WHAT IS THE COMPETITION POLICY REVIEW?
Also called the Harper Review or the “root and branch” review, the Competition Policy Review is an independent inquiry into Australia’s competition policy, law and institutions, whether they remain “fit for purpose” in the current economic climate, and how they can improve Australia’s productivity and competitiveness over the next decade or two.
It is the most significant inquiry into Australia’s competition framework since the 1993 inquiry chaired by Fred Hilmer, which introduced substantial microeconomic reform.
The Review was instituted in February 2014 by the Commonwealth Minister for Small Business Bruce Billson MP. It is being undertaken by chair Professor Ian Harper and Review Panel members Su McCluskey, Peter Anderson and Michael O’Bryan QC.
WHERE IS IT UP TO?
The Panel delivered its Draft Report on 22 September 2014, making 52 draft recommendations summarised here. It consulted widely on the Draft Report until late November 2014.
Panel members have emphasised that this is a Draft Report rather than an Interim Report, suggesting that unless it is presented with significant new evidence or convinced that circumstances have changed, its draft findings and recommendations will be largely reflected in the Final Report to be delivered to the Commonwealth Government in March 2015.
The Commonwealth Government will consider the Final Report and is likely to issue a formal response before implementing some or all of its recommendations through legislation or administrative arrangements, but there is no indicative timetable for this process.
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WHAT IMPACT WILL IT HAVE?
If the recommendations of the Draft Report are implemented by the Government in anything close to their current form, they will have a substantial impact on businesses and governments across the economy. The most significant recommendations are:
+ Misuse of market power and a new “effects” test: the Panel has suggested a broader and more uncertain test for conduct engaged in by a business with a substantial degree of market power. Since many Australian markets are relatively concentrated, markets may be defined narrowly and market power may be associated with relatively low market shares, a great number of businesses would be affected by this change.
+ Price signalling and a new “concerted practices” concept: the Panel has recommended the replacement of the current banking-specific price signalling provisions with a new prohibition of “concerted practices” that would cover all businesses that might privately or publicly disclose competitively significant information. The ACCC has identified petrol prices, airline capacity and mobile phone carrier subsidies as information that might be captured by a general provision like the one proposed.
+ Merger processes: the Panel suggests combining the formal clearance and authorisation processes into a single formal process administered by the ACCC. This could provide a more useful alternative to the informal process, particularly in complex and contentious matters – but would remove the option of applying directly to the Australian Competition Tribunal for authorisation.
+ Intellectual property: the Panel suggests a further inquiry into the effects of IP laws on competition, innovation and trade, a removal of all remaining restrictions on parallel importation that are not necessarily in the public interest, and a removal of the exemption of IP licensing agreements from the competition law. These changes could have a considerable impact on creators and licensees of intellectual property in Australia.
+ Access to infrastructure: the Panel suggests changes to the National Access Regime that may promote investment in new infrastructure, potentially at the expense of those who seek access to essential infrastructure to provide downstream services.
+ Government activities: the Panel recommends extending the competition law to apply to government procurement and other activities that do not constitute carrying on a business. It strongly recommends opening health, education and other human services to greater competition, which may provide significant opportunities for private participation.
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MISUSE OF MARKET POWER AND A NEW “EFFECTS” TEST
The Harper Review has been characterised from the beginning as a contest between small business and big business, despite the efforts of the Panel to present a wider perspective. The Draft Report largely avoids taking sides, but some of the changes it recommends may have a particular impact on bigger businesses across the economy.
The most controversial recommendation of the Draft Report is its proposed overhaul of the “misuse of market power” provisions in section 46 of the Competition and Consumer Act 2010 (CCA). The current section prohibits
a business from taking advantage of substantial market power for the purpose of damaging a competitor or preventing
a person from entering or competing
in a market. The new test would simply prohibit a business with substantial market power from engaging in any conduct that has the purpose, effect or likely effect of substantially lessening competition.
By adding an “effects” test – dispensing with the requirement to prove an anti- competitive purpose – and removing the “take advantage” element, these changes
would discard two of the tools used to help distinguish legitimate competition from anti-competitive conduct, and make it more difficult for businesses to determine whether any action on their part might be considered to breach the
CCA. Since many Australian markets are relatively concentrated, markets may be defined narrowly and market power may be associated with relatively low market shares, a great number of businesses would be affected by this change.
