Reinvigorating Australia’s Competition Policy
Australian Competition & Consumer Commission
Submission to the Competition Policy Review
25 June 2014
Table of Contents
1Executive summary 3
2Reinvigorating Australia’s Competition Policy 15
1Objective of the current Competition Policy Review: Improving productivity 15
2Productivity: Role of competition policy 16
3ACCC submission 17
3Microeconomic reform 19
5Competition principles 22
1.Review of regulatory barriers to competition 27
2.Creating architecture necessary to facilitate markets 29
3.Structural separation 30
4.Government or private ownership 32
5.Social and equity objectives 32
6.Corporatisation and competitive neutrality 34
7.Consumer participation 34
8.Economic regulation 36
6Identifying key areas for reform 44
10.Regulation and productivity 50
12.Congestion pricing 58
Intellectual property 73
16.Human services 82
17.Land use 87
4 Competition and consumer law in Australia 90
1.Making markets work for consumers and businesses now and in the future 90
2.Assessing Australia’s competition law 91
3.ACCC submission regarding the CCA 91
Misuse of market power prohibition requires reform to be fully effective 93
1.Anti-competitive disclosure of information provisions should be extended to the whole economy 99
2.Merger authorisations should be determined by the ACCC with rights for merits review by the Tribunal 102
3.Third line forcing conduct should only be prohibited if it has a significant impact on competition or consumers 106
4.Exemptions from competition law should be regularly reviewed and transparent 109
5.Overseas conduct having an anti-competitive effect in Australia 112
1.Clarity in the CCA 113
2.Provisions relating to cartel behaviour could be improved 114
3.Simplifying the authorisation and notification regimes to promote accessibility for business 116
1.The ACCC’s investigative tools are critical to the effective enforcement of the CCA 121
2.Current penalties and enforcement regime for non-compliance with section 155 notices are inadequate 123
3.The ACCC should be able to use section 155 in more circumstances 124
4.Greater protection for whistle-blowers 127
1.ACCC role in the small business sector 130
2.Provisions restricting unilateral conduct and prohibiting unconscionable conduct 132
3.Small business issues relating to the supermarket and grocery industry 133
4.Effective dispute resolution for small business 135
Improved processes for small business to notify collective bargaining and collective boycotts 135
5.Industry code provisions require reform to improve their enforceability 138
6.Enhanced educative and research role for the ACCC 142
1.Resale Price Maintenance 143
2.International price discrimination 145
3.Merger processes in Australia 148
4.Market definition and merger analysis 157
5Institutions and implementation 159
1.Australian Competition & Consumer Commission 164
2.Australian Competition Tribunal 175
Attachment A – Further potential reforms to investigative tools 180
The Australian Competition and Consumer Commission (ACCC) considers that the National Competition Policy (NCP) and related reforms have been critical to Australia’s economic performance and rising living standards over the last two decades. The NCP reforms relating to infrastructure alone were estimated to have permanently increased Australia’s GDP by 2.5 per cent.
While Australia can be proud of its past economic performance, there are challenges ahead, not least more recent declines in the nation’s productivity as the public policy focus on competition and other incentives has declined. There is no better time, therefore, to build on the success of these earlier reforms and reinvigorate Australia’s competition policy.
Reinvigorating Australia’s competition policy involves removing regulatory barriers to competitive market structures and improving price signals, amending the Competition and Consumer Act 2010 (Cth) (CCA) to create suitably balanced incentives for market participants, and ensuring that institutional settings sustain competitive processes across markets and governments and over time.
Context: Australia’s modern economy
The key challenge facing the original National Competition Policy Review1 (the Hilmer Review) in the early 1990s was how to spur greater efficiency in non-trade exposed industries. Since that time, many substantial reforms have occurred and the nature of Australia’s economy has continued to evolve. As integration with the global economy grows, the structure of Australia’s economy continues to shift away from traditional sectors such as manufacturing towards service based industries, with sectors such as agriculture and mining also playing a significant role.
Rapid advancement in technology, particularly digital technologies, is playing a large part in these structural shifts. Future economic growth will be closely connected with the digital age, as technological development lowers barriers to entry across a range of markets, exposing more sectors of the economy to domestic and international competition.
In service industries, online marketplaces are emerging to connect disparate buyers and sellers, in the process disrupting established businesses and expanding or creating new markets. Australian consumers are increasingly drawn to online services and, in many cases, individuals can participate as either consumers or suppliers, or as both, with trades facilitated by online reputation and ratings.
Technology, and the pervasiveness of digital platforms, also provides numerous opportunities in more traditional sectors of the Australian economy. The use of new technologies continues to drive reforms in sectors including roads and shipping (e.g. GPS or other tracking devices on trucks and shipping containers), energy (e.g. smart-grid applications) and health (e.g. remote monitoring to head off emergencies).
