Friday, 26 May 2017

The real increase in infrastructure

The government made a decent effort in the Budget to boost the spend on infrastructure, as it showed in this graph, taken from the 'Capital at a Glance' document handed out yesterday as part of the Budget material.

But if you thought that we will have an extra $32.5 billion worth of shiny new infrastructure in four years' time, think again.

All these numbers ignore depreciation. But, as we all know, road surfaces get worn, bridges develop cracks, classrooms get leaks, equipment wears out. How much of the budgeted $32.5 billion is actually going to get us new stuff, and how much is going to maintain, repair or replace existing stuff? Repairs and maintenance are of course a good and necessary thing, and nobody's begrudging that spend, but how much of the infrastructure is going on maintenance of the stuff we've already got, and how much on genuinely new additional stuff?

The answer is, at least a good half of the announced spend is keeping the existing stuff in good nick, and only around half, at most, is for new stuff.

Here's the calculation, which I've taken from Note 15 to the Forecast Financial Statements on page 107 of the Budget Economic and Fiscal Update (the 'BEFU').

You'll see that the table says that the government is planning to add $28.8 billion to the stock of infrastructure. This is less than the $32.5 billion in the graph, because the numbers in Note 15 don't include some $4 billion of new spending that hasn't been allocated to anything specific yet. But even if you add that $4 billion to the $28.8 billion in the table, you get a gross addition of $32.8 billion, and on the (generous) assumption that there is no depreciation at all on all this extra $4 billion, the answer comes out, gross addition $32.8 billion, depreciation $18.4 billion, net addition $14.4 billion. Maintaining existing stuff 56%, adding new stuff 44%.

All these numbers involve some forecasting, and the forecast events may or may not happen, and they also involve some judgement calls about what assets are worth. Valuation can be a bit of an art sometimes, though having looked at how these assets are valued and depreciated (which you can read for yourself in the 'Accounting policies' bit of the BEFU's 'Additional information' document, pages 43-6) the methodologies look reasonable enough to me. All that said, let's round things off massively to allow for the uncertainties: very roughly, of every $2 that's going to be spent on infrastructure over the next four years, $1 will go on new stuff and $1 will keep the old stuff going.

To recap. There's nothing wrong with counting maintenance in the total spend: there are too many countries which roll out new facilities and don't maintain them properly, so it's good that we allow for it. And it's good that we're upping the total spend. It's rather late in the day, and there is still a huge infrastructure deficit, built up under a succession of governments, to tackle - as I've noted before, there are Third World countries making a better fist of building links to their airports than we've been able to manage - but we are at last getting more serious about it. 

That's all good. But next time you see a big spend-up announced, calm down, and remember to take $4.5 to $5.0 billion a year off the headline number, to get some feel for the extra stuff we're actually getting.

Thursday, 25 May 2017

Budget 2017 - the big picture

What's the very, very first thing you should look for in any Budget? It's not the headline surplus or deficit, no, nor the spend-ups, nor the tax breaks, nor the gimmicks (does anyone ever track the effectiveness of this year's grant scheme or last year's incentive?).

It's whether the Budget boosts or brakes the economy. And how would you know? By digging out the 'fiscal impulse'. Which isn't the easiest thing to find: it's never in the big Budget bumph, but is relegated with the horoscopes and crossword to an 'additional information' document (this year's is here). And that's partly because Treasury are a bit embarrassed by it: the calculations involved can be on the arbitrary side, and you wouldn't want to bet anything valuable on the accuracy of the outcome.

But for all its flakiness, it's the only thing we've got. What it does, is strip out all the cyclical stuff from last year's Budget and this year's. It could be, for example, that last year's Budget showed a surplus solely because the economy was doing well and the GST take was pouring in, and this year's surplus is even bigger because the economy is doing even stronger still (not a million miles removed from what's actually happened). Both surpluses, and the increase from the first to the second, may have sweet eff all to do with careful stewardship of the nation's finances, and may not tell you anything about the overall impact of the Budget.

So what you do, is you strip out the fortuitous cyclical stuff from both Budgets, taking out (for example) the happenstance of higher GST in good times or lower GST in bad times. You might have to take out one-offs like earthquakes as well, to get a proper feel for the real 'normal times' state of the government's books. And when you've done that, then you compare the true, 'underlying', 'structural', 'cyclically adjusted', outcome - call it what you will - in the two Budgets. If, for example, last year's Budget had a true deficit of 1% of GDP, and this year's has a true surplus of 1%, that's a turnaround of 2% of GDP, which by fiscal standards would be a reasonably significant tightening of fiscal policy - a clear brake on the economy (last year injecting some money into the economy, this year taking some out). And conversely a larger true deficit, or a smaller true surplus, would be a boost.

We know, too, that Ministers of Finance ought to do the right counter-cyclical thing - in good times (like now), fiscal policy doesn't need to be, and shouldn't be, a stimulus to the economy. In bad times, it does, and should. So, how'd Joyce go? Here's the fiscal impulse.

The good news is that he didn't go for a pro-cyclical splurge in election year. Overall, the stance of fiscal policy won't be making much of a difference, either way, to our current business cycle. There is a mildly pro-cyclical fiscal stance for 2018 and 2019 (acknowledging, again, the ropiness of these kinds of calculations), and the heavy lifting of getting government debt down has been pushed out to 2020 and 2021 and beyond.

That said, I for one don't mind too much if we take a while to get net government debt below the target 20% (which on current forecasts will be in the June 2021 year) if instead we spend up large on our severely deficient infrastructure. The Budget speech said that "Through this new capital spend [$11 billion] and existing commitments the Government and its key infrastructure agencies will invest a total of $32.5 billion over the next four years in new infrastructure". It may sound odd to say that $32.5 billion is only a start, but that's the reality: the infrastructure deficit has been allowed to balloon to a level that is now difficult to grapple with, even in $32.5 billion chunks. And even these higher levels of spending will result in indefensibly slow improvement (30 year timeframes for rail to Auckland's North Shore come to mind).

What else?

The tax thresholds. Yes, of course they should have been adjusted upwards, good job they were. And it's good to see the bulk of the increase concentrated on raising the lowest threshold (where the 10.5% rate applies) from $14,000 to $22,000. Leaving them unadjusted had been an insidious and regressive way to raise the tax take: people barely into middle-class incomes, paying the top marginal tax rate, along with the millionaires? Give us a break.

Mr Joyce did not, however, take a principled approach and commit to keep on adjusting them every year. While (I guess) he thinks that's clever politics - keeping a lolly up his sleeve for future years' scrambles - it's not good, either as economics or politics. The economics is obvious: we'll soon have teachers and police constables back paying the millionaires' tax rate. Politically, it would have been smarter to commit to indexing the thresholds, gaining all the moral high ground, and watch the opposition parties squirm if they didn't match it. And if you really want to inherit the technocratic, managerial mantle of Bill English, a valuable political asset built up over many years, you do the fiscally right thing, even if it costs you the option of a cheap political stunt every year.

Lowering the target for net government debt to 10% to 15% of GDP by 2025 is fine by me. If there's anything we've learned over the past decade, it's that you need to leave a lot more 'fiscal space' or 'fiscal leeway' than you might have thought in pre-GFC days. You don't want to go into whatever the next unpleasant surprise may be carrying significant amounts of debt (as countries like France may discover) and even countries like Ireland, which appeared to be in a decent net debt starting point, found that, in fact, it wasn't enough to cope with the implosion of their banking system.

Finally, the economic forecasts. At first squizz they look reasonable enough - perhaps a tad on the optimistic side - but there's an interesting wrinkle in the details, where housing construction is expected to barely grow in the year to June '18 (+0.3%) and then perk up a lot (up 8.7% in the year to June '19, and another 8.8% in the following year). As the forecast document says, "There is considerable uncertainty associated with the judgement that this slow-down will be temporary", and that a building boom in the Auckland market is on the horizon. I really hope there is. But then I look at our capacity constraints, and our planning delays, and I wonder.