To address concerns about “over- capture”, the Panel suggests a two-limbed defence which would apply where the conduct both:
+ would be a rational business decision by a corporation that did not have a substantial degree of power in a market; and
+ would be likely to have the effect of advancing or promoting the long-term interests of consumers.
The first limb of this defence effectively reverses the burden of proof of the current “take advantage” element, though its language does not correspond closely
with any of the previous judicial or legislative explanations of that element and would need to be interpreted by the courts. The second limb of this defence is likely to be problematic. Not only is it unclear what is meant by “long- term interests”, it is even more unclear how this element should be assessed prospectively by businesses wishing to engage in particular behaviour.
Submissions on the Draft Report suggest that nobody is happy with the proposed recommendation, with business groups maintaining that no change to the section is necessary and the ACCC arguing that no defence should be available to the new section. A number of legal and academic submissions have proposed
a wide range of alternative tests and defences.
In light of the controversy surrounding section 46 and the “effects” test more generally, with senior figures from both sides of politics weighing in, it is difficult to predict the government’s response to
this recommendation or the prospects of
its legislative passage.
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PRICE SIGNALLING AND A NEW “CONCERTED PRACTICES” CONCEPT
One of the most significant proposed changes to the CCA involves the replacement of the price signalling provisions with a new prohibition of “concerted practices” that have the purpose, effect or likely effect of substantially lessening competition.
The price signalling provisions were introduced in 2011 to respond to the ACCC’s concern that it might be too difficult to establish an “arrangement or understanding” between competitors in cases involving the sharing of price information. Currently, the price signalling rules apply only to the banking sector, though there is scope for them to be extended by regulation.
The existing price-signalling provisions are complex and unwieldy and will not be missed. However, while the Review Panel does not seem convinced that the ACCC’s concerns with the CCA are justified, it has nonetheless recommended the introduction of a new “concerted practices” provision to capture coordinated behaviour that falls short of an arrangement or understanding.
The concept of “concerted practices” is taken from European antitrust and has been shaped by decades of case law. It is not clear how it will apply in the Australian context. The definition provided in the Draft Report – of “a regular and deliberate activity undertaken by two or more firms” – does not appear to capture the European nuance, and could easily apply to a wide range of actions, including many innocent or necessary ordinary course of business information disclosures between industry participants.
While certain key submissions on the Draft Report argue that the price signalling provisions should be repealed without replacement, most submissions have focused on more appropriately defining the extent of the “concerted practices” concept. As a result, it appears that the recommendation has a reasonable prospect of being implemented.
For the banking sector, this would require compliance with a new regime governing the disclosure of price and other information, which should be more clearly defined than the current regime but may be broader or narrower depending on the definitions adopted.
For all other sectors, the change would introduce a new restriction on the public or private disclosure of competitively significant information, and may result in increased investigative and enforcement action in relation to disclosures identified by the ACCC – including petrol prices, airline capacity and mobile phone carrier subsidies.
Gilbert + Tobin 5
Currently, there are three processes available to parties seeking a competition clearance for a proposed asset or
share sale – an informal clearance by the ACCC, a formal clearance by the
ACCC or authorisation by the Australian Competition Tribunal (Tribunal).
The Panel considers that the informal clearance process is operating well, but that there should be further consultation between the ACCC and business representatives to achieve more timely decisions. The formal clearance process has never been used, partly because of its onerous information requirements, and the formal authorisation process has only been commenced twice, abandoned once (Murray Goulburn’s attempted acquisition of Warrnambool Cheese and Butter)
and completed once (AGL’s successful acquisition of Macquarie Generation).
The Panel recommends that the formal clearance and authorisation processes be combined into a single process with simplified information requirements and clear time limits. Under this process:
+ the ACCC would be the decision-maker at first instance;
+ the ACCC would decide to approve a merger if satisfied that it would not substantially lessen competition or that it would lead to a net public benefit (currently, the ACCC processes do not allow it to take into account the public benefits associated with a transaction); and
+ decisions of the ACCC would be subject
to review by the Tribunal.
The proposal to simplify the information requirements of the formal processes
is a welcome one, and the combination of the two alternatives makes some sense. However, over the past year – and particularly since AGL’s acquisition of Macquarie Generation – merger parties have increasingly considered direct application to the Tribunal to be a viable option, and removing this option may remove a useful alternative to informal clearance.
THE PANEL RECOMMENDS THAT THE FORMAL CLEARANCE AND AUTHORISATION PROCESSES BE COMBINED INTO A SINGLE PROCESS WITH SIMPLIFIED INFORMATION
REQUIREMENTS AND CLEAR TIME LIMITS.