Effective competition policy creates incentives for firms to continually drive such innovation for the long term benefit of consumers, and for markets to evolve in response to changing consumer demands.
Microeconomic reform opportunities
The Competition Principles Agreement, agreed to by Australian governments in 1995 following the Hilmer Review, provided the foundation for competition reform in Australia for the ensuing decade.
Against this background, this submission identifies eight key principles that the ACCC considers are central to an effective and sustained competition policy. These are:
Review of regulatory barriers to competition: Legislation and government policies should not restrict competition unless it can be demonstrated that the benefits of the restriction to the community as a whole outweigh the costs, and the objectives of the legislation can only be achieved by restricting competition.
Architecture necessary to facilitate markets: In certain sectors (for example, possibly in road infrastructure), governments will need to create the architecture necessary to facilitate trade; for example, as occurred for the national electricity market, and water markets in the Murray-Darling Basin.
Structural separation: Governments should structurally separate natural monopoly from potentially competitive activities, and further separate potentially competitive activities into a number of smaller, independent business units, unless the cost outweighs the benefit.
Government or private ownership: Governments should not retain ownership of business enterprises unless there is a clearly stated public policy reason for doing so, and government ownership is the best way to meet this objective. Most importantly, privatisations should never be driven by budget goals at the expense of creating a competitive market structure.
Social and equity objectives: Targeted social assistance policies are likely to remain necessary. However, governments should regularly review the merits of any community service obligations (CSOs) and the best means for funding and delivering any mandated CSOs.
Corporation and competitive neutrality: If a business is to remain in government ownership despite being a contestable activity, government should establish a corporatised governance structure, and ensure that the business does not enjoy any net competitive advantage simply as a result of its government ownership.
Consumer participation: Successful structural reform of a market may require measures designed to support effective consumer engagement in the market.
Economic regulation: Regulation may be required where competition is not feasible. This may involve access regulation where access to a monopoly service is needed by businesses to compete in upstream or downstream markets, or price regulation where competitive pressures on a supplier of a good or service are not sufficient to achieve efficient prices and protect consumers.
It is, however, in their application that such principles deliver for Australian markets and consumers. In chapter 3 of this submission, the ACCC identifies, by way of example, ten areas where the application of these principles has the potential to drive productivity growth. The first two examples apply across sectors whereas the latter eight are more targeted reforms.
There are signs that in privatising assets, Australian governments are focusing overly on short term budget goals without sufficient regard to longer term competition. Governments should consider how the privatisation process can promote competition, for example by separating, rather than integrating, potentially competitive facilities. Governments should also avoid the temptation to boost asset values by privatising without appropriate price and access regulation in place. Such short term financial benefits to governments amount to a tax on future generations of Australians.
2. Regulation and productivity
There are still a number of areas across the economy where the policy purpose of regulation and its associated costs are disproportionate and regulation is limiting productivity. Examples include the ethanol mandate on petrol in NSW, the WA potato marketing corporation and a number of cases of government licensing requirements. Governments should ensure that regulations such as these are reviewed from a competition perspective.
While road reform began during the microeconomic reform agenda of the 1990s, it is far from fully implemented. With current road charging mechanisms and structural arrangements failing to promote efficient decisions by road users and funding bodies, Australia has an opportunity to engage in structural reform of road provision and charging, leading to considerable productivity benefits.
4. Congestion pricing
There are opportunities to enhance the productivity of certain key infrastructure assets such as roads, electricity, ports and airports by greater utilisation of congestion pricing.
Approximately 99 per cent of Australian imports and exports are transported by sea. Policies currently exist which restrict competition in the shipping industry; they should be reviewed and abolished where appropriate.
While the energy sector has gone through an extensive reform program, the implementation of further reforms, such as privatising remaining government owned assets with the objective of promoting competition, and deregulating retail markets, would further enhance the efficiency of Australia’s energy markets.
The water sector has gone through a series of microeconomic reforms and water markets now exist in many areas throughout Australia. 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.
8. Intellectual property
Intellectual property is of increasing importance to Australia’s economy. The extent of any intellectual property rights should balance:
on the one hand, the incentives for innovation in the creation of intellectual property; and
on the other, the incentives that access to intellectual property material provides for efficient use of that intellectual property and for innovation from such use.
A review by the Productivity Commission would assist in this regard. Remaining restrictions on parallel imports should also be removed. The intellectual property related exemption in section 51(3) of the CCA should be repealed, and further consideration given to the effectiveness of current access mechanisms.
