John Dahlsen, 11 November 2015

THE aim of a new Section 46 effects test is not to prop up failures. It’s to recognise the lack of level playing field for small business.

There are two deeply entrenched and irreconcilable positions on the Harper competition review’s recommendation to amend Section 46.

Harper proposes modifying the section to create a straightforward and direct effects test: that is, any conduct that has the effect of substantially lessening competition in a market.

This recommendation is backed by the Australian Competition and Consumer Commission, Choice and many industry associations representing small business, from booksellers, grocers, farmers, newsagents, hoteliers, pharmacists, retailers, convenience stores, independent hardware and timber, petrol, independent supermarkets, optometrists, grain growers, master builders and hairdressers to motor btraders.

But the big end of town at the Business Council of Australia wants to continue with the status quo and all the difficulties in proving the misuse of, and taking advantage of, market power.

The argument is clouded by recent history. The ACCC has devoted huge resources to tackle the supermarket chains, engaged in an intense fight for growth and market share, on their relationship with their suppliers. Though not directly relevant to this discussion, it colours the arguments about how power is exercised and misused in some sectors.

Section 46 does not deal directly with the tension between big and small business. The practical reality of Section 46 is not the protection of failing or less successful businesses.

It is a realistic understanding of the weak position of small business.

The existing Section 46 causes uncertainty and it is surprising that the BCA does not support pro-competitive change on those grounds alone.

Big business is, however, better equipped to deal with uncertainty and a mass of regulatory detail. It already does so on sensitive environmental, health and safety, and labour issues in detail – so why not on competition matters as well? It is also well-placed to negotiate with the ACCC.

Small business is, on the other hand, compromised. Under current law it has to prove behaviours that have the purpose of substantially lessening competition in a market. This is difficult, if not impossible.

The BCA shows no compromise or mercy in its objective of keeping things as they are.

Perhaps a subsidised newspaper death notice column of failed small businesses, and the damage caused, might lead some to think more about the long-term effect of the existing Section 46. This may not look pretty for the banks.

The BCA members have massive scale, information, knowledge and resources to pursue their cause, while small business does not.

There is no comparable organisation to the BCA with similar resources or influence, though it is good to note that many of the associations representing small business have for the first time informally come together to present their views.

Together it represents a huge number of Australian businesses.

The High Court acknowledges that competition is brutal.

This does not help those who argue for checks and balances in the competition process, particularly given the disruptive and destructive effects on people.

The High Court should not and does not make moral comment on the nature of competition process – but that does lead to a legalistic and narrow view of competition. There are unacceptable conduct provisions, endorsed by the ACCC, that apply to some business sectors.

These provisions are not universal, but tailored to the tensions in certain industries. The more tailored they are, the more effective they are.

But surely some general code of behaviour could be designed and modified as needed for particular sectors.

These could reset the imbalance of economic and strategic power, information and resources between the parties, and make the competition process fairer and more open to smaller players with less disruption.

Some well-known economists are beginning to express concern about competition.

So did Adam Smith, 240 years ago, the father of the free market.

Some argue that Adam Smith favoured unbridled competition. But Adam Smith was a moral philosopher, not an economist as we understand it today. He believed that there should be limits on competition. The difficulty is where you draw the line. The fact that this is difficult should not deter an attempt to develop a code that might recalibrate the process of competition.

Markets are there to serve the unique needs and wants of individual human beings.

Competition should be subservient to this aim – not to the unbridled, unfettered activities of those who would damage the competition process.

Employees, stakeholders and consumers would applaud if corporations laid down their own conditions of fair and ethical conduct. Is this a pipe dream?

John Dahlsen was chairman of Woolworths from 1992 to 2001.

Extracted in full from Stock & Land.