public policy has become focussed on enablers, and not on incentives.
I agree with Fred’s observation.
But there are wider signs of the malaise.
My second example is that we are seeing a return to calls for “national champions” in Australia.
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? Firms involved in cosy duopolies or oligopolies in Australia are unlikely to succeed on the world stage.
I first encountered this argument when Robert Holmes à Court sought to take over BHP in the late 1980s. BHP asked the government to stop the bid and protect BHP as a national champion. The government refused.
In many ways this was a turning point for BHP. It is now a national champion through its own efforts rather than through government protection.
Third, we are also hearing more calls for weaker merger laws to allow industries to consolidate in response to low investment returns.
Some in business are incredulous that the ACCC would not wave through a merger when investment returns are low so that the merger parties can create, in their terms, a more rational market with sensible, and so higher, pricing.
As someone who has spent 15 years advising companies on corporate strategy I know that companies generally expect such orderly pricing with 2-3 players and high entry barriers.
David Thodey in 2012 was stating the obvious when he said:
“Now, all the data we’ve looked at around the world says three operators (in a market) are very rational from a pricing perspective. Once you get to four or five is when you start to get behaviour that can be aberrant in terms of shareholder value.”
While it may be inconvenient for established players to be challenged by new entrants, consumers are the ones who lose from higher prices and less innovation. Competition is, and is meant to be, at times a disruptive process for the companies involved. Allowing mergers that reduce competition and/or substantially increase barriers to new entry can therefore come at a considerable cost.
I must add that there is often some hypocrisy on this topic. Some will quote from the High’s Court judgement in Queensland Wire that:
“Competition by its very nature is deliberate and ruthless. Competitors jockey for sales, the more effective competitors injuring the less effective by taking sales away.”
This quote, with which I agree, will often be heard in defence of accusations against usually larger companies concerning inappropriate business dealings. Some companies using this quote can then be seen to seek mergers that will reduce competition because the market has become uncomfortable.
Fourth , and the largest concern at present for Australia’s competition culture, arises from the seemingly prevailing approach to privatisation. There is a large plus and a large minus.
The plus is that governments are increasingly adopting the right approach to the question of “when” to privatise. In essence, commercial operations should be run by the private sector unless there is a clear public policy objective that can demonstrably best be met by continuing public ownership.
Where governments are increasingly failing is in “how” to privatise. Privatising in ways that limit competition in order to maximise the sale proceeds is the wrong way.
Such an approach increases the one-off sale proceeds by effectively taxing future generations and Australia’s future competitiveness.
In the late 1980s and early 1990s the Commonwealth Bank and Qantas were privatised to increase efficiency. Indeed, Qantas was privatised into a largely “open skies” environment.
I remember having heated arguments when Victoria was privatising its electricity generation. Didn’t I realise that Victoria would realise higher sale proceeds if it sold all its generation assets to one or two buyers?
There were some who just did not get the point that Victoria was privatising to benefit future economic efficiency; that this was the way to prosperity, not gaining one-off higher sale proceeds.
The then Victorian Government understood the point and sold its generation to six different players so as to maximise economic efficiency.
Worryingly, this same approach is increasingly not being followed today by State Governments, notably in relation to the privatisation of electricity and port assets.
Electricity companies have a strong commercial incentive to have all players vertically integrated. Trading wholesale electricity through the spot market is a competitive process with low entry barriers. If electricity retailers can tie up most of the generation then they can create a stable oligopoly with high entry barriers and so higher prices and better returns.
Some degree of vertical integration, as we currently see in Victoria, for example, is beneficial; but beyond a certain point, it is harmful to a competitive electricity market.
These issues go to the heart of the ACCC’s report to the Australian Competition Tribunal (the Tribunal) in its consideration of AGL’s proposed acquisition of Macquarie Generation. The ACCC formed the view that the proposed acquisition was likely to result in a substantial lessening of competition when compared with a future in which the State either held the assets or sold to another purchaser. In its report to the Tribunal the ACCC said:
“As a result of this lessening of competition, the proposed acquisition is likely to mean that consumers will pay more for electricity…and be offered less choice.”
Of course, it is up to the Tribunal to decide whether the benefits from the transaction outweigh those detriments, which is the test for merger authorisation under the Competition and Consumer Act 2010 (the CCA).
Some governments are privatising ports without appropriate open access regimes, nor controls on pricing.
We shouldn’t be surprised when buyers pay a high price to acquire monopoly power, with the expectation that they will be able to recoup that expenditure by increasing prices.