9. Human services
There is scope for greater competition in human services, the potential benefits of which may include lower prices, greater efficiency in service provision, greater innovation and improved consumer choice. Mechanisms by which this could be achieved include by facilitating competitive neutrality between private and public providers and also by promoting competition between ‘public’ providers.
10. Land use
Land use restrictions such as restrictions on the location of retail outlets may affect competition by unduly raising barriers to entry. While some land use restrictions can serve valuable social purposes, they are inappropriate where they are used for the purpose of protecting existing market participants from competition from new entrants.
A key plank of effective competition policy is effective competition law. Such laws are critical for preserving the integrity of markets, so that businesses have the incentive to operate more efficiently, price competitively and offer better products to their customers. This in turn delivers benefits to the community through lower prices, innovation, and higher quality products.
Australia will only benefit from a market economy if it works within appropriate boundaries. Competition law must strike a balance between, on the one hand, preventing business activities that undermine the competitive process, and on the other not inhibiting healthy rivalrous behaviour that is part of the ordinary cut and thrust of robust competition. While the ACCC recognises this challenge, it should be stressed that there are large losses from exclusionary, collusive or coercive conduct if the competition law is too weak.
In preparing this submission, the ACCC has had regard to a number of principles that it considers provide a useful framework for assessing whether the competition law continues to promote the welfare of all Australians.
Efficient: Competition law ensures that markets work in an efficient manner by prohibiting businesses from engaging in conduct which undermines the competitive process. The law should prohibit anti-competitive conduct but should also permit conduct which is pro-competitive or more efficient.
Universal: Competition law should apply to all sectors of the Australian economy, other than where a more limited application has been found to provide a net benefit to the public.
Clear: Setting the parameters regarding how businesses may behave to ensure the integrity of markets can give rise to some unavoidable complexities. It is important that the CCA strikes the right balance between complexity and clarity so that the laws remain comprehensible and workable.
Effective: Prohibitions will not act as a deterrent or shape business behaviour where they cannot be readily enforced or where penalties do not act as an appropriate deterrent. To be effective, the prohibitions must be able to be efficiently enforced by the ACCC and private litigants, and penalties must outweigh the gains that businesses may obtain from anti-competitive conduct.
Proportionate: Regulation should be imposed only when it can be shown to offer an overall net benefit. The prohibitions and statutory processes set out in the CCA should strike a balance between providing a framework which promotes more efficient markets and the regulatory burden imposed upon business.
The ACCC considers that there are several areas where the CCA could be amended to better meet these principles.
Reforms to the competition provisions
Key areas for CCA reform
Amend the section 46 misuse of market power prohibition to ensure that it is effective in prohibiting anti-competitive conduct by firms with substantial market power. The ACCC considers that this could be best achieved through the introduction of an effects test and amendments to overcome limitations with the application of ‘take advantage’.
Expand application of the ‘price signalling’ provisions prohibiting anti-competitive disclosure of information throughout the whole economy, not just the banking sector.
To bring merger authorisation into line with other authorisation provisions, remove first instance merger authorisation by the Australian Competition Tribunal (the Tribunal), to be replaced with merger authorisation by the ACCC with a right of review by the Tribunal.
Amend the third line forcing provisions to prohibit such conduct only where it has the purpose, effect or likely effect of substantially lessening competition in a market (subject to review and, if necessary, amendment of the Australian Consumer Law to ensure adequate consumer protections remain).
There are a number of exemptions from the CCA that are no longer appropriate, and others that should be amended to better ensure that the restriction on competition is proportionate and results in a net benefit to the public.
Amend the CCA to put beyond doubt that conduct which occurs overseas, but which has an anti-competitive effect in Australia, is caught by the CCA. This should include clarification of the circumstances in which an overseas corporation is considered to be ‘carrying on business within Australia’.
There are two key areas in which the ACCC considers greater clarity in the drafting and structure of the provisions would considerably improve the accessibility of the provisions and reduce the regulatory burden: cartel provisions; and the authorisation and notification provisions.
Reforms to the ACCC’s investigative powers
The effectiveness of the CCA in discouraging anti-competitive conduct is directly linked to its enforceability. In turn, the investigative tools available to the ACCC are critically important for effective enforcement.
Several investigative tools in the CCA require amendment to ensure that they operate appropriately.
Key reforms to the ACCC’s investigative powers
The ACCC’s compulsory information gathering powers under section 155 are of particular importance. Recommended changes include:
increasing criminal penalties for non-compliance, and introducing civil penalties;
introducing civil provisions to compel compliance with a section 155 notice;
ensuring section 155 powers apply where appropriate; including in relation to:
particular investigative circumstances, such as multi-party investigations; and
other ACCC functions under the CCA, such as enforcement of section 87B undertakings, assessment of formal merger clearances and Part IIIA access undertakings.
