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The greatest Australian competition reforms in 20 years? Dr Martyn Taylor, Partner, and Josh Buckland, Associate, Norton Rose Fulbright

1 A once-in-a-generation opportunity

The Commonwealth Government will shortly announce the final terms of reference for its fundamental review of Australian competition policy. This review is colloquially known as the ‘root and branch’ review (“Review”). The Review will involve the most comprehensive consideration of Australia’s competition and regulatory framework in 20 years. The Review provides a once-in-a-generation opportunity for stakeholders to express their views on the future of Australian market regulation. Entities more affected by competition and market regulation may wish to 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 remainder of this commentary covers the following issues:

The political context to the Review

The ‘extraordinary’ breadth of the Review

The Review panel and proposed timing

The likely appetite for further deregulation

Regulatory agency reforms may focus on the NCC

Competition law reforms may involve a welcome ‘trim’

Improved outcomes for small businesses

Some industry sectors are under particular scrutiny

Media comments regarding privatisation are overstated

Further information

2 The political context to the Review

In 1993, Professor Frederick Hilmer AO chaired an independent review of Australian competition policy, leading to the publication of the ‘Hilmer Report’. The implementation of Hilmer’s recommendations had a profound impact on the Australian economy. Australia's GDP growth was one of the strongest in the OECD between 1993 and 2005. Australia’s reforms were adopted as a model for competition policy reforms worldwide. It is now some 20 years since the Hilmer Report. Australia’s productivity levels have stagnated, leading to renewed interest in the role of competition policy in improving productivity. 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

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ensure that big and small businesses get a ‘fair-go’ when competing in their respective marketplaces.

Following the successful election of the Coalition in September 2013, these commitments are being implemented. Draft terms of reference for the Review were released in December 2013.

3 The ‘extraordinary’ breadth of the Review

In an article in 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 the Competition 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 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:

Theme Scope of recommendations

Overall microeconomic reform

The Review must identify reforms to remove impediments to competition that are not in the public interest:

(The removal of impediments to competition may include:

removal of excessive Government regulation, such as deregulation and microeconomic reform;

prevention of anti-competitive behaviour, such as the application of generic competition law and sector-specific regulation; and

reduction in Government involvement in competitive markets, such as privatisation and competitive neutrality requirements).

Improvements to regulatory institutions

The Review must ensure the effectiveness of the relevant competition policy and regulatory agencies (State and Commonwealth):

1. Regulatory agencies must be transparent, efficient, and accountable and they should provide sufficient regulatory certainty.

2. The ACCC’s interface with industry should be improved, including for merger clearances and immunity applications.

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Theme Scope of recommendations

3. Enforcement practices should be appropriate and regulators should have sufficient enforcement powers and remedies

Improvements to competition laws

The Review must ensure the CCA is operating effectively:

1. The CCA must be effective in achieving its policy objectives.

2. The specific provisions of the CCA must achieve their intent.

3. Uncertain or rarely used provisions may be reframed.

4. The misuse of market power provisions must be effective.

5. The exemptions from the CCA should be reviewed.

6. The industry code of conduct provisions should be reviewed.

7. The unfair contract and unconscionable conduct provisions should be extended to protect small business.

Improvements to sectoral regulation

The Review must advise on appropriate amendments to institutional, legislative and regulatory measures in various industry sectors:

Shipping The need for the continued exemptions for liner shipping in Part X of the CCA.

Infrastructure and natural monopolies

The adequacy of the existing national access regime in Part IIIA of the CCA and the adequacy and effectiveness of existing sectoral regulatory regimes.

Technology, including e-commerce

The adequacy of existing regulation and enforcement in emerging markets and new technologies to promote entrepreneurship and innovation.

Groceries, utilities, petrol and other key markets

Whether key markets are competitive and whether legislative amendments are necessary to enhance opportunities (i.e., promote competition and increase market access)

Parallel importing and global price discrimination

Whether regulatory intervention is required to ensure that Australians can access goods and services at internationally competitive prices.

Appropriate role of Government in competitive markets

The Review must examine whether Government businesses serve the public interest and promote competition and productivity:

1. Government funding may be separated from service provision.

2. Privatisation and corporatisation may be considered.

3. Price-regulation in non-competitive markets may be considered.

4. Competitive neutrality policies should be applied.

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.

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4 The review panel and proposed timing

As at 18 February 2014, the membership of the panel to implement the Review has not yet been publicly announced (“Panel”). We understand an announcement is imminent.

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 will essentially be the same as the draft terms of reference released in December. This commentary is based on that draft and will be updated once the final terms are released.

The review timetable is expected to be ambitious, involving completion of the Review within 2014. 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. 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.

5 The likely appetite for further deregulation The primary objective of the Review is to remove impediments to competition that are not in the public interest. Such impediments may involve excessive governmental regulation via a process of deregulation. In effect, competition policy involves a shift from more heavy-handed government regulation towards a light-handed regulatory approach. The lightest forms of market regulation may involve reliance on competition law alone. Poor regulation acts as a drag on the economy by reducing flexibility and innovation, increasing cost, and impeding productivity growth. In 2006, following the implementation of the Hilmer reforms, Australia was identified as one of the most deregulated economies in the western world. Today, Australia remains as one of the front-running countries in the OECD in its regulatory reform practices. However, as other nations have implemented regulatory reforms, Australia’s competitive advantage has eroded.