I will shortly be writing to all governments to point out that the trend towards selling monopoly or near monopoly assets with the primary aim of maximising proceeds, without due consideration of the competition implications, is effectively a tax on future generations.
The ACCC is becoming aware of an increasing level of concern amongst businesses that are most directly affected by the sale of upstream monopoly assets to downstream competitors. The trade-off here is short sighted and the costs in terms of productivity and investment are likely to be significant.
Fifth, and my final illustration in relation to a pro competition culture, arises from the national drive to reduce “red tape”. This is, of course, a necessary spring clean as we reflect on all those past new regulations that seemed right at the time.
Many owners of monopoly assets, however, including vertically integrated owners, are utilising sensible general red tape reduction statements to argue for reduced curbs on their market power.
“Red tape” reduction needs to remove barriers to competition and doing business; it is not, however, about cementing monopoly power.
Our competition culture will be increasingly tested with the growth of new technology.
One example I read recently concerned protests in Europe by taxi drivers worried that new mobile apps, such as the operated by technology firm Uber Technologies, were damaging their businesses. Similar issues are emerging in the taxi industry in Australia.
Competition regulators across the world have expressed concern at measures that might be taken to ban or deter the entry of such firms.
2. Using competition and other incentives to boost productivity
I always find it irritating when people say Australia has picked all the low hanging micro economic reform fruit. We have not; and besides, there is never only one crop.
Let me provide just three examples of what could be tackled.
First, a major area of unfinished business post-Hilmer relates to our land transport infrastructure. Currently, road user charges provide very poor road usage signals; those charges reflect past expenditure and so cannot directly fund future roads; and the user charge revenue does not go to those building the roads. There is much to consider.
Second, congestion pricing can be an effective mechanism to flatten out the usage of infrastructure networks generally, so that the same infrastructure services more users. In addition to roads, utilisation of congestion pricing could be an effective tool in relation to electricity networks, ports and airports.
Generally, the Review could focus on making more effective use of price signals in many sectors.
Third, given the importance of shipping to the Australian economy, the ACCC considers there are two particular areas where reform could lead to productivity gains.
Part X of the CCA, which provides cartel immunity to registered international shipping lines to enable them to cooperate with each other, should be revoked. As with other sectors, cooperative arrangements between competitors can be authorised by the ACCC if they are deemed to deliver net public benefits to the Australian community.
In addition, in the domestic shipping sector, there are a number of important restrictions on competition such as onerous procedural requirements relating to the granting of temporary licences for foreign shipping lines.
The ACCC’s submission to the Harper Review will also address potential reforms in water, intellectual property, energy, human services, land use and a range of regulatory barriers to productivity.
3. Ensuring effective competition laws
As I said earlier, competition laws must strike an appropriate balance between promoting healthy rivalry and deterring anti-competitive conduct. A number of principles can be brought to bear in determining where our competition laws could be improved. I will give just three examples.
First, competition laws should be directed towards the principle of economic efficiency, and the law should proscribe conduct that undermines such outcomes. The ACCC considers there is a significant gap in the coverage of the misuse of market power provisions in s46 of the CCA.
The ACCC considers that the provision is deficient in two respects; first, due to its failure to capture unilateral conduct which has a deleterious effect on competition; and second, due to the way in which the “take advantage” limb of the test is currently being applied.
At its simplest the courts have recently articulated the test of whether a corporation has taken advantage of its market power as whether a firm in a competitive market “could” have taken the action; rather than whether, in such a market, it “would” have. For example, in the recent Cement Australia decision, the court found that a substantial purpose of the decisions of Cement Australia to enter into and renew contracts to obtain flyash surplus to its requirements was to foreclose a rival entering into the market. However, because it would not be a “hopelessly uneconomic” activity in a workably competitive market, the Court found Cement Australia had not taken advantage of its market power.
The ACCC has investigated a number of complaints that did appear to result from concerning behaviour, but we have felt that we could not meet the various hurdles in the current drafting and/or interpretation of this section. Even where a dominant firm engages in conduct which has a clear, documented anti-competitive purpose and a significant anticompetitive effect, as the recent case against Cement Australia shows, the technical requirements of section 46 make it difficult to establish that a firm has misused its market power. This damages our ability to protect the potential for beneficial competition and innovation particularly from those seeking to challenge dominant firms.
