G20 leads to once-in-a-generation opportunity

The Australian Government’s success at the G20 in Sydney over the weekend has paved the way for domestic regulatory reform. The Government’s ambitious ‘root and branch’ review of competition policy (“Review”) could result in the greatest regulatory reforms in 20 years.

The intended scope of the Review is ambitious. The formal announcement of the Review panel and final terms of reference will presumably now occur, building on the outcomes of the Group of Twenty (G20)Finance Ministers and Central Bank Governors Meeting. The Communiqué from the G20 meeting specifically mentions the promotion of competition and hence makes the ‘root and branch’ review all the more important and relevant.

Importantly, the Review provides a once-in-a-generation opportunity for stakeholders to express their views on the future of Australian market regulation. We recommend that those companies and organisations most affected by competition and sectoral regulation give serious thought to making a submission.

This commentary provides an overview of the intended scope of the Review and identifies key issues that may be considered. We have kept this commentary succinct. We are happy to discuss any issues in greater detail.

The political context to the Review

It has been 20 years since our national competition policy was comprehensively reviewed. The so-called ‘Hilmer Review’ into National Competition Policy, chaired by Professor Frederick Hilmer AO, had a profound impact on the Australian economy. In 2006, Australia was one of the most deregulated economies in the western world. Australia’s competition policy reforms led the world and delivered Australia some of the strongest growth rates in the OECD.

As other nations have implemented reforms, Australia’s competitive advantage has eroded. However, Australia currently has an important role leading the G20 at a critical stage in the evolution of the world economy. The Review provides a further opportunity for Australia to provide global economic leadership and to reap the corresponding economic rewards.

The recent decline in Australia’s productivity levels has already led to a recent renewed focus on the importance of competition policy. Many commentators, including Hilmer himself, have called for a new or invigorated approach. Peter Harris, Chairman of the Productivity Commission, identified in a speech in November 2013 that the alternative is a “low growth scenario” for Australia.

In the 2013 Federal election, a stated policy objective of the Liberal/National Coalition was to boost Australian productivity. Improved competition policy was identified as a key means to achieve that objective. If elected, the Coalition stated that it would:

  • undertake a ‘root and branch’ review of competition law and policy to deliver more competitive markets; and
  • ensure that big and small businesses get a ‘fair-go’ when competing in their respective marketplaces.

Following the election of the Coalition in September 2013, these commitments are being implemented. Draft terms of reference for the Review were released in December 2013. Given the successful G20 meeting, the announcement of the review panel and final terms of reference will presumably now occur.

The ‘extraordinary’ breadth of the Review

The potential breadth of reforms that could be considered should not be underestimated.

In an article in the The Australian in January 2014, John Durie described the draft terms of reference as “extraordinarily wide”. As with the Hilmer review in 1993, the Review is not limited to consideration of theCompetition and Consumer Act 2010 (Cth)(CCA). Rather, the review encompasses general competition policy and market regulation with a view to more sweeping structural reform.

The G20 has emphasised productivity growth. The promotion of competition is seen as one means to achieve is. Consistent with this theme, the primary objective of the Review is to recommend appropriate reforms to achieve competitive and productive markets throughout the economy. These reforms must be directed at removing impediments to competition that are not in the public interest. Four key principles are to guide such reforms:

  • no market participant should engage in anti-competitive behaviour;
  • any microeconomic reforms should promote fair, transparent and open competition;
  • government should not crowd-out the private sector in competitive markets; and
  • the regulatory burden on business must be minimised.

The remaining terms of reference then flesh out these reforms in four key areas, namely improvement of regulatory institutions, improvement of competition laws, improvement of sectoral regulation, and the appropriate role of Government in competitive markets.

The draft terms of reference are lengthy, partly to address stakeholder concerns that the Review should focus on competition objectives, not sectoral interests. The potential scope of the Review is paraphrased in the following table:

Click here to view table.

Relevantly, the Review does not cover the provisions of the Australian Consumer Law (which have already recently undergone comprehensive reform), except where amendments are required to protect small businesses. 

The review panel and proposed timing

As at 25 February 2014, the membership of the panel to implement the Review (“Panel”) has not yet been publicly announced. We understand an announcement may have been delayed by the need to first finalise the outcomes from the G20 Finance Ministers and Central Bank Governors Meeting in Sydney.

The final terms of reference and timetable for the Review should be announced at the same time as announcement of the Panel. We understand that the final terms of reference should essentially be the same as the draft terms of reference released in December.