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The Draft Report recommends a further review of intellectual property, this time with a particular focus on negotiations for international trade agreements, which it argues may bind Australia to make changes to IP laws without sufficient consultation.
Independently of this review, the Panel also recommends the repeal of section 51(3) of the CCA, which generally exempts IP licensing agreements from the operation of
the competition provisions. The Report argues that, as vertical supply arrangements, IP licensing agreements would continue to be exempt from the per se cartel provisions of the CCA, but they would now be prohibited if they had the purpose, effect or likely
effect of substantially lessening competition – unless authorised by the ACCC. While the ACCC has argued that restrictions in IP licensing agreements will rarely have a substantial effect on competition, it may be easier to establish that an agreement has the purpose of substantially lessening competition (as in the Universal Music case), which would increase the potential risk to businesses entering into or giving effect to IP licensing agreements.
The Panel also recommends the repeal of the remaining parallel import restrictions – whether arising explicitly under the Copyright Act 1968 or implicitly as a result of the Trade Marks Act 1995 – unless they are in the public interest and their objectives can only be achieved by restricting competition.
The remaining restrictions under the Copyright Act are for the most part limited to books, and as digital distribution of copyright material increases, geoblocking technologies are replacing legal restrictions on physical imports. The Draft Report adopts several of the recommendations of the recent House of Representatives inquiry into IT Pricing, including the proposal that consumers should be legally entitled to circumvent geoblocks. This may affect the Australian creators or licensees of rights to digital content that is available more cheaply overseas.
The Panel also suggests that other parallel import restrictions, such as those arising under trade mark legislation, should be subject to the same review process and removed unless they are necessary in the public interest.
THE HARPER REVIEW IS THE MOST SIGNIFICANT INQUIRY INTO AUSTRALIA’S COMPETITION FRAMEWORK SINCE THE 1993 INQUIRY CHAIRED BY FRED HILMER,WHICH INTRODUCED SUBSTANTIAL MICROECONOMIC REFORM.
Gilbert + Tobin 7
The Draft Report recognises the need to continue to balance infrastructure access and the development of competitive downstream markets with the encouragement of investment in new and expanded infrastructure.
The centrepiece for these changes would be the creation of a new national access regulator to take over telecommunications and energy functions from the ACCC,
as well as coordinating access regulation across other sectors such as water.
Also significant is a proposal to constrain the application of the general access regime in Part IIIA of the CCA to a limited and defined set of industries
– given the economic cost of access regulation. Given that the current regime was intended to apply generally across industries, this would mark a substantial shift in the legal framework and is certain to be opposed by access seekers.
Other proposals likely to be welcomed by network owners include:
+ The general deregulatory flavour of the Draft Report includes proposed reforms to planning and zoning processes that should help ease the time and complexity of new
THE CENTREPIECE FOR THESE CHANGES WOULD BE THE CREATION OF A NEW NATIONAL ACCESS REGULATOR TO TAKE OVER
TELECOMMUNICATIONS AND ENERGY FUNCTIONS FROM THE ACCC.
+ Some of the early idealism of the Hilmer era has been tempered with pragmatism. For example, the Draft Report questions the need to pursue structural separation of rail freight operations on small branch lines.
+ The Panel pushes continuing market
reform in the energy and water sectors.
+ The Panel repeats the Productivity Commission’s recommendations to clarify the criteria for declaring a service under the National Access Regime, and endorses the High
Court’s interpretation of when a
facility will be uneconomic to duplicate. It also recommends that access decisions be subject to full merits review by the Australian Competition Tribunal.
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The Draft Report shows a clear interest in exposing more government activity to
competition and to the CCA.
One small but potentially far-reaching change is the provision that the CCA’s competition law provisions would apply to governments at all levels to the extent that they “undertake activity in trade or commerce”, which is broader than the current requirement that they “carry on a business”. This change is particularly directed
to government procurement. The Baxter case found that the private party to an anti-competitive agreement with a state purchasing authority would be liable under the CCA, but not the state or government party to the agreement, and the Panel’s recommendation would put both parties in the same position.
Competitive neutrality is also a key focus of the Review Panel, which received a number of passionate submissions from businesses claiming unfair competition from local governments in areas such as waste collection and the provision of caravan parking. The Draft Report contains valuable recommendations for increased transparency and accountability in the development and application of competitive neutrality policies, which to date have often lacked transparency and rigour.