Second, turning to the principle of universality, the CCA was amended relatively recently to recognise, rightly, the potential for considerable competitive harm from disclosures of pricing and other information between competitors (sometimes referred to as ‘facilitating practices’). Such practices facilitate cartel-like outcomes without necessarily establishing more formal forms of agreement between competitors.
Just as the harm from cartel conduct can occur anywhere across the economy, so can the harm from facilitating practices. However, the current legislation limits the application of these laws to banking services. The ACCC considers this limitation should be removed, and the provisions applied to all sectors of the Australian economy.
This will also bring our laws into line with overseas competition regimes.
Third, in relation to the principle of clarity, Australia’s competition laws are often criticised for their prescriptive drafting style which is a stark contrast to the approach adopted in other jurisdictions such as the United States. This is not just an issue for the regulator trying to prosecute breaches, but for businesses endeavouring to do the right thing.
Despite limited experience with their application, the cartel provisions introduced in 2009 have been widely criticised for the complexity of their drafting. Concerns include the potential difficulty in achieving a successful criminal prosecution, where a jury must be directed on complex competition matters, and the interpretation and application of the various defences and exceptions.
The ACCC would support amendments which would bring greater clarity without altering the current policy settings in respect of cartels.
The effectiveness of the CCA in making markets work is, of course, of key importance to the small business sector.
The ACCC has also made a number of recommendations that it considers will assist small businesses including in relation to amending the collective bargaining regime.
4. Creating processes and institutions that continually foster competition
I see one of the key successes of Australia’s competition policy since Hilmer as being the integration of competition enforcement, consumer protection, and economic regulation into a single agency with the sole purpose of making markets work as they should.
Given this common objective the current ACCC structure provides many economies of scale and synergies; it avoids the many gaps that would arise if these complementary functions were separated; and it avoids the overlap that would arise as the same behaviour could be pursued by more than one agency.
It is this integrated perspective held by the ACCC that informs and drives its actions in areas where other singularly focused regulators may not tread. In its recently commenced proceedings against Coles (still before the Court) the ACCC alleges the supermarket engaged in unconscionable conduct towards its suppliers in breach of our consumer laws. Influencing the ACCC’s action was a concern over the potential for suppliers to become less able to plan and less able to innovate in the market, with resulting reduced economic efficiency, a driver that may not be front of mind to consumer protection agencies.
Similarly, the ACCC’s focus on credence or premium claims is not one solely based on consumer protection but, as indicated in our published priorities, is also driven by the potential for misleading claims of this kind to undermine the unique selling point that other businesses (including smaller enterprises) may have. Often the complainant in the credence claim matters is a competitor doing the right thing.
The success of the National Competition Policy following the Hilmer Review required more than just an effective regulatory agency. Other institutions and mechanisms were integral to creating what the OECD praised in 2005 as a “deep-seated competition culture”.
With the completion of the legislative review program and cessation of competition payments, it seems that Australia’s commitment to competition has regressed. The Harper Review provides an ideal opportunity to reinvigorate Australia’s ‘competition culture’.
The ACCC’s submission to the review makes one particular suggestion directed to that end; namely, consideration of the role that market studies might play.
The International Competition Network, the umbrella body for all the world’s competition agencies, describes market studies by competition regulators as research projects conducted to gain an in-depth understanding of how sectors, markets, or market practices are working.
The OECD has noted that, along with investigating infringements of competition law, almost all competition authorities conducted general sector investigations or economic studies. One benefit of such studies is that they allow the competition authority to bring its information-gathering powers to bear to assess the functioning of the market as a whole rather than on the conduct of particular firms within it. The result of these studies can be enforcement action, recommendations to governments, simply “shining a light” on particular practices or, often more important, they can explain clearly to the public why there is not a problem.
The inability of the ACCC to initiate these market studies means that the ACCC is out of step with overseas regulators, and Australia is losing an opportunity for a continuing competition focus on particular sectors and activities.
Parties often bring concerns to the ACCC which the ACCC cannot act on unless we believe there has been a breach of our Act. Having a market studies power could allow the ACCC to better determine if there are or are not problems which should be addressed.
Over 20 years ago business, government and people generally got behind a pro competition culture and change process that brought many benefits to Australia.
The Harper review can replicate this success.
There will, of course, be challenges. Past major reforms, for example, often affected then government enterprises which were not well placed to oppose change. This time the opponents of change will be more vocal.
Microeconomic reform always affects the position of a few to the benefit of many.
It will be important that this time around all groups take a national rather than sectional perspective to protect and advance our dynamic market economy.
Thank you for your time today.