The review timetable is expected to be ambitious. While the Government has indicated that it seeks completion of the Review within 2014, we would not be surprised if the timing were extended given the delays in announcing the Panel. A clear challenge for the Panel will be to achieve this timetable given the very broad scope of the terms of reference.

Once the Panel has handed down its final report, there is no guarantee that the recommendations of the Panel will be accepted by the Government. Politically, we expect that the recommendations of the review will be taken seriously. The Government will need to deliver on the G20 outcomes and the ‘root and branch’ review provides a means to do so.

Where recommendations are accepted, political and legislative processes will still need to be followed. As such, it is unlikely that the Review would lead to formal legislative amendments until at least mid-to-late 2015.

The likely appetite for further deregulation

The Review could provide a blueprint for a next wave of sectoral deregulation and reform.

The G20 has emphasised productivity growth. Poor regulation acts as a drag on the economy by reducing flexibility and innovation, increasing cost, and impeding such growth. The review has been tasked to recommend removal of impediments to competition to enable such growth, including via a process of deregulation. New regulation may also be subject to screening via regulation review.

Historically, there has been a clear appetite within all levels of Australian government to remove superfluous regulation, particularly where regulation is impeding productivity. The “National Partnership Agreement to Develop a Seamless National Economy” in 2008, for example, involved a set of 45 reforms by the Council of Australian Governments (COAG) for that specific purpose. We would expect the Review to recommend enhancements to the regulation review process and to identify a set of recommendations for further deregulation and reform.

In this context, a key philosophical issue for the Review will be the appropriate level of regulation in critical sectors of the economy. Relevant questions may include:

  • Should more sectoral regulation be removed and reliance placed solely on competition law? In January 2014, ACCC chairman and CEO Rod Sims cautioned that “in a frenzy of deregulation, all regulation can be removed”.
  • Should new regulation be applied? In February 2014, the Business of Council of Australia urged caution and advocated a ‘principle based’ approach to the Review.
  • What areas should be the priority areas for further reform? We would expect the Panel to identify those areas where reform will deliver the greatest benefits.

Ultimately, the Review will need to identify an appropriate regulatory balance for Australia for the coming decades.

Regulatory agency reforms may focus on the NCC

The Review may recommend institutional reforms, including the reinvigoration of Australia’s competition policy institutions. 

In a recent speech, Professor Frederick Hilmer AO identified three distinct tiers in the institutional framework for competition policy in Australia, as set out below:

Click here to view image.

Hilmer argued that any reforms should focus on the first and second of these tiers.

Consistent with Hilmer’s comments, the Review is likely to focus on the role of the policy review agencies, particularly the NCC. Some have proposed the creation of an independent, high powered policy review and development entity to support each responsible Minister and COAG. The new entity would have regulation review powers. Any such reform could involve a greater role for the NCC, the expansion of the Productivity Commission, or even the integration of these entities.

While some have speculated on ACCC reform, the ACCC remains one of the best competition agencies in the world. In 2003, the so-called ‘Dawson Committee’ undertook a detailed review of the ACCC’s functions and powers. That Committee was generally dismissive of proposals for greater reforms to the ACCC at that time.

A more likely outcome will be that the Review will recommend fixes for some important ACCC processes. Of these, the formal merger review process is an obvious candidate for further reform. That process was enacted in 2005, but has never been used, largely due to its perceived inflexibility. The recent experience in the application for merger authorisation by the Murray Goulburn Co-operative may also result in refinements to the merger authorisation procedure.

Competition law reforms may involve a welcome ‘trim’

There is welcome scope for fine-tuning Australia’s competition laws.

While some have joked that our competition laws rival our tax legislation for their excessive complexity, Australia’s competition laws remain some of the best in the world. From 1974, Australia adopted a unique approach that blended the best elements of competition laws in Europe and the United States. Australian competition laws are widely regarded as highly effective and consistent with international best practice. The review is unlikely to recommend a substantive redraft.

However, some provisions of the CCA have been the subject of regular criticism. Other provisions of the CCA were enacted in reaction to historic political concerns and have rarely been used. We suspect these provisions are likely to be the primary focus of the Review. In effect, the ‘root and branch’ review may provide the opportunity for a welcome ‘trim’.

Some important examples are set out below:

Click here to view table.

Importantly, the Review has been expressly asked to consider the continued relevance of the various exemptions contained in the CCA. We therefore expect a careful review of the nature of those exemptions, including potentially for intellectual property and liner shipping. The express mention of parallel importing in the terms of reference suggests that the historic conclusions of the Ergas Report on Intellectual Property and Competition Policy in 2000 may be revisited.