Health and human services are now seen as the most economically significant area
in which services are either provided or acquired principally or exclusively by the government, and the Draft Report strongly recommends opening these services up to greater competition or contestability. These recommendations may provide significant opportunities for private participation in these sectors, though these reforms will require significant coordination with the States and may be difficult to achieve.
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The recommendations of the Draft Report are organised into three main sections: competition policy, competition laws, and
competition institutions and governance.
The Draft Report identifies a range of areas in which the application of competition policy principles could
provide potential benefits. It does not provide many detailed recommendations for realising these benefits but leaves questions of implementation to the various levels of government.
Some administrative aspects of this reform, such as reviewing regulations and reporting on progress, are intended to be carried out by an independent body such as the proposed Australian Council for Competition Policy (ACCP), further discussed below.
The priority areas of reform identified by the Draft Report are:
+ human services: governments should craft an intergovernmental agreement establishing choice and competition principles in human services including health, education and community services. These principles should emphasise user choice; the separation of funding; regulation and delivery; and maintain a diversity of providers including community and voluntary services.
+ transport: governments should introduce cost-reflective road pricing to replace indirect charges and taxes on road users. Liner shipping agreements should be dealt with under the ACCC’s general exemption powers and coastal shipping restrictions should be removed. Taxi services should be substantially deregulated and limits on licence numbers removed.
+ intellectual property: an overarching review of intellectual property should be undertaken by an independent body such as the Productivity Commission. Costs and benefits of IP provisions in international trade agreements should be analysed and published before negotiations are concluded. The exemption for IP licences in section 51(3) of the CCA should be repealed.
+ parallel imports: the remaining restrictions on parallel imports should be removed.
+ planning and zoning: the objectives of planning and zoning legislation should include competition principles such as the long-term interests of consumers, ensuring arrangements do not favour incumbents, and reducing the impediments to challenging existing regulations.
+ regulatory restrictions: all Australian governments should review regulations and remove unnecessary restrictions. The proposed ACCP should oversee this review and report annually on progress. Priorities include restrictions on retail trading hours, pharmacy ownership and location rules, professional licensing and standards, product standards and labelling, media and broadcasting services, liquor and gambling, private health insurance, agricultural marketing and air service restrictions.
+ competitive neutrality: all Australian governments should review their competitive neutrality principles. Complaints process and compliance should be more transparent and accountable.
+ gas, electricity and water reform: state and territory governments should finalise the energy reform agenda by applying the National Energy Retail Law, deregulating retail prices and including WA and NT in the National Electricity Market. Governments should recommit to reform in the water sector to create a national framework.
The Draft Report briefly considers
the key retail markets of supermarkets and fuel retailing from a competition policy perspective before turning to the competition law.
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Although Professor Harper has consistently emphasised that the Review will be more concerned with broad microeconomic reforms than with the detail of the CCA, it makes a number of significant recommendations in relation to the competition law:
+ concepts and simplification: the central concepts, prohibitions and structure of the CCA are appropriate, but there should be a public consultation on simplification of the CCA by removing overly specified and redundant provisions.
+ government activities: competition law provisions should apply to governments to the extent that they “undertake activity in trade or commerce” (even if they do not “carry on a business”).
+ market definition and competition: the definition of “competition” should be amended to make clear that it includes potential as well as actual competition from imports.
+ extra-territorial reach: competition law should apply to any conduct that damages competition in Australian markets, without requiring a particular connection between the firm and Australia.
+ cartels: the language of the cartel provisions in the CCA should be simplified. The provisions should apply only to goods and services traded in Australia, and only to collusion between likely rather than possible competitors. Broad exceptions should apply to joint ventures and vertical supply arrangements. The earlier prohibition of exclusionary provisions should be removed.
+ price signalling and concerted practices: the “price signalling” provisions recently added to the CCA, and currently applying only to the banking sector, should be repealed. The section 45 prohibition against contracts, arrangements or understandings that have the purpose, effect or likely effect of substantially lessening competition should be extended to include “concerted practices” – that is, regular practices undertaken by two or more firms.
+ misuse of market power: the section 46 prohibition on taking advantage of substantial market power for an exclusionary purpose should be replaced by an “effects” test prohibiting conduct that has the purpose, effect or likely effect of substantially lessening competition. It would be a defence to show the conduct “would be a rational business decision or strategy” for a business without market power and would “benefit the long-term interests of consumers”.