Monday, 22 May 2017

The state of telco play - 2017

We pay too much attention to bad stuff, so here's some good news that has come out of the Commerce Commission's latest annual report on the state of the telco markets (media release here, quick infographic here, whole thing here).

Speeds are up. Congestion is down. Value for money is better. Prices generally compare well with other countries. Competition is working. Investment is high, with a big slab of dollars going into the rollout of the Ultra-Fast Broadband (UFB) fibre project. And even though the telco team at the Commission don't say so in the report, I'd give them credit for helping to make this happen.

There are lots of ways to illustrate the good stuff: here's just one, on fixed line broadband, which speaks for itself.

As I said in my piece on last year's equivalent report, the Commission's comparison of our broadband download speeds with other countries' could be a bit better and doesn't sweep in some of the comparator countries you'd normally expect to see, but even on a wider set of comparators we're doing better than we were. If you go to the source Akamai document the Commission used, we now rank 34th globally for download speed - not enormously flash, but better than the 41st we scored a year earlier. And we're a little better against European country standards, where we would now tie for 19th rather than 21st. Room for improvement, as they say in the school reports, but as the UFB builds out and more people sign up for it, we've got good prospects of climbing the rankings a bit more.

The UFB trends in the report also spell out Sky TV's ongoing corporate nightmare: the rollout and adoption of a whole new way to deliver movie and sports event quantities of data. There are now 368,000 UFB connections, and growing like fury, and nearly half of households are on unlimited data plans, and the proportion is rising rapidly.

Have we got unfinished business? I speculated last year that maybe it is time to revisit our regulated mobile termination rate: it's still unrevisited, at a left-high-and-dry level by comparison to current overseas rates, for no obvious reason that I can see. And there's an ongoing issue with the high cost of mobile data downloads to data-only devices (see pp28-29 of the report).

The other bit of unfinished business is the ludicrous arrangement whereby the Telecommunications Commissioner is required to monitor the telco industry, and the Commerce Commission is forbidden to monitor any other industry. MBIE went through a whole process in 2015-16, in its targeted review of the Commerce Act, which included the option of fixing this nonsense. Ten months have gone by since the final cross-submissions (including mine) darkened MBIE's door.

Come on MBIE. This is getting embarrassing.

Thursday, 11 May 2017

No change to interest rates? Really?

Today's Monetary Policy Statement wasn't quite what I expected.

I thought we'd get something along the lines of, "One quarter's CPI is neither here nor there, so we'll wait and see if the June one is also unexpectedly high, but if the March quarter outcome is repeated, we'll probably start raising the OCR a bit earlier than we've previously indicated". Instead we got exactly the same projected track for the OCR as we had in the February Statement - no increase until late 2019, and then only one 0.25% increase.

Can't see that happening, myself, and neither can the financial markets. Today's 90 day bank bill yield is just below 2%: the futures market has it at 2.77% by the end of 2018, which would be equivalent to three 0.25% increases next year. The futures market can be a flighty beast, and futures sentiment can change quickly, but having had the best of today to think about it, it's currently saying there it doesn't believe a word of "nothing till late 2019".

What explains the gap in viewpoints?

Three things, I'd reckon.

One is the possibility - I'd put it no stronger - that the Bank is institutionally scarred by its premature tightening in 2014. It wasn't, in my view, a strange thing to have done at the time, but as things panned out it had to be reversed (and then some). So it's possible that the Bank has decided, whatever mistakes it's going to make in the future, premature tightening isn't going to be one of them. The risk, though, is that it gets "behind the curve", as the jargon goes, chasing after inflation that's got away from it.

The second is that we're actually at an inflexion point in trend inflation - it's been unusually low, but is on the turn - and turning points are notoriously hard to pick in real time. I'm not surprised that "uncertainty" and its variants turned up 38 times in the Statement. So these are genuinely tricky times for the Reserve Bank, and irrespective of whether it is battle scarred or not, it might well want to wait for clearer signals.

For what it's worth, I think the inflation tide is definitely coming in. I like to look at non tradables inflation, ex the cost of new houses, as a rough and ready guide to domestically generated inflation pressures (the only ones the Bank can ultimately influence). As the graph shows (and I've included an alternative, non tradables ex housing and ex household utilities, as an extra perspective), domestic inflation is on the up.

The third is even trickier again: what if the economy isn't behaving the way it used to? As the Bank found on its latest visits to businesses, "wage pressure remains surprisingly limited". It's not clear whether the employers, or the Bank, were surprised - maybe both - but in these strong cyclical conditions, on past experience, people would be asking for pay rises and threatening to move on if they didn't get them.

But "on past experience", that's the thing. As the visits found (p26 of the Statement), "Contacts suggested this may in part reflect the negative impact of the GFC on employees’ expectations of wage growth and employers’ willingness to offer substantial wage increases". I have some sympathy for this view that the post-GFC world is (at least for now) structurally different to the pre-GFC one, though not quite enough to believe it has changed enough for the Bank to leave policy "accommodative for a considerable period". We'll see.

Two final thoughts. Businesses also reported that "it is difficult to find workers with the right skills", which may be partly cyclical (the one with the skills are already spoken for) but also, I suspect, reflects all not being entirely well with our education system and our 'active' labour market policies. And they said that they "also expected to increasingly look offshore for labour": I don't expect this will make a blind bit of difference to the current anti-immigration sentiment and its backers,  but it's a reminder that tightening up immigration in a boom labour market doesn't look like the smartest idea.

Friday, 5 May 2017

Common sense - at last

Yesterday I warned you that I was writing a piece for competition policy tragics, and this is it. In the event it's not terribly technical, so give it a go even if you're not a tragic - especially as it shows how we've got, finally, to a better place when it comes to assessing things like the NZME/Fairfax merger. Plus it's got some pirates in it.

First some context. The Commerce Commission when it gets the likes of NZME/Fairfax has to decide, if there's a loss of competition (as there was), whether to authorise the thing anyway, because there are, overall, net benefits to New Zealand: the good stuff (cost savings, international competitiveness, whatever) outweighs the bad (mainly the increased market power of the new entity).

Here's a completely general, utterly uncontroversial little diagram of all possible benefits and detriments.

The 'net of realisation costs' in the table is fairly simple, too. Let's say there is a cost savings benefit - scrunching two head offices into one, for example. You should count any costs involved (redundancy payments, for example) when putting a number on the cost savings benefit. All good. All clear.

Where it starts to go strange, however, is in the Commission's Authorisation Guidelines, where you find this.
37. In our assessment we regard a public benefit as any gain to the public of New Zealand that would result from the proposed transaction regardless of the market in which that benefit occurs or whom in New Zealand it benefits. We take into account any costs incurred in achieving benefits.30
38. In contrast, in assessing detriments we only consider anti-competitive detriments that arise in the market(s)31 where we find a lessening of competition (whether substantial or otherwise).32
39. To illustrate the difference in our approach to benefits and detriments, if a transaction gives rise to a lessening of competition in market A and benefits in market A and market B, then:
39.1 the public benefit is counted across both markets A and B; and
39.2 only those detriments arising in market A are counted.
In terms of the diagram, when it comes to things like NZME/Fairfax, the Commission would count A, subtract B, add C, but ignore D.

This makes no sense from an economist's or indeed any commonsensical perspective, as I've argued before, and any lawyers who thought the case law on the Commerce Act required it need to go away and have a good lie down until they come to their senses. Why ignore D - if the merger caused some large detriment outside the markets the merger is taking place in, why on earth wouldn't you count it?