Improved outcomes for small businesses

The Review may recommend reforms to address the concerns of small business.

Small business has been a key focus of Coalition policy. The genesis of the ‘root and branch’ review was to address concerns of small business and ensure “that small business can compete equally with big business”. Reflective of this focus, the Review is currently being administered by the Minister for Small Business, Hon Bruce Billson MP, rather than the Treasurer. Billson is quoted as stating that he has a “hunting licence to go where I need to go to give more support and encouragement to the enterprise ecosystem”.

The draft terms of reference indicate that the Review will consider extending the unfair contract provisions (which currently apply to consumers) to small business and expanding the protections against unconscionable conduct to small business. While this may benefit small business, it does impose a greater regulatory burden overall. Much debate has also historically centred on such issues. As such, it is by no means certain that any such reforms would ultimately be recommended.

We also expect a careful analysis to be undertaken as to the nature of the regulatory regime associated with industry codes of conduct. One feature of a more deregulated approach is a greater reliance on industry ‘self-regulation’, including the use of industry codes of conduct. However, sufficient protections are required to ensure that ‘self-regulation’ does not degenerate into no regulation at all.

In relation to franchising, the Federal Government accepted (or accepted in principle) most of the recommendations made in April 2013 following an independent review of the Franchising Code of Conduct. Given this, it seems unlikely that the Review will seek to revisit Franchising Code of Conduct issues.

Some industry sectors are under particular scrutiny

Companies may push for greater protections against knee-jerk sectoral regulation.

A number of industry sectors have been singled out for specific attention in the draft terms of reference, namely shipping, e-commerce, groceries, utilities, automotive fuel (e.g. petrol, diesel), technology, and natural monopoly infrastructure. Some of these sectors mirror the ACCC’s current areas of focus, as identified by ACCC Chairman and CEO Rod Sims in a speech on 21 February 2014. Technology and e-commerce, for example, is a current key focus for the ACCC, including given the disruptive effect of the Internet on traditional business models. 

Infrastructure is a key area of G20 focus. As the Productivity Commission has just completed a detailed review of the Part IIIA national infrastructure access regime, it is unlikely that the Review will reopen the need for reform of that regime. However, Part IIIA is but one component of the regulation of Australian infrastructure. The Panel may give attention to such issues as State-based price surveillance (particularly of natural monopoly infrastructure) and State-based access regulation.

The competition issues relating to groceries, utilities, and automotive fuels are perennial and tend to be unique to those particular sectors. For example, in petrol retailing, public concerns may lead to submissions that the price signalling provisions should be extended. Given the likely limited resourcing and timetable of the review, any such detail would be best left to sector-specific inquiries. Yet the review may seek to guide future policy-making and sectoral regulation. A more harmonised, principled and predictable approach may reduce the risk of ad hoc government intervention. The review has the ability to define the circumstances and parameters within which any sectoral regulation should be applied.

We also suspect that the Review is intended to provide a means to revisit competition issues that have been the subject of previous reports and recommendations. For example, the exemptions for liner shipping agreements set out in Part X of the CCA are mentioned. These provisions provide limited exemptions from the CCA for collective arrangements involving international liner shipping for cargo into or from Australia. The Productivity Commission last reviewed Part X in 2005.

Model for Government businesses under review

Interestingly, reforms may occur to the regulatory model for government businesses. 

The Review is required to consider whether Government businesses promote competition and productivity. These issues are relevant to competition policy as Government involvement in competitive markets has the potential to ‘crowd-out’ private sector investment. Moreover, there is an inherent conflict of interest where the Government has the ability to set the regulatory structure for its own businesses.

The draft terms of reference indicate that the focus will be on four sets of issues:

  • whether Government funding should be separated from service provision;
  • potential for greater privatisation and corporatisation of Government businesses;
  • the appropriateness of price-regulation in non-competitive markets; and
  • the continued application of competitive neutrality policies.

The inclusion of these issues indicates that the Review could potentially cover reforms in economic sectors that have traditionally been the domain of Government, including healthcare.

The use of the word “privatisation” in the draft terms of reference has already attracted disproportionate media comment and will likely continue to do so. However, such issues are inherently political and it is unlikely that the Review will be so granular that it will identify particular assets for privatisation.

Further information

Historically, Australia’s competition policy reforms led the world and delivered Australia some of the strongest growth rates in the OECD. As leader of the G20, the review provides a further opportunity for Australia to provide global economic leadership and to reap the corresponding economic rewards.