Given such issues, there is 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 identify a set of recommendations that provide a blueprint for a next wave of 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 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.

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

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6 Regulatory agency reforms may focus on the NCC

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:

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. Hilmer and others have proposed the creation of an independent, highly capable policy review and development group to support each responsible Minister and COAG. Such a group could assume greater regulation review powers. The Review may well consider a greater role for the NCC, the expansion of the Productivity Commission, or even the integration of these entities.

While media commentary has focussed on substantive reforms to the ACCC, we doubt this is intended. Hilmer’s comments support this view. By international standards, the ACCC continues to be consistently recognised as one of the best competition regulators 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.

However, a review of the effectiveness of current ACCC processes is clearly on the Review agenda. Such processes include merger clearances and authorisations. 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 Goulbourn Co-operative may also result in refinements to the merger authorisation procedure.

7 Competition law reforms may involve a welcome ‘trim’

Australia’s competition laws are some of the best in the world. From 1974, Australia adopted a unique approach that sought to blend 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. We would be surprised if the Review recommended a major redrafting of the CCA.

However, some provisions of the CCA have been the subject of regular debate and 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

Relevant Ministers, Ministries and Departments (Commonwealth, State and Territory)

•Political responsibility for implementing and updating competition policy

National Competition Council (NCC); Productivity Commission

•Policy review advisors to the relevant Ministers and Australian Governments

Australian Competition and Consumer Commission; Australian Energy Regulator; Australian Competition Tribunal; State-based competition agencies

•The administrative structure that applies competition law and market regulation

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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:

Provision Likely approach of Review

Misuse of market power

The Dawson Review in 2003 recommended no amendment after detailed consideration. Subsequent amendments were made to s46 addressing below cost pricing, known as the Birdsville Amendments. These amendments have been widely criticised. We would expect the Review to recommend simplification to s46 to address that criticism.

Price signalling

Concerns regarding tacit co-ordinated conduct in the banking sector lead to the enactment of provisions regulating price signalling in 2012. These provisions apply only in the banking sector and have also been criticised. The Review may consider whether an alternative approach is desirable.

Third line forcing

Australia’s third line forcing provisions remain inconsistent with international best practice. The Dawson Review recommended a competition test be applied, but that recommendation was not adopted. We would expect the Review to make a similar recommendation.

Joint venture defence

Australia applies a joint venture defence in the context of the per se prohibitions relating to cartel provisions and exclusionary provisions. However, the defences are inconsistent and differ from the approach used overseas. The Review may consider a more harmonised approach.

Exclusionary provisions

Concerns remain regarding the drafting of the prohibition on exclusionary provisions in Australia given its ‘per se’ application. An overlap exists between exclusionary provisions, cartel provisions and exclusive dealing. The Review may revisit the Dawson Committee’s recommendations to soften this prohibition and may consider the utility of the current drafting

Cartel provisions

Concerns have been expressed at the excessive complexity of some parts of the CCA, including the cartel provisions. We suspect some attention could be given to simplifying the drafting. However, given the fundamental importance of these provisions it is unlikely they will be substantively reformed.

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.

8 Improved outcomes for small businesses

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”. Given the fundamental importance of small business in the Review, we expect a particular focus on competition reforms that may assist small business. We also anticipate that the

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Government’s oversight of the Review will be weighted in this direction. 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.

9 Some industry sectors are under particular scrutiny

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), and natural monopoly infrastructure.

As the Productivity Commission has just completed a detailed review of the Part IIIA national infrastructure access regime, we believe it 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. Much recent criticism has been directed at the absence of a coherent national approach. The Productivity Commission is relevantly undertaking a review of the financing models for public infrastructure following concerns with insufficient levels of investment. Given this context, the Review may well canvass the adequacy and nature of Australian infrastructure regulation more generally.

The competition issues relating to groceries, utilities, automotive fuels and e-commerce 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. The Review will have an interesting task in screening out the noise to adopt an approach consistent with competition objectives. In most of these sectors, many previous reports and investigations have occurred that could inform the Review. Some have queried whether such issues should be better addressed in industry-specific inquiries.

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 and recommended partly in favour of repeal.

10 Media comments regarding privatisation are overstated

An interesting inclusion in the terms of reference is that the Review will 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.

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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. As such, the Government may be seeking to identify ground rules that could guide future microeconomic reforms. Media attention was piqued by the inclusion of references to privatisation. Some media commentators suggested that this was an implied reference to the potential privatisation of Australia Post and Medibank Private. However, such issues are inherently political and it is unlikely that the Review would be so granular that it would identify particular assets for privatisation. Moreover, such issues are already being considered separately by Government. As such, media comments implying that the Review will contemplate the privatisation of particular assets appear to be overstated.

We are happy to answer any questions arising from this commentary.

18 February 2014

Further information

Please contact Dr Martyn Taylor, Partner, Norton Rose Fulbright if you have any questions arise from this commentary:

Dr Martyn Taylor

Partner Sydney +61 2 9330 8056 martyn.taylor@nortonrosefulbright.com