To support the ACCC in gathering evidence for investigations, and foster greater detection of anti-competitive conduct, greater protection for whistle-blowers or informants should be provided through:
sanctions that better deter intimidation; and
the creation of a third party whistle-blower regime, modelled on the regime in the Corporations Act 2001 (Cth) (Corporations Act).
Several more suggested reforms to investigative tools are set out in Attachment A to the submission.
Reforms to assist small business
The ACCC, like all regulators, has a ‘dual role’; it both enforces the provisions of the CCA and educates businesses about their rights and responsibilities. Given the particular needs of small businesses, the ACCC provides them with specific resources to address these requirements. The ACCC considers that there are a number of specific amendments to the CCA that would assist small businesses.
Key reforms to assist small businesses
Extend the unfair contract term provisions in the Australian Consumer Law to contracts involving small businesses.
Amend the collective bargaining / boycott notification regime to make it more accessible and to allow small business greater opportunities to undertake collective boycotts. The ACCC proposes a number of amendments which will make notifications more flexible and will allow for a greater number of arrangements to be put into effect.
Amend all prescribed industry codes to improve their enforceability. The ACCC supports the introduction of civil pecuniary penalties, infringement notices and improvements to the audit provisions regarding industry codes.
Implement a legally enforceable supermarket and grocery industry code of conduct that provides clear rights and obligations.
Amend the Horticulture Code to improve its coverage.
Amend the ACCC’s educative and research role as provided for by the CCA to better reflect current practices and stakeholder expectations.
The ACCC’s submission also outlines further information in relation to specific queries raised by the Issues Paper. The ACCC would be happy to provide the Competition Policy Review Panel with further information regarding any of its functions under the CCA.
Further information to assist the Competition Policy Review Panel
resale price maintenance should continue to be prohibited outright; and
the potentially negative effects on competition and consumers should be considered in relation to any proposed legislative response to international price discrimination.
The ACCC has provided information regarding merger processes in Australia, the ACCC’s approach to merger review and an overview of merger processes in the European Union and the United States to further inform the Competition Policy Review Panel’s consideration of these issues.
The ACCC has provided further explanatory information regarding the role of market definition in competition matters and other related factors that arise in relation to merger analysis.
Institutions and implementation
The ACCC notes that the framework implemented in the 1995 reforms has been used to guide competition reform in other countries, and could similarly provide the model for future competition reform in Australia.
That experience suggests that there are a number of components which contributed to its success:
1. The use of independent expert bodies to progress reform within the framework agreed to by governments.
2. A shared vision and commitment to a clear set of principles across all Australian governments (Commonwealth, state/territory and local) and across political parties.
3. The Productivity Commission to quantify expected net benefits from the proposed reforms, and impact on government budgets.
4. Where reform to be undertaken by the States/Territories is expected to result in an increase in Commonwealth tax revenue, some distribution by the Commonwealth to the States/Territories of that increase in revenue, subject to States/Territories implementing the reform.
5. A statutory body to undertake monitoring and transparent reporting on outcomes, including where commitments are not being delivered.
6. Tying the intergovernmental commitments to legislation.
7. Targeting social assistance and adjustment packages to facilitate adjustment to, instead of preventing, structural change.
The institutional structure arising from the 1995 reforms has been one of the core strengths of Australia’s NCP. This includes the structure of the ACCC, combining competition enforcement, consumer protection and economic regulation into a single, economy-wide body with the single objective of making markets work to enhance the welfare of Australians. This amalgamation of functions is consistent with recent international trends.
One issue consistently raised in Organisation for Economic Co-operation and Development (OECD) assessments of Australia’s competition policy framework is that the ACCC, unlike most comparator jurisdictions overseas, does not use market studies to supplement its enforcement function.
The ACCC considers that a broader market study function is needed for the ACCC to assess whether, in particular sectors, competition problems exist or not, and to support better targeted action by the ACCC or others in response.
In 2012, the International Competition Network found that 40 member authorities including, for example, the United States, the UK, European Commission, Japan and Republic of Korea, conduct market studies, and that the number continues to grow.
Market studies overseas are used:
as a lead-in to enforcement action when anti-competitive behaviour is expected but the exact nature and source of the problem is unknown;
to identify a systemic market failure and to better target a response; and
to address public interest or concern about markets not functioning in a competitive way. The market study could either confirm these concerns, and propose some solutions, or find them to be unfounded.
The Hilmer Review significantly improved Australia’s productivity and international competitiveness, stimulating job creation and improved living standards for Australians. The ACCC likewise expects the same outcomes from the current Competition Policy Review.