In what I think may have been the best single para I've ever written in this blog, I finished my previous post about this nonsense with this:
All this may seem technical and picky, and maybe nothing will ever turn on it. In practice, though, every imaginable set of business circumstances sooner or later comes in the Commission's window, and it's possible a merger or a restrictive trade practice will indeed involve a sizeable D, a detriment to the community that is being ignored. If the courts have said you can safely take a better, more logical route, why wouldn't you?
And what indeed happened?

Along comes NZME/Fairfax, where there is indeed a big D, a detriment outside the immediate markets involved: as the Commission said in paras 75-77 of its decision (irrelevant footnote omitted):
the proposed merger of NZME and Fairfax has the potential for negative consequences that may extend beyond the reader and advertising markets in which competition is affected.
In particular, a loss in plurality might impact on New Zealand society more generally...
A significant reduction in plurality would affect all New Zealanders, whether they directly consume news content or not. A loss in plurality may therefore have effects that extend beyond the reader markets in which competition is affected.
As you can imagine, the lawyers for NZME/Fairfax told the Commission, stick to your own Guidelines. They referenced the Guidelines, and, for good measure, the Commission saying the same thing in an OECD Working Party, and said (at para 27) that
the Commission's inclusion of plurality effects in its detriment analysis is contrary to the statutory scheme, its previous positions, case law and its own restatement of the correct legislative framework within the Draft Determination
The Commission, in short, found itself boxed into an untenable position: big detriments that it had said wouldn't be counted under its usual approach. As it pointed out (para 81 of the decision)
The implication of the Applicants’ approach is that we might have to authorise a merger that in our assessment was not in the public interest. That is, if we considered that there was a negative consequence that outweighed the positive aspects of a proposed merger, we might still have to authorise depending on where those negative impacts were felt
So how did the Commission extricate itself from the daftness of the Authorisation Guidelines and navigate its way back to Planet Earth?

First (here come the pirates) it used the Captain Barbossa approach in Pirates of the Caribbean where he reneges on an apparent deal with Elizabeth 'Turner' made under the pirates' code, by pointing out that "the code is more what you'd call "guidelines" than actual rules", or as the Commission put it (footnote 72, page 34), "the Guidelines are necessarily general and we must apply them flexibly according to the facts of each application. The Guidelines do not, and cannot, address every issue that might arise".

The Commission also found a little escape hatch in footnote 32 of the Guidelines. The footnote says that in the key case on benefits and detriments ('Godfrey Hirst 1' as it is called in the decision), "while the court endorsed this settled approach [i.e. of  ignoring D], it observed that ‘disbenefits’ or negative benefits that arise outside the affected markets may be relevant to the public benefit test". Of course, that rather raises the question why the Commission said it wouldn't usually count them, but never mind.

And it also made the (to me not very persuasive) argument that the law has moved on ('Godfrey Hirst 2') and the Guidelines have yet to be updated.

In any event we got to a good place. The Commission has now definitively said (para 134.1, my emphasis) that
we can consider all negative consequences arising from the proposed merger, in our consideration of whether the merger will result, or will be likely to result, in such a benefit to the public that it should be permitted
which in this case enabled them to get to the right conclusion, that (para 134.2)
irrespective of whether the plurality consequences of the proposed merger are ‘in market’ or ‘out of market’, we will consider any plurality losses as ‘disbenefits’ or ‘negative benefits’
So it's been a bit of a journey, but it's now very likely the next edition of the Authorisation Guidelines will reflect this eminently more sensible approach.

Thursday, 4 May 2017

Yup, as expected

By now you're likely reaching saturation point on the NZME/Fairfax merger decision - every newspaper in the country seems to be running an editorial on it this morning, with the Herald for example saying 'Blocking this merger is a big mistake' and the Dominion Post going for 'The Commerce Commission doesn't get it' - so I'll try and say something new.

First thing is, I have a fair degree of sympathy for the folks in the two companies. They're on leaky ships that are taking in water, and even though the merger lifeboat wouldn't have held all of them, enough of them would have clambered on board to live for another day. You can understand why they've reacted with everything from disappointment to rage.

But that's commercial life, folks. Technologies  improve, customers switch preferences, economic policies change, businesses lay their plans best they can, and the best plan (by luck or design) wins, and sometimes wins big, as it should given the risks involved. And the losers, well, lose. The whole process - and you'll realise I'm just channelling Schumpeter here - works out for us in the end as businesses are highly incentivised (by stick and carrot) to do their level best to be the most appealing option to us customers. As an American judge once said - oddly enough, in a media case - "society has an interest in competition even though that competition be an elimination bout".

And that's my second point. The Commission did a good job explaining why ongoing competition would be a better long-run option than permitting the substantial loss of competition the merger lifeboat would have caused.

It's a perennial battle to make that case, because people tend to have odd but partly understandable ideas about competition: the ideas make some sense because there are some facts which appear to support them.

At the one end there are the people who see competition as a race to the bottom - who can deliver the nastiest barebones bundle at the cheapest price. You get a lot of that kind of reaction when anyone suggests more private provision of education or health services, for example, but you can see why people think it could apply to the media, too. As I write, the latest 'News' on the Herald's website includes 'Princess Diana's biggest fear over Camilla revealed', and 'Kanye's Met Gala absence due to fury over Kardashian's butt photo'.

At the other there are the people who argue that less competition means better resourced competitors, who are better able to meet consumer demands or fight an effective fight against rivals (one of the big themes in  NZME/Fairfax). Too much competition, and nobody in a skinny-margin industry will have the funds for R&D, too little and you'll get lazy monopolies who'll gouge the customer, but in a sweet spot in the not-too-much-competition middle, companies will be making enough money to be able to fund research and innovation. There's some evidence for this, too, as I mentioned the other day in the context of the mobile phone business.

But I thought the Commission made a good fist of arguing the case that competition typically enhances quality, rather than reducing it, and that more competition is more likely to hold companies' feet to the fire than less. As the Commission put it (in paras 26 and 27 of the Executive Summary)
we consider that competition between NZME and Fairfax leads them to produce higher quality content than would exist with the merger. Competition incentivises investment in editorial resources, motivates journalists and editors in their day-to-day work, and ensures diversity of editorial approaches. Competition also leads to greater investment and innovation in the way that content is presented to readers.
Fairfax and NZME compete to be the first to unearth and break news. When they have been beaten to a scoop each works quickly to catch up and look for new angles. Under the proposed merger this rivalry and the benefits it delivers is likely to be removed. In our view this would negatively impact the quality of news and breadth of coverage produced.
My final point is that the decision represents a rare triumph for generic competition law over sectoral regulation. Many countries have given up on the competition law of the land as an effective way to rein in unwanted problems and have turned to sector-specific regulators instead. In the UK, for example, there are Ofgem (gas and electricity), Ofwat (water) and Ofcom (communications), and we've gone down that road, too, with a Telecommunications Commissioner and an Electricity Authority.

But we haven't gone down the route of a media overseer, though many countries have: as the Executive Summary said (para 42), "there are no media ownership restrictions or other mandatory journalistic regulations that would be effective enough, in our view, to materially constrain the merged entity". For once, the Commerce Act has been able to step into the breach and play that role, without erecting another bit of complex sectoral regulatory infrastructure. That's a plus.

There's a lot else in the decision, mostly around process and the technical pros and cons of the various economic and legal arguments, but when we've already had wall to wall coverage, I'll keep my tragically tragic post for tragically tragic competition tragics for another day.

Tuesday, 2 May 2017

Only one more sleep...

...until the release of the blockbuster NZME/Fairfax decision by the Commerce Commission.

