Additional Comments by Senator Canavan
1.1
The committee notes concerns within the community about the misuse of
market power by large corporations and the limitations in existing competition
law in effectively deterring or addressing such behaviour (2.42). I wish to add
my voice to these concerns. The important role that competition plays in
promoting productivity and innovation in the Australian economy means that
ensuring Australia has a strong and effective competition laws should remain an
ongoing focus for policymakers.
1.2
In my view, competition in Australian markets would be strengthened
through including divestiture as a potential remedy for a breach of section 46
of the Competition and Consumer Act 2010. This change is required
because:
-
the existing penalties are not sufficient to deter serious
breaches of competition laws;
-
claims that its introduction would introduce undue business
certainty do not stack up against the extensive overseas experience of
divestiture penalties; and
-
a divestiture remedy would only be used in cases of serious
misconduct and it was a practical remedy given the nature of the markets under
consideration.
1.3
Of particular importance is ensuring regulators have a sufficient range
of tools, with appropriate powers to investigate and, where appropriate,
penalise and remedy situations where competition is damaged. Of relevance are
the cases brought by the Australian Competition and Consumer Commission (ACCC)
last year against Coles which exposed the serious nature of the misconduct that
has been taking place in Australia's retail sector. The Federal Court judgement
concluded that Coles gravely misused its bargaining power. It found Coles
demanded payments from suppliers
to which it was not entitled by threatening to harm their business and withheld
money from suppliers it had no right to withhold. The Court concluded that
'Coles' practices, demands and threats were deliberate, orchestrated and
relentless.'[1]
1.4
The penalty given to Coles of $10 million, the maximum allowable under
the existing arrangements, was insufficient. In particular, Federal Court judge
Justice Gordon stated that the penalties should have been higher in part to
provide
an 'important element of deterrence' to others, noting:
I don’t regard these penalties at the top end for these
proceedings at all ... This conduct could have attracted considerably higher
penalties. You are dealing with a company worth $22 billion on one side and the
smallest supplier worth less than 0.1 per cent of that on the other.[2]
1.5
The Coles example does not, of course, provide prima facie justification
for the introduction of a divestiture power in Australian competition policy
laws. For one, this case involved a breach of unconscionable conduct provisions
(section 20 of the Australian Consumer Law) not the misuse of market power
provisions (section 46) that Senator Xenophon's bill deals with. Nonetheless,
the brazen misconduct revealed in this case highlighted the need for stronger
deterrents to broader issues of anti-competitive conduct covered by the Competition
and Consumer Act 2010.
1.6
Further, the gravity of the revelations made by the ACCC in this case
raises the question as to whether the existing competition policy framework may
need to be augmented either now, or in the future, so that it can respond
effectively and in
a manner proportionate to the significance of the infringement. The importance
of regulators having a sufficient range of enforcement tools to be able to
respond to compliance breaches in a proportionate way was highlighted by the Productivity
Commission in a recent study.[3]
1.7
A major reason provided to this inquiry for opposition to the
introduction of divestiture powers are the potential loss to economic
efficiencies, in particular economies of scale, that deliver positive outcomes
to consumers as well as increasing the overall productivity of the economy.
This is an important point. But it does not,
of itself, rule out the use of a divestiture mechanism in some instances.
1.8
Clearly any use of divestiture powers would be an extraordinary measure
and would only be appropriate in the most serious circumstances and for
industries with particular market structures. This is borne out by the
international experience highlighted in the committee's report. The use of such
powers in jurisdictions where they exist, such as the United States, highlights
that, notwithstanding the deterrent effect, they are in practice not often
used. And when they are, real world economic imperatives mean they are used for
industries that have a high degree of vertical integration. These include
telecommunications, electricity and energy markets with clear points of
division within businesses.
1.9
Another point to note is that the trigger for the consideration that a
misuse of market power has occurred, under section 46, explicitly rules out
behaviour by a firm — even one with substantial market power — that in the
normal course of events would reasonably be undertaken to improve its
efficiency of operations. Hence, beneficial activities undertaken to exploit
economies of scale to reduce business costs, such as consolidation etc., would
be unaffected by a divestiture provision. A business acting in a manner
consistent with competitive behaviour would not breach section 46 and therefore
would not be liable to a penalty of divestiture under this amendment.
1.10
More broadly, the possible adverse impact of divestiture provisions in
terms of impacts on economic efficiency, such as reductions in economies of
scale, logistical difficulties in divesting particular businesses, including
the potential unviability of divested parts of a business, disruption to a firm
or industry's activities, as well as the impacts on investment due to regulator
risk and uncertainty need to be considered against the costs to economic
activity and efficiency that are already occurring due to misuse of market
power.
1.11
A point that cannot be overstated is that competition is the driving
force for economic growth, dynamism and innovation in any economy. The very
existence of competition laws recognises this fact. Hence, a substantial
weakening of competition invariably extracts a heavy price on an economy, on
consumers, businesses and workers. To take one example, the potential dampening
role played on the investment plans of small firms or potential new market entrants
by the actions of an incumbent with extensive market power must also be
considered. Firm entry and exit is
an important factor in economic efficiency over time.
1.12
Analysis by the Productivity Commission confirms that productivity
growth 'arises from many small, everyday improvements within organisations to
improve
the quality of products, service customers better, and reduce costs.'[4]
The Commission highlighted three policy 'planks' for driving and stimulating
innovation — incentives, flexibility and capabilities. In emphasising the
crucial role of competition as providing the first of these planks, the
Chairman of the Commission Gary Banks observed:
International evidence suggests that it is market
competition, rather than government assistance, that is the main driver of
innovation and its diffusion throughout an economy.[5]
1.13
As always, the question of when the employment and use of
pro-competition policies and instruments is appropriate hinges on the likely
balance of costs and benefits in particular circumstances. These are empirical
questions. And, as such, consideration of whether a divestiture power is
appropriate cannot be ruled out
on grounds of the potential adverse impact on economic efficiency per se.
Any arguments would need to be argued based on evidence rather than asserted.
1.14
Further, some of the arguments used against divestment on practical
grounds, such as the concerns raised by the Law Council about the lack of
certainty about what could be achieved, are not in themselves reasons to rule out
divestment as a possible policy tool. All policy actions have degrees of risk
and the potential for unintended consequences. Many are highly complex and
involve substantial risks that must be managed.
1.15
That there are many logistical and practical issues associated with
implementation of divestiture powers is not in dispute. As the committee report
has highlighted, identifying the assets to be divested and monitoring outcomes
following the divestiture process will not be easy. But as with other aspects areas
of competition policy, these are issues that would need to be worked out over
time through the courts and mediation processes.
1.16
On balance, I believe that the Competition and Consumer Act 2010
should be amended to include a divestiture remedy for breaches of the misuse of
market power provisions. Nonetheless, the bill as drafted by Senator Xenophon
should be amended to take into account the issues raised during this inquiry
about its impact on business certainty. In particular, the bill should be
amended to ensure that the remedy would only be used for serious and repeated
breaches of section 46 and that a Court applying the remedy would consider the
efficiency and competitiveness of any business entities formed following a
divestment notice.
Senator Matthew
Canavan
Nationals Senator for Queensland
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