For this section the Institute invites comments from two differing policy viewpoints. In this edition of farm institute insights, The Hon Bruce Billson MP and Mick Keogh discuss current Australian competition legislation and how can be improved to protect small businesses and farmers.

 

Does Australia’s current competition legislation provide adequate protection for small businesses and farmers while maintaining a competitive economy? What if any changes might be needed to ensure small businesses have an equal opportunity to compete in the future? 

The Hon Bruce Billson MP

Federal Member for Dunkley and the Minister for Small Business

The Australian farming community has long been the ground from which our economy has grown. Australian farmers are renowned for their innovation and enterprising spirit. Small businesses are the engine room of our economy, and nowhere is this more evident than in rural and regional Australia.

With this in mind, the Abbott Government is committed to ensuring efficient businesses, big and small, are able to operate on a level playing field. The Government’s vision is for Australia to be the best place to build and grow small business and family enterprise, and nowhere is this ambition more important to local communities than in rural and regional Australia.

Before the election we promised to identify ways to build the economy and promote jobs. To achieve this we have commenced a comprehensive review of Australia’s competition framework as part of our Economic Action Strategy.

The Harper Review is the first independent review of its kind in more than 20 years. The Review isn’t only examining the current laws, but also the broader competition framework, to increase productivity and efficiency in markets, to drive benefits that ease cost of living pressures and raise living standards for all Australians.

On 22 September 2014, the Review released its draft report, including 52 draft recommendations. A key area of focus for the review was examining the competition provisions and how they relate to the supply chain, of which farmers are a part, to ensure all market participants can compete based on merit, not on muscle.

This meant investigating whether the framework for industry codes of conduct and protections against unfair and unconscionable conduct provide an adequate mechanism to encourage reasonable business dealings across the economy. The Review identified three key forces that are affecting the Australian economy now more than before, and are likely to affect the economy in the coming years:
  • the industrialisation of developing nations and, in particular, the rise of Asia and the growing Asian middle class
  • ageing of the Australian population and falling workforce participation
  • diffusion of digital technologies with their potential to disrupt established patterns of economic activity.
The Government is aware that each of these three key areas affects the farming community as much as any other sector in our economy.

At this stage the Government is not commenting on the merits of any of the draft recommendations as it is important to give the draft report clear air, to allow for open debate on the views it presents.

This is why farmers are encouraged to take the time to read the Review at http://competitionpolicyreview.gov.au and provide your feedback. The draft report discusses a number of areas relevant to farming, small business and agriculture.

One observation was that in recent years the Australian agriculture sector has become strongly market-oriented, with farmers now exposed to competition in domestic and world markets, and governments having largely removed production and trade-distorting support. The panel recommends that governments should resist calls for past reforms to be unwound.

The panel also notes that some stakeholders questioned whether the Australian Competition and Consumer Commission’s (ACCC) application of merger laws is constraining the ability of Australian businesses to achieve efficient scale in order to become globally competitive, for example in the case of Murray Goulburn’s proposed acquisition of Warrnambool Cheese and Butter, which did not proceed because it was held up by the merger approval process. I know this case was of particular interest to farmers, as Murray Goulburn is a farmer-owned co-operative.

The draft report indicates that the potential public benefit from increased scale can be accommodated under the existing legal framework. In addition to the Review the Government is committed to improving the operating environment for small businesses by streamlining government processes.

We are providing small business the support they need to thrive. There are many factors that farmers can’t control, but as a government we want to ensure that we do all that we can do to make running a farm easier.

The Government’s small business policy agenda focuses on cutting taxes, reducing red tape burdens, improving the operating environment for family farms and making it easier for the farming community to engage with government.
Australian farming communities deserve the Government’s assistance and support - our primary producers are world class. That is why we want to ensure the operating environment for farmers is also world class.

Every day in government, knowing how hard farmers are each working in their farming business, makes us even more committed to ensuring we have the right framework in place for their success.

The Hon Bruce Billson MP is a Member of the Australian House of Representatives and was first elected in March 1996 to represent the constituency of Dunkley.

Bruce was sworn in as the Minister for Small Business in September 2013.


 

Australia’s competition laws need a rethink

Mick Keogh

Executive Director, Australian Farm Institute

One of the biggest challenges associated with competition law in Australia is that the law takes a ‘black and white’ approach to what is fair or unfair market behaviour. The reality is that every market is slightly different, and actions that might be ‘unfair’ in some markets may not be in others.

An example of the ‘black and white’ approach to competition law is the current legal cases which have been initiated by the Australian Competition and Consumer Commission (ACCC) against major supermarkets. These legal cases are painstakingly slow, because the process of collecting evidence is inherently difficult.

On the one hand, supermarket suppliers are very reluctant to come forward, knowing full well that if as a consequence of being identified as a complainant they lose their supplier status, this can be the end of their business. On the other hand, supermarkets collect and retain an enormous store of market information, but will not willingly disclose this unless forced to, especially if that information is potentially damning.

As a result, it has taken the ACCC more than three years to get to the point where there is a belief that sufficient evidence is available to launch legal proceedings. What happens next is up to the court system, but it is a reasonable wager that it will be at least another two years before court proceedings, and the inevitable subsequent appeals process, reach a conclusion. 

Ultimately, a judge or judges need to make a threshold decision about whether particular actions by market participants amount to ‘unconscionable’ or unfair market behaviour, and are therefore subject to a penalty, or whether the actions undertaken constitute fair behaviour, and are ultimately to the benefit of consumers. Depending on which side of the very fine line called unconscionable conduct the courts decide this case falls, the result will either be millions of dollars of fines for the accused, or complete exoneration.

Given that there are few strong precedents associated with the provisions of this legislation, there is a great deal of uncertainty for both the ACCC and the retailers about which way this decision will fall.

An alternative is to adopt a preventative rather than a curative approach, which has parallels with the use of the ‘precautionary principle’ in environmental legislation. Under such an approach, the focus is on identifying those market situations where the potential for unfair or unconscionable behaviour is higher, and adopting precautionary policy responses in those markets to reduce the risk of anticompetitive behaviour. 

There is a well-established analytical approach that has been developed for the consideration of mergers in the USA by the US Department of Justice that provides a robust foundation for such policy. The first step is to define the boundaries of the ‘market’ being considered. The next step is to assess the degree of ‘concentration’ in that market, by considering the market share held by the major market participants. 

This is usually analysed by calculating the Herfindahl-Hirschman Index (HHI), which is simply the sum of squares of the market shares of participants in the market. A market dominated by a very small number of major participants will have a very high HHI, whereas a market with many participants will have a very low HHI.

The HHI can then be used as the basis of a decision-making framework about appropriate policies to ensure markets remain fair. At lower HHI levels, there would generally be no need for market-specific policies. In mid-range situations, ‘light’ policies such as the encouragement of voluntary industry codes and dispute resolution processes may be appropriate. 

In more concentrated markets, mandatory industry codes and compulsory reporting of market information such as prices and volumes in order to improve market transparency may be an appropriate response. 
In the most concentrated markets or those in which natural monopolies exist, an appropriate policy approach may be to implement regulated pricing or mandatory access codes that ensure new competition can emerge. Ultimately, in the most concentrated markets, mandatory divestment may need to be considered, as was the case for Bell Telephone in the USA in 1982.

Most of the likely policy responses identified above are already adopted in different situations in Australian markets, but there is no overall framework that helps to identify when specific policies may be appropriate, and just as importantly when they are no longer needed. 

By adopting a more objective methodology to assess market concentration, and by establishing in advance the potential policy responses appropriate to different concentration thresholds, market participants could have much more certainty about the policy framework under which they operate, and a much clearer understanding of the type of behaviour that is considered appropriate in that market. 

Utilising policies such as mandatory market information disclosure in more concentrated markets not only improves market transparency, but can also act as a market ‘antiseptic’ because dominant market participants are aware that the availability of this information makes unfair behaviour much easier to detect and take action against. This is in stark contrast to the slow and laborious process of collecting market information which is the current situation in Australia.

Mick Keogh is the Executive Director of the Australian Farm Institute. 

Previously, Mick was the General Manager Policy, NSW Farmers’ Association.

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Images: Clare Bellfield, Campbell Brodie, Dairy Australia, Geoff Penaluna