David Uren, 17 September 2015

Reserve Bank governor Glenn Stevens told the recent National Reform Summit that the biggest gains to prosperity in the past 25 years had come from reforms promoting competition.

“Competi­tion lowers prices and costs. It promotes the drive to do better, which spurs innovation,” he said. Lowering tariffs, floating the dollar, enterprise bargaining and forcing government businesses to operate with market disciplines blew a gale of competition through the Australian economy in the 1980s and 90s, and set Australia up for the 2½ decades of growth it has achieved since.

“How do we foster the conditions under which innovation and genuine risk-taking can flourish?” Stevens asked.

Less than a week later, the Abbott government shelved reforms intended to promote competition in the face of fierce opposition from the Business Council of Australia and fears of a mining-tax style campaign against it. With the ministry divided, reforms to competition policy seemed too hard. It was not so much that the Abbott government lacked the courage of its convictions but, rather, that it had no conviction about the reform to start with.

The reforms were opposed by senior ministers including Foreign Minister Julie Bishop, Attorney-General George Brandis, Trade Minister Andrew Robb and Fin­ance Minister Mathias Cormann.

As the former chairman of Goldman Sachs, Malcolm Turnbull was expected also to oppose the changes. But Nationals leader Warren Truss implied in a media conference on Tuesday that Turnbull had spoken in favour of the reforms in cabinet. Certainly, Turnbull has promised the Nationals in the new Coalition agreement that they will be brought back for consideration and, with a new and different cabinet, the Nationals’ understanding is that they will be endorsed.

The reforms to section 46 of the Competition and Consumer Act, which deals with the abuse of market power, were recommended by the competition review led by Ian Harper and were strongly backed by Small Business Minister Bruce Billson. Among the many recommendations it makes, the changes to section 46 have generated the most heat as big business, the trade unions and Labor unite in opposition while small business groups and the Nationals argue in favour. The Nationals are representing farmers fearing the market power of the big retailers, dairy companies and distribution companies.

The mission before the Harper review was to ensure competition policy and laws were equal to the demands of the next 15 to 20 years as the forces of globalisation pressed relentlessly forwards and while disruption of business deploying digital platforms transformed markets. Impediments to competition should be removed.

There are several objections to the existing section 46, which says that conduct will be illegal if a firm takes advantage of its market power for the purpose of damaging a competitor.

Harper argues competition law ought not to be about stopping damage to competitors — all competition is calculated to hurt others in the market. The Harper report argues the test should be whether market power is used to substantially lessen competition in the market.

It would not be an offence for Bunnings to set up shop in a country town and deploy its economies of scale to offer prices that could not be matched by the small local hardware stores. That is just business. But it would be an offence if Bunnings cut prices below cost knowing it could wear the losses longer than its small local competitors could remain in business.

The other argument against the existing section 46 is that it doesn’t work — it is too hard to prove that a company’s purpose was to damage competition and too hard to prove to a court that a company’s actions were taking advantage of its market power. Coles and Woolworths could argue that their deep discounts on bread were not taking advantage of market power when smaller competitors were also offering discounts.

The arguments against Harper’s recommended changes are that they would catch too much behaviour, halting competition, and become a “lawyer’s picnic”. However, the tests Harper pro­poses are identical to those that work happily enough in adjacent sections of the act dealing with anti-competitive agreements, mergers and exclusive dealing.

The fact big business and the trade unions oppose the reforms is a clue that they don’t want anything that disrupts the cosy market arrangements they enjoy. Because of Australia’s relatively small market size and its geographic isolation, its markets are highly concentrated, with four banks, two retailers, two media companies, two airlines and so forth. The top 10 companies account for 40 per cent of the market value of the ASX 200.

Research by David Gallagher from Sydney’s Centre for International Finance and Regulation shows big companies are exploiting their market power. In the US, companies in the most concentrated markets generate lower than average returns because they become complacent and do not innovate, while the highest returns are achieved in the most competitive markets.

In Australia, the results are the opposite. Companies in the most concentrated 20 per cent of industries achieve annual returns that are an amazing average 5.8 percentage points higher than those in the most competitive 20 per cent of industries. Australia’s small scale and weak law governing abuse of market power make it too hard for smaller competitors while delivering fat profits to oligopolies.

The backbench was furious with Tony Abbott for shelving the competition reforms at last week’s party meeting. Billson did not conceal his contempt for the big business forces that had undercut his reform. But Turnbull, by embracing it, would be doing more than showing he is listening to the backbench.

As communications minister, Turnbull — himself an internet entrepreneur — has been attentive to the calls for policy reform by start-up and entrepreneurial business. Innovation will be a central theme in his economic policy. “Our future lies in technology, in science, in all the new industries. It lies in the future,” he told parliament in his first question time as Prime Minister.

If Turnbull follows through with the reforms, it will demonstrate he understands the roots of innovation and provide hope that his will be a government with the conviction to respond to the challenge Stevens has posed.

Extracted in full from The Australian.