+ unconscionable conduct: there is no need to supplement or strengthen the unconscionable conduct provisions of the CCA, which are working as intended to meet their policy goals.
+ price discrimination: a specific prohibition on domestic price discrimination should not be reintroduced into the CCA. International price discrimination such as the “Australia tax” on IT products should be addressed through market solutions such as ensuring that consumers are able to take legal steps to circumvent geo-blocking technologies.
+ vertical restrictions: third-line forcing should no longer be prohibited per se but only where it has the purpose, effect or likely effect of substantially lessening competition. Section 47 should be simplified to cover broad categories rather than particular forms of vertical restrictions.
+ resale price maintenance: resale price maintenance should continue to be prohibited per se, but should be capable of exemption through the simpler notification process. Resale price maintenance between related bodies corporate should be exempted.
+ mergers: the informal merger clearance process should not be regulated but the ACCC should consult with business to improve timeliness and transparency. The formal clearance and authorisation processes should be combined into a single formal exemption process allowing the ACCC can approve a merger if satisfied that it will not substantially lessening competition or will result in a net public benefit. Information requirements should not
be prescriptive and the process should be subject to strict timelines and review by the Australian Competition Tribunal. There is no need to further amend the merger provisions to address “creeping acquisitions”.
+ employment-related matters: secondary boycotts should continue to be subject to the CCA, and enforcement should be strengthened. Further comment is invited on whether environmental or consumer action that directly impedes lawful commercial activity, as opposed to merely exercising free speech, should be encompassed by the secondary boycott provisions.
+ exemption processes: authorisation and notification processes should be streamlined and ensure that the ACCC can grant an authorisation or notification for any conduct if it satisfied that there will be no substantial lessening of competition or a net public benefit. The ACCC should also be able to grant a block exemption for specified conduct in particular market conditions.
+ enforcement and remedies: the Panel agrees that the sanction for a corporation failing to comply with a section 155 notice is inadequate, and invites further comment on the adequacy of sanctions for the employment-related provisions. The ACCC should “accept a responsibility to frame section 155 notices in the narrowest form possible”, and the obligation to provide documents in response to these notices should be qualified by what is reasonable.
Private actions should be further facilitated by allowing admissions (as well as findings of fact) from one proceeding to be used as prima facie evidence in another proceeding.
+ national access regime: the Part IIIA declaration criteria should ensure that access is only mandated where it is in the public interest, consistent with the recommendations of the Productivity Commission. Further comment invited on the categories of infrastructure to which Part IIIA might be applied in the future.
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COMPETITION INSTITUTIONS AND GOVERNANCE
The Draft Report recommends a number of changes to Australia’s competition institutions, in order to improve the performance of existing institutions and
to drive the broader reforms suggested.
The Panel’s recommendations include:
+ a new national competition body: a new Australian Council for Competition Policy should replace the National Competition Council with a mandate to provide leadership and drive implementation of the evolving competition policy agenda.
+ ACCP functions: the ACCP should be an advocate and educator in competition policy; monitor and
report on progress in implementing reforms; identify areas of further reform; make recommendations on market design and regulatory issues; and undertake research into competition policy developments in Australia and overseas. It should be given a power to undertake market studies and make recommendations to the government for changes to regulation or to the ACCC for investigation of potential breaches.
+ competition payments: the Productivity Commission should study reforms agreed to by the governments and estimate their effect on revenue in each jurisdiction. Competition policy payments should ensure that revenue gains flowing
from reform accrue to the jurisdictions undertaking the reform.
+ a competition and consumer regulator: the ACCC should retain its competition and consumer protection functions.
+ an access and pricing regulator: however, a new regulator should be responsible for the ACCC, AER and NCC’s access and pricing regulatory functions under the National Access Regime, the National Electricity and Gas Laws, the Part XIC telecommunications access regime and the Water Act 2007, as well as state regulatory functions as appropriate over time.
+ ACCC governance: ACCC governance would be improved by incorporating a wider range of business, consumer and academic viewpoints, whether by replacing the current Commission with a Board comprising both executive members (the current Commissioners) and
non-executive members with broader expertise; or by adding an Advisory Board that would provide advice but have no decision-making powers. The ACCC should appear regularly before a broadly-based Parliamentary Committee and develop a Code of Conduct for its dealings with the media to strengthen the perception of its impartiality in enforcing the law.