What'll they do? Bear in mind that any of these big set-pieces that come into the Commission are always tangled, could-go-either-way affairs, and (just to be clear) I have no dog in the fight, but my guess is they'll reaffirm their decline.

For one thing, while they have to have an open mind to the late flurry of submissions, and I'm sure they do, it's going to be rather hard to walk back from this (para 1012 of the draft decision, footnote omitted):
Even in the face of a changing media landscape, the Commission cannot lose sight of the fact that is being asked to authorise a merger that would provide a single organisation with control of nearly 90% of all print media, New Zealand’s two largest news websites, and one of New Zealand’s two largest commercial radio companies. This would be an unprecedented level of media concentration in a well established liberal democracy
And from this (para  1016)
We consider that the level of media concentration brought about by the proposed merger would not be in the public interest. We have weighed the cost-savings arising from the merger against the increased levels of media concentration, the ability of the merged entity to influence opinions and lead the news agenda and the overall detriments to plurality. In an industry where there are substantial costs of entry to achieve the scale of a large news publisher, we consider that the loss of plurality that arises from the proposed merger is likely to be significant and potentially irreplaceable
The parties and their lawyers and consultants have had a good go at the "changing media landscape" and "detriments to plurality" points (and others, including how the Commission has applied the 'net benefits' test, which we will hear more of if there is indeed a decline and a subsequent appeal).

Their final submission essentially said that the merged entity would not be a colossus bestriding the old-economy print media, but just one player in a much wider and rapidly evolving media market and one moreover with its own new-economy giants (the likes of Facebook and Google).

And on plurality, they argued (my paraphrase) that you'll lose some of the plurality you've currently got if the current standalone companies go down the gurgler, or as Russell McVeagh put it in an earlier letter to the Commission, "none of the alternative, potential wished for Plan Bs that have been postulated for either business make any difference to their financial trajectory, nor to their ability to maintain the quality of journalism which they currently produce".

One thing that struck me about the whole thing is the prominence of the "plurality" discussion, which partly reflects the effectiveness of some submissions (I'd pick out this one in particular, from a group of academics).

In overseas jurisdictions, plurality has generally been shoe-horned into merger authorisations as an additional but separate public interest that merger authorities are allowed to take into account, over and above the usual nitty-gritty of expected changes to competition. As this article notes, for example, the EU allows for additional consideration of "three legitimate public interests...public security, plurality of the media and prudential rules (of relevance in the area of financial services)".

I have trouble seeing it that way. Media plurality seems to me to fall squarely within the usual competitive effects analysis. When we are looking at effects on consumers, for example, we tend to focus on the money price - will the merged entity charge more, or offer less - but we can forget that "price" is really just a shorthand for the whole menu of consumer effects, sometimes described by the SPQR acronym: service, price, quality, range. If the end result of a media merger is clickbait tat (quality) from a 600 pound gorilla (range), there's your result. I don't need to start wandering off-piste into what is the appropriate social infrastructure for a liberal democracy.

To that extent that it looked as if the Commission was doing that, I can see where NZME/Fairfax were coming from: "The Applicants’ view was that issues of media plurality are not relevant to our analysis and fall outside of the scope of the merger authorisation process" as the Commission said (draft decision, para 905). But on the substance, I think NZME/Fairfax were wrong: plurality and quality fit squarely within the usual competitive effects box.

Friday, 28 April 2017

Mobile network mergers - what happens?

If you've got any interest in what happens when competition increases or decreases in an industry, you've got to read this excellent paper, "Evaluating Market Consolidation in Mobile Communications". Especially as it's not only important, but easily missable: I only came across it by accident thanks to this helpful post on The Irish Economy blog site, which referred me to this conference.

The three authors set out (as they say on p3) to "study the relationship between prices, investments, and market structure in the mobile telecommunications industry. We use an empirical approach by looking at the experience of thirty-three countries in the period 2002-2014. We collect what is, to our knowledge, the largest dataset employed to-date for works of this kind".

And you'll be pleased to know that, unusually, the data include New Zealand. While our official statistics have got better (and will get better still), across official and private sector data we can be short of what's available overseas, and I've lost count of the number of cross-country econometric studies where we don't feature. This time we do, though we don't get any country-specific mentions.

First, here's a rather amazing finding - what's happened to prices in the mobile market, with national prices converted into euros at PPP rates.

As the authors say (p10), my italics, "Overall prices steadily declined by almost 50% during this period, amounting to an average decline of 2.2% per quarter". Isn't that remarkable? And, in passing, doesn't it leave you wondering how, despite this massive technological progress and similar advances in the rest of the ICT sector, official measures of countries' productivity growth appear to show a slowdown.

But on to their main focus. "The dataset", they say (p3) "spans a time period long enough to capture changes in market structure (especially entry via licensing, and exit via mergers) that provide ideal variation in the data to assess how market structure impacts on prices and investments, holding other factors constant".

And what they find is pretty dramatic.

On prices, they find strong positive links between concentration and prices:
prices decrease by about 15.9% in markets with four operators compared with the comparison group of two or three operators (p17)
an increase in the HHI has a positive and significant impact on increase in the HHI by 10 percentage points (for example from 0.3 to 0.4)* would increase prices by 20.37%. Similarly, a 4-to-3 merger in a symmetric industry (raising the HHI by 8 percentage points from 0.25 to 0.33), would increase prices by 16.3%. This is an average effect based on the sample of all countries post-2005. While this effect is statistically significant, it has a relatively wide 90% confidence interval, between 7.9% and 24.7%...How important is this effect against the background of the general price drop of 47% over the same period of eight years? Given that the price trend is -2.2% per quarter, a hypothetical merger that increases the HHI by 10 percentage points is roughly equivalent to going back to the price level of about 8 or 9 quarters ago (p18)
On investment, they also find strong positive links with concentration:
An increase in the HHI by 10 percentage points raises investment per operator by 24.1% using the first instrument set... and by 27.9% using the second instrument set...In both cases, the effect is statistically significant at the 5% level. Perhaps more concretely, a 4-to-3 merger in a symmetric industry (raising the HHI by 8 percentage points) would raise investment per operator by about 19.3% (under the first instrument set) (p19)
They can also use their modelling to estimate the effects of some real world mergers, which is also highly interesting. Full details are in their Table 6: there are wideish confidence intervals, but in every case prices went up, but so did investment.

And that makes merger approvals very tricky indeed: their research
is the first time that the dual impact of market structure on prices and investments has been assessed and found to be very relevant in mobile communications, both from an economic and from a statistical point of view. Our findings are therefore of utmost importance for competition authorities, who face a trade-off when confronted with an average merger similar to one captured in our sample. Ceteris paribus, a merger will have static price effects to the detriment of consumers, but also dynamic benefits for consumers to the extent that investments enhance their demand for services (p29)
They say that efficiency arguments pointing to the possible pro-consumer benefits of higher investment get short shrift, at least in Europe:
In European merger control, merging parties face tough hurdles when putting forward an efficiency defence and, as such, it remains questionable whether efficiencies will ever play an important role in decisions under the EC Merger Regulation in any but the most exceptional cases. However, this is not to say that advisers should abandon enquiries about the rationale for mergers or any anticipated efficiency gains (p29)
But in jurisdictions where there's an more open mind - and I'd include New Zealand and Australia - I'd suggest these arguments are worth running with. Higher prices, but 5G or 6G or Umpteen G three years faster than you'd get it otherwise - that could be both correct and have some persuasive local resonance, given that we are already down the totem pole when it comes to global rollout of some goods and services.

If I were a regulator, I wouldn't necessarily be a sook for every "we need higher prices to fund good stuff" line: after all, what are the capital markets for? But on this evidence, there might be a stronger case than you might have previously thought.

*They use a HHI with a scale from 0 to 1 rather than the more familiar 0 to 10,000. So what they call an increase from 0.3 to 0.4 is what we'd usually describe as 3,000 to 4,000.

Thursday, 20 April 2017

An "ugly casserole" indeed

So we've tightened up our immigration settings, again. Opponents are saying it's fiddling at the margins. I hope the critics are right: while it's dismaying that they've felt the need to bend with the prevailing political winds at all - "an ugly casserole of prejudice, resentment, economic envy and xenophobia from which New Zealand is not exempt", as Vernon Small put it in his Ä«nsightful Dom-Post article - I hope it's the absolute minimum the government could get away with.

Not that it's without its own political dangers.Throwing scraps of meat out of the sleigh as the wolves close in may delay the chase, but wolves soon learn to chase sleighs for reward, and will be after you fitter and faster than before.

And I certainly didn't like the "Kiwis first" messaging around the thing. That's more the sort of jingoism you expect from the Aussies, and indeed got this week in their own tightening of their immigration regime, which more obviously pandered to the likes of One Nation and is more likely to do real economic damage. Early reactions suggest they've shot themselves in the foot, making it harder for employers to fill hard-to-recruit vacancies.

Let's not pretend, either, that there's anything remotely linked to the economy behind this. It's pure politics.

For one thing, the cyclical state of the labour market is very strong. Wanna see a picture of a thriving labour market? Here's one from the ANZ's Bank's latest tot of job ads.

Wanna see another? This is MBIE's latest tot of vacancies - jobs available right now. High, and climbing steadily,

If you're concerned that unskilled emigrants are driving down wages and stealing the everyday battlers' jobs at the hard end of the labour market, the greatest rise in vacancies in recent years has actually been for unskilled and semi-skilled jobs.

So it's extraordinarily hard to make any case that immigrants have soaked up the available jobs. Despite a recent large increase in net migration, there are more vacancies available than ever, even at the low wage end.

As for the fable that immigrants are putting pressure on already stressed infrastructure, it's either a marginal effect or complete bollocks. Higher levels of net immigration are a relatively recent phenomenon - the last three years or so - whereas the infrastructure, especially in Auckland, was already stuffed every way to Sunday well before that. 

Here's the clincher: as an economist colleague helpfully pointed out when I was tweeting about this, there was very little difference between Statistics New Zealand's population projections for Auckland's population ten years ago and what has actually happened. We knew there was a surge coming, and didn't plan for it, and still aren't - that's the reality, under national and local administrations of all political hues. It's got very little if anything to do with migration, and everything to do with systematic underfunding of infrastructure and obstructive land-use and other regulation. Our politicians have preferred to run dairy farms, mine coal, deliver letters and keep prime housing land to grow onions, rather than deliver the social and physical infrastructure for a high-income economy.

And that's something else the anti-immigration crew are missing. Far from being a burden on the economy, many migrants are actually alleviating the roadblocks to growth we've inflicted on ourselves. Across the road from us, one of those terrible Asian property investors - probably got one of those suspicious Chinese-sounding surnames - has started to turn two houses into five. Round the corner another of these awful leeches has already redeveloped one house into three. Employment for two gangs of tradies, five extra houses. Not bad for two parasites.

Maybe I shouldn't be surprised about these latest turns of events here and in Australia. Liberal values and sensible economics are under attack pretty much everywhere, from the clowns in Washington to the Brexit-deluded in the UK through to the more sinister operators in (for example) France, Hungary and Poland. It's especially sad to see people "of the left", who might be expected to take a more progressive, internationalist view of the world, going along. 

But maybe there's hope around the corner. As this excellent article, 'In defence of liberalism', points out, the liberal values and better economic policies that created post World War Two prosperity are certainly under attack. But it concludes
the things we value can’t all be realised simultaneously and made compatible with each other. A liberal society is the best method yet devised of recognising this multiplicity of aims. It stresses value pluralism in the face of political and religious dogmatism, and of spurious appeals to national unity for the common good. I’ll doggedly stick to it.
So will I, even though in the short run the probability of a socially liberal, economically responsible government emerging from our next election looks to be half of five eighths of sod all.

Tuesday, 18 April 2017

A quiet word in your ear...

First of all, a quiet word in the ear of parties appearing before the Commerce Commission.

Look at para 38 of the written reasons for the SkyTV/Vodafone decline. I've bolded the bit that's most important. The para reads
We collected and reviewed some useful evidence from which to construct the factual and counterfactual and our competition analysis. However, we also note that a number of parties provided some submissions on the merger that did not seem, to us, to accord entirely with statements made by the submitters elsewhere, including in internal records. We did not consider that all evidence of past or present conduct or events provided a reliable predictor of future likely impact.
This, folks, is somewhere in the general territory of a reproof, rebuke, and warning, and it's a good reminder (as I've advised before) not to take an opportunistic approach to competition or regulation proceedings. One of your biggest assets is your credibility, and your advisers'. While you will be tempted - of course you will - to run arguments that are inconsistent with what you've said somewhere else, to run with the incumbent hare and hunt with the new entrant hounds, don't do it.

And a quiet word in the Commission's ear, too.

At [15] the Commission says (I've italicised the bit I want to talk about)
We make a pragmatic and expert assessment of what is likely to occur in the future with and without the merger
which rang a bell, since something very like it appears in the Mergers and Acquisitions Guidelines, except that there (in para 2.35) it reads
We make a pragmatic and commercial assessment of what is likely to occur in the future with and without the merger
Perhaps this upgrade is a good 'deference' card to have in your hand in the appellate courts. But on the other hand you wouldn't want one of them saying something like, "We have difficulty seeing how an 'expert' tribunal could come to those conclusions on the facts before it", would you?

Bit more humility, lads and lasses. It's the Kiwi way.

The details of SkyTV/Vodafone

Just before the Easter weekend the Commerce Commission published its written reasons for turning down the SkyTV/Vodafone merger. Like other competition tragics, I read it over the holiday - all 566 paragraphs of it.

Like everything that comes in the Commission's door these days, the Sky/Vodafone fell in that twilight zone where you can make a decent case for both sides. In the event, the Commission said No: the merged entity would be able, and incentivised, to offer Sky Sport based bundles of pay TV and broadband/telco services that other Internet Service Providers (ISPs) and telcos wouldn't be able to match. There would consequently be a real chance of a substantial lessening of competition (SLC) as Sport-less rivals were less able to compete.

Sky/Vodafone was especially problematic because it fell into two of the more difficult areas for regulators to assess - the alleged use of market power in one market to gain advantage in another, and allegedly exclusionary bundling. These are always going to be line ball calls: the ACCC for example stopped the Aussie supermarkets from giving out large petrol discount vouchers ("shopping dockets") to buy petrol from them, because they thought the supermarkets were using their market power in the grocery trade to drive the petrol stations out of the petrol game (I thought the ACCC could be wrong about that).

And anti-competitive bundling is just as tricky, not least because the economics is not settled (you lawyers at the back, stop sniggering). As the abstract from one review article said
While the [economics] literature has demonstrated the possibility that bundling can generate anticompetitive harm, it does not provide a reliable way to gauge whether the potential for harm would outweigh any demonstrable benefits from the practice. As a result, the widespread application of the antitrust laws to bundling by firms can generate significant error costs by erroneously condemning or deterring efficient business practices. In the future, economists should seek to expand their understanding of both the anticompetitive and procompetitive reasons firms engage in bundling.
So given all the inherent uncertainties, I think the Commission came to a reasonable conclusion. And I think it fits well with what regulators should do in fast-moving sectors, which (as I argued here) is take a conservative view (though it is not always obvious whether doing something or not doing something is the conservative course), don't give leg-ups to anything, and generally try to let events unfold, but deal with any anti-competitive rorts that survive the Schumpeterian storms.

What struck me most about the whole thing was, why did Sky and Vodafone go for a clearance ("there is no SLC") rather than an authorisation ("there is an SLC, but there are compensating benefits")?

Maybe they genuinely believed there would be no SLC; maybe they didn't want the relative hassle of an authorisation (typically longer and more expensive, and the associated conference process isn't everyone's cup of tea, either). But having gone that route, they were stone cold dead if the Commission found an SLC (or, strictly speaking, couldn't be satisfied that there wouldn't be an SLC). That can prove a difficult barrier to get over when, as here, it's a dynamic sector where anything might happen, and it only takes one plausible enough ("real chance") scenario where there might be an SLC for the Commission to throw its rider at the fence.

But with an authorisation, you're still alive with the second leg of your argument: there are SLC downsides, but more than compensating benefits. And there were benefits: as the Commission said, for example at [198], "consumers may be better off in the short term as the merged entity offers better bundles (including better prices) and rivals react with their own bundles (and lower prices)", or again at [226], "it is likely that the bundles offered by the merged entity would be lower priced and/or higher quality, with more additional features than those available without the merger, or compared to those available on a standalone basis".

The Commission may still have jibbed at an authorisation, because it clearly worried that any short term consumer benefits would be taken back when the Sky/Vodafone entity had seen off some of its competitors, but it would have been a better route to go. An argument along the lines, "clear short term benefits in the (semi-predictable) near to medium term, but uncertain detriments in the (much less predictable) medium to long term" was a real runner, particularly as the Commission said at [358] that it is "difficult to predict with any certainty what effects might occur in the medium to long term". A bird in the hand today, versus more heavily time-discounted and more uncertain detriments sometime in the future, could have snuck through.

Especially (if Sky and Vodafone are minded to appeal) as the Commission has taken a somewhat debatable view on how hard it would be for ISPs to get into the post-merger game. The evidence shows that there are heaps of them today, all giving it a go despite the much heavier firepower of the big guys. This suggests easy conditions for entry.

Of course, the Commission would respond, that was then, what about the post-merger world?  But I for one would be inclined to think that (for example) a determinedly "cheap and cheerful" barebones ISP (or several of them) could still keep the merged entity honest. I wouldn't rule out the possibility of some other innovative bundling by competitors, or other attractive add-ons. And I also had quite a bit of sympathy for the point that NERA made, quoted at [454]: "NERA advised that if consumers were attracted to the merged entity’s discounts, then they would equally revert back to other TSPs [telecommunications service providers] if those discounts were reversed. If so, the merged entity would not be able to exercise market power".

If there was anything else I'd quibble with, it was the Commission's view that content and the means of delivering the content are becoming more the same thing in consumers' eyes. For example it said at [170] that
As services become more converged, consumers are likely to start associating them as part of the same purchasing decision – the content and the method of delivery become more closely linked in the minds of consumers
and again at [386.4] where it said that
broadband and mobile services become more closely aligned with the delivery of content
Personally, I'd agree that delivery services are indeed converging, but I'd argue that they're becoming commoditised, and that content is increasingly standing alone, which is what the rest of 386.4 says:
the importance of content to competition in relevant telecommunications markets is also likely to increase
Who provides Game of Thrones, and over what infrastructure, is of the utmost indifference to me. They're not - for this sample of one - becoming all the one deal, wrapped up with the series itself. Rather, they've become markedly more separate. Though if you follow that logic further, you start to think dark thoughts about entities monopolising a market for premium sports content (the Commission found at [259] that there is one). There's a lot happening in the commercial and policy space around telecoms and convergence: I wonder if some regulation of 'fair access' to premium sports is lurking in the mix.

Wednesday, 5 April 2017

That touchy-feely stuff

Life's too short, and you can't do everything, and one of the things that fell off my radar for a while was Masterchef. Lately, though, I've caught up with it again (the 'professionals' series), and I've found it as compulsively watchable as ever.

But I was struck by something that goes beyond cooking.

People aren't used to getting praise.

Especially in the early rounds, where you've got people who haven't yet climbed into the higher branches of the professional tree, you can see that they've had little or no positive feedback at all in their careers.

A kind word from any of the judges, and you have some contestants going all teary-eyed. They've rarely had people in their professional lives tell them they're doing a good job.

And it's not just a  bit of recognition from Michelin-starred Marcus Wareing that's got people going all gooey. Sure, you might be a bit overwhelmed, too, if the big guy in your line of business said you were pretty good. But a bit of appreciation from Gregg Wallace (whose autobiography is well worth reading, by the way) or from Monica Galetti will do it too. You can see that praise has been thin on the ground for the contestants, even though - almost by definition given that they've entered this competition - they're talented and motivated people.

And it got me thinking about the poor business culture we've created. There's little or no leeway for making mistakes, there's a very low tolerance for risk (manifested, for example, in businesses' very high 'hurdle rates' for investments), there's bugger all appreciation of the difficulties of making decisions under uncertainty (the RBNZ in particular tends to get it in the neck, as I've argued), and hence or otherwise there's a focus, and with 20:20 hindsight at that, on shortcomings and blame.

You ever been through one of those corporate 'performance reviews'? "Well, I see you had 12 KPIs for this year, and you've achieved ten of them. Now, let's talk about those other two, shall we?".

Some companies are finally getting the gumption to dump the damn things, as you'll find in this fine Harvard Business Review article, 'The Performance Management Revolution'. Two brief extracts: it concludes by saying that
Performance appraisals wouldn’t be the least popular practice in business, as they’re widely believed to be, if something weren’t fundamentally wrong with them
and earlier says that the something fundamentally wrong thing is
With their heavy emphasis on financial rewards and punishments and their end-of-year structure, they hold people accountable for past behavior at the expense of improving current performance and grooming talent for the future, both of which are critical for organizations’ long-term survival 
I wouldn't usually bother wandering into management theory, except that I can't help feeling that poor management practices are part of our long-standing productivity under-performance. A while back I posted about some research which found that
43.5% of the productivity gap between us and the [United] States is down to our relatively weak management capabilities (and it's interesting that Australia, with a somewhat similar business environment to ours, comes out with a similar number, at 45%)
What I didn't add at the time, but Masterchef  has now prompted me to, is that, in turn, a lot of our relatively poor overall management practice is down to bad performance management and really bad people management. As this paper found, "People management is the weakest area for New Zealand manufacturers with the country ranking fourteenth among [seventeen] participating countries". Here's what the data looked like.

Other than on the terraces at the game, or after a few jars, we don't do that inspire-y motivation-y gooey praise-y thingy. We tend not to open up, and especially not if it risks being a bit confrontation-y. Look how we score (below) on 'addressing poor performance': by international standards, we just don't want to go there. 

Everyone, this election year, seems to have a list of policies that might help turn our productivity around: the New Zealand Initiative came out with one the other day, to mixed reactions. So here are two more from me.

The less important one is, Fred in Sales and Wilma in HR have been a drag on the business for years. You know it, their colleagues know it, and you've let it drift. Fix it.

The more important one is, focus on what people have been doing well. Let them know, and help them get even better. There aren't huge numbers of win-win policies, but praising a job well done not only makes people happier, but the research shows it improves personal, business and national performance.

Beating the academic paywalls

We've all got to make a living, and people are entitled to a return on their work, but there's a justified feeling that the paywalling of academic research has gone too far - not least because in many cases we're paying for it twice, once through government funding of the original research and again through the often hefty journal subscription fees of the academic publishers.

So I was interested to find, via Twitter - hat tip to Prof Diane Coyle who retweeted the original tweet from Prof Dennis Dittrich - the announcement about Unpaywall, which is an extension for Chrome which with a bit of luck will find the full text of an academic paper you're after. Totally legal: as the folks behind it say, "it’s powered by an open index of more than ten million legally-uploaded, open access resources".

At this stage it looks mostly oriented towards the physical sciences, but toujours gai - I thought I'd give it a go and see how it worked on economics journals. So I installed the extension - a doddle - and picked an article at random from the latest issue of the American Economic Review, 'Escaping the Great Recession'.

Not that I've got anything against the AER - quite the reverse, it's cheap to get at, and one of the AEA's sister publications, the always interesting Journal of Economic Perspectives, is free to all - but just as a test run of Unpaywall.

It works, for all practical purposes. It didn't storm the ramparts of the AER itself, that's not how it works, but it did find the same article on EconStor, where it had appeared as a working paper in the Fed of Chicago's series.

So at a minimum it saves you the hassle of searching by author names on the likes of EconStor or SSRN, and cuts to the chase.

Sample of one and all that, but it worked straight out of the box. Recommended.

Tuesday, 4 April 2017

If it's tech, let it play out

After an earlier draft decision to decline, last week the ACCC definitively declined an authorisation application from three big banks (the Commonwealth Bank, National Australia Bank, and Westpac) and one decent sized one (Bendigo and Adelaide).The banks had wanted to engage in a collective negotiation with Apple over Apple Pay, its mobile phone payments app, and to engage in a collective boycott of Apple Pay in the meantime.

There were several incongruities about the application from the git go. One was the unusual spectacle of the big banks getting together to increase their bargaining power against one tech company: you don't normally have an image of the banks needing much regulatory help with their negotiations. Another was the absence of the ANZ, which has signed up with Apple Pay - you may have seen those quite good "an epic way to pay" ads on the TV - which again would have left you wondering why the other lot needed a helping hand. And yet another was the unlikelihood of Apple agreeing to what the Aussie banks wanted, even if the banks were allowed to bulk up as one bargaining entity. As the ACCC's Summary said (page v)
The ACCC notes that Apple has taken a global decision to offer an integrated mobile payment service on iPhones which does not allow open access to the NFC [I'll explain the NFC in a minute]. Apple submits that even if authorisation is granted it will not grant NFC access, and therefore the proposed conduct cannot lead to any of the public benefits claimed
However, any group is entitled to have a go at the ACCC's 'authorisation' process, if they can show that what would normally be an anti-competitive gang-up has, on the facts, benefits that outweigh the anti-competitive detriments. We have the same arrangements here.

There were all sorts of torpedoes running, for and against, but the banks' best argument was that if they got their way, there would be greater competition in the market for processing mobile phone payments. They hoped that their collective heft would be enough to push Apple into letting the banks access the 'NFC controller' in Apple phones - no, I didn't know before this decision what it was either, but it's the hardware and associated software that manages the close-distance wireless communication between devices like phones and check-out terminals.

That would mean that the banks could, via the the NFC controller, direct payments into their own payments systems, rather than into Apple's: everything is, typically, inhouse for Apple, and Apple Pay transactions get processed in Apple's own back office payments system. And the banks said that having the threat of diverting the payments away from Apple would constrain Apple's payments handling fees, which would benefit consumers.

And the ACCC agreed (page vi of the Summary):
NFC access is likely to result in a significant public benefit from increased competition in mobile payment services on iPhones. This increased competition, particularly in the short term, is likely to provide a competitive constraint on Apple in its pricing for Apple Pay
On the downside, however, there were problems that tipped the scale the other way.

One was that the ACCC thought there would be a loss of consumer choice between two clearly alternative models: the Apple/iOS way and the Google/Android way. If the banks got their way, the differences would be smudged over: my words, not theirs, but that was the gist. As the ACCC said (p ix)
this would affect Apple’s current integrated hardware-software strategy for mobile payments and operating systems more generally, thereby impacting how Apple competes with Google. In particular, NFC access may involve modifications to Apple’s software or hardware that lessen the degree of differentiation between the iOS platform and the Android platform
Another issue was Apple's 'accept all kinds of cards into the Apple digital wallet' approach ('multi issuer' in the jargon). For consumers, that's a good thing because you are less locked in to any one financial institution (p ix):
Multi-issuer digital wallets such as Apple Wallet and Android Pay are likely to increase competitive tension between payment card issuers by increasing the ease of consumer switching
The banks' versions of digital wallets, however, would be likely to maintain the current system of being, to some degree, tied to one institution (page ix):
The incentives of issuers to favour their own wallets over multi-issuer digital wallets are likely to have the effect of reinforcing the use of one payment card as a default card; whereas multi-issuer digital wallets would not have the same effect...To the extent NFC access would bias the development of issuer digital wallets over multi-issuer digital wallets, these potential benefits are likely to be lost
But perhaps the big take-away from the whole thing was the ACCC's reluctance to intervene in the early stages of a fast developing market - "the emerging markets for digital wallets and mobile payment services are subject to rapid innovation and change, which is already producing an increasing variety of mobile payment services, mobile payment devices, and digital wallet apps" (p vii) - where it is anyone's guess how things will play out or what the longer-term effect of early regulatory intervention might be. The best approach is surely not to try and second-guess when even the industry gurus aren't sure, and when large amounts of money are being placed on different runners.

And to the (limited) extent the ACCC could see impacts from allowing the banks' access, it didn't like the look of them in these freewheeling tech circumstances. For example (p ix)
Assuming that Apple opens access to its NFC controller as a result of the proposed conduct, this is likely to distort competition in mobile payment services by artificially directing the development of these emerging markets to the use of the NFC controller in smartphones. This is likely to hamper the innovations that are currently occurring around different devices and technologies for mobile payments
A lot of mergers and authorisations these days have this 'where will the tech go' element: here in New Zealand it's front and centre in both SkyTV/Vodafone and Stuff/NZME. Mark Berry, the chair of our Commerce Commission, said in February when knocking back the SkyTV/Vodafone one, that "uncertainty as to how this dynamic market will evolve is relevant to our assessment".

None of this is to say that any old anti-competitive rort should be ignored in dynamic markets, because it'll all get swept away by The Next Big Thing in the end. Tech companies may well get up to stuff that breaches section 27 of our Commerce Act, or section 36, and should be pinged (if s36 were in fact practicably enforceable in New Zealand). But if Mark's view can be unpacked a bit into something like "we can see the short-term impacts, but who the hell knows what's round the corner, and anything we authorise might make things worse", then he - and the ACCC - are on the right track.

Saturday, 1 April 2017

More good books - April 2017

A history of Britain's Census may not be many people's first idea of a good read, so you'll be pleasantly surprised by Roger Hutchinson's The Butcher, the Baker, the Candlestick Maker: The story of Britain through its census, since 1801. It's full of interesting themes and 'fancy that' detail: the 1841 census, for example, was the first to record people's names and ages (the previous ones were effectively just enumerations), but among the details it got wrong was Queen Victoria's birth date ('about 1821') when in fact it was 1819. As Hutchinson says (pp60-1), "If the national census could consistently get wrong the personal details of the Queen of Great Britain and Ireland and future Empress of India, what hope had anybody else?".

But that's to do the early census takers a bit of an injustice. In the days when the IT infrastructure was paper, pens and horses, the early censuses got the job done remarkably quickly: first results from the census of March 1 1801 were published in June 1801, and 600 pages of summaries and abstracts in December 1801. I doubt if we could manage the same today. Our technology has improved out of all recognition, but so have assorted deadweight managerial costs and, especially, mission creep. You should see the form that our census enumerators will be using in 2018 to record answers to the religion question, which includes at its most detailed level 167 different 'Religions', 'Beliefs' and 'Philosophies', including Satanism, Maoism, and the Church of the Flying Spaghetti Monster (aka Pastafarianism).

Some of the recurrent themes remain highly topical. The late 19th century influx of Jews from eastern Europe, as documented in the 1891 census, got the racists slavering: as the author says (p225) "Right-wing populists denounced an 'alien invasion' which was apparently taking British jobs from British workers. Ratepayers were, according to the Manchester Evening Chronicle, being bilked of excessive poor relief" (the rates-financed social welfare of the day), just like today's incoherent reactions where immigrants are supposedly both stealing jobs and bludging on the dole. An inquiry as part of the 1901 census, however, found that in the archetypal Jewish refuge, the East End of London, "The proportions of indoor Paupers [i.e. totally destitute and reliant on workhouse relief] among the general population and among the European Foreigners were 15.1 and 1.7 per 1,000 respectively" (p233). And among those damn job stealers were people like Michael Marks (first counted in the 1891 census), who had the temerity to go on and build Marks & Spenser. Shouldn't be allowed.

We've moved on from that, haven't we? Then you read on Wikipedia that in the 2011 UK census, "Other new questions involve asking migrants their date of arrival and how long they intend to stay in the UK; respondents also required to disclose which passports they held". But no doubt that's all intended to inform sound policy analysis. In any event, you'll find yourself following Hutchinson down all sort of interesting historical side alleys, and learning a fair amount of economic history on the way. It's a good read.

I try to stay in touch with Aussie politics, and my latest foray is David Marr's Faction Man: Bill Shorten's Pursuit of Power, a short portrait of the Australian Labour Party leader that is an updated and extended version of a 2015 Quarterly Essay. Shorten has made it to the top of Labor via the Australian Workers' Union, where he was initially an organiser, then National Secretary from 2001 to 2007, when he became a federal MP. I knew next to nothing about Shorten before this book, which broadly makes the case that he is a rough-house player of Australia's factional politics, with little commitment to any settled philosophy beyond self-advancement: a Paul Keating without a programme. I'll be interested to learn more beyond this initial worrying impression.

I've been having a good run with fiction. Top of the list is debut author Jane Harper's The Dry, a riveting and extraordinarily well written novel about murders in rural drought-ravaged Australia: even if you're not normally a crime/murder reader, make an exception for this one. I came to Jonas Jonasson backwards - I read his later Hitman Anders and the meaning of it all ahead of his earlier (and now filmed) The 100-year-old man who climbed out the window and disappeared - but they're both good, though hard to categorise (black comedy? satire on modern Sweden?). If time's short, try Hitman Anders and see if you like the style. And I very much enjoyed David Thorne's East of Innocence, where an ex City of London lawyer is now reduced to scraping by in Essex and gets involved with police brutality and the local Essex hard men.

In 'more of the same but just as enjoyable', there's the fourth (Silk Chaser) in Peter Klein's series about an Australian professional better on the horses who finds himself caught up, Dick Francis style, in industry shenanigans, this time the serial murders of 'strappers' (horse grooms). And there's the latest (Tatiana) in Martin Cruz Smith's series about Russian police investigator Arkady Renko, where an investigative journalist falls foul of the Russian powers that be.

Good intelligence/espionage novels can be hard to find, so you might want to try Alan Judd's series about a chap making his way up through the British security service. I've finished Legacy and am half-way through Uncommon Enemy, with Inside Enemy still to come. And then there's the ever reliable Gerald Seymour's latest, Jericho's War, about a semi-officially-sanctioned raid on high value Al Qaeda targets in the back blocks of Yemen. All good stuff. And let's hope that one of the great maestros of the genre, Alan Furst, gets his mojo back into top gear this year.

Thursday, 30 March 2017

Nature abhors...

...well yes, a vacuum. And that's what we've got.

Sky TV and Vodafone have been told by the Commerce Commission that their marriage is off, but while they haven't been told in full detail why, to keep their appeal rights open they've challenged the refusal in any event, without knowing which of their arguments for the marriage got thrown out or which arguments against their marriage got accepted. And people like Spark who didn't want them married in the first place had to go to court to stop them getting married, although at the time they didn't know that Sky and Vodafone wouldn't be allowed to get married, and even now still don't know exactly why they weren't, though they're happy about it.


If this seems odd to you, you can put it down in part to the Commerce Commission's current practice of announcing decisions, with detailed reasons to follow.

Before I go much further, let me put my hand up and say, I've been there, done that, and used to think the Commission's process was just fine. When I was there it made sense to me, because generally a faster decision (I thought) trumped a detailed decision.

And I've changed my mind, as I said a wee while back. Leaving people in a limbo where something's been decided, but neither those wanting it nor those opposing it know for sure why, is increasingly looking odd to me.

You might well think (in a Francis Urquhart sense) that an economist's view on due process is worth half of five eighths of the proverbial, and maybe that's true. But the other day, in the middle of something else, I got chatting to John Land, the competition lawyer, and I told him that I'd been blogging about this.

And I discovered that he'd come to the same view. A while back, John put in a submission - it was in the context of the Commission updating 'MAGs', the mergers and acquisitions guidelines - arguing that decisions without reasons at the same time was the wrong way to go.

In sum, he had three issues: decisions without reasons could be an error in law (I'm no expert there); the practice unfairly prejudices parties affected (I tend to agree); and, importantly, that "the discipline of finalising the reasons is important in ensuring that the Commission arrives at the correct decision", which sounds right. But don't take my summary of it as gospel: go read the full submission.

And I've also been rethinking the whole speed versus transparency thing. SkyTV/Vodafone came in the Commission's door on June 29 2016, and the decision to decline was announced on February 23 this year, almost eight months later. Stuff/NZME came in on May 27 last year and the decision is due (on the latest timing) on May 2 this year, which is eleven months and a bit.

I'm not bagging anyone over these times, by the way: clearances and (especially) authorisations are complex beasts to start with, and are getting trickier and trickier to determine, for a bunch of reasons, and they need to be done right.

But if these decisions are going to take nine or ten months or so in the first place, is it really worth going into the vacuum territory of decisions without reasons, for the sake of a couple of weeks' quicker announcement?

The other thing that resonates with me, and probably resonates most with anyone who's had to make a really complex judgement call on the net balance of a swathe of expert economist and legal reports, is that you'd want to see the finished product, and kick its tyres, and satisfy yourself that the whole thing hangs together. I usen't feel that way, but now I don't think, were I in their shoes, that I'd want to make the go/no go decision and subsequently hope that the whole recipe comes out of the oven okay later on. And irrespective of the decision-making process,  I'm not sure the uncertainties created for the parties are worth it.

None of this is a big deal. Life will go on either way. And we've got a bunch of more important competition regime issues stacked up and still undecided (section 36, market studies, cease and desist, the shipping lines' exemption, cartels) that should be addressed first. But it wouldn't hurt to tidy this up. It could be win-win all round: a better process for the Commission (arguably better enough to create some efficiencies, so that decisions aren't actually delayed at all), and greater clarity for the parties involved.

Monday, 27 March 2017

Still stuck

So here's the state of play.

The Commerce Commission can't do "market studies", proactive inquiries into the state of competition in particular sectors or industries. That's because of a historical - and in my view strange and misguided - court decision, but the Commission is lumbered with it in any event.

The Commission's overlord, MBIE, can do market studies. It's been asked to do one on petrol prices. So the policy Ministry will be doing the operational work, and the operational agency will be sucking its thumb.

And on top of this strange demarcation process, while MBIE has talented people, they're starting near ground zero, while competition analysis is the Commerce Commission's day job, and it's good at it.

It's a botch and a bungle, in sum. Which is why allowing the Commerce Commission to do market studies has been one of the agenda items on MBIE's mini-review of the Commerce Act.

But that appears to have gone to ground. As I've noted before, it's one of a number of competition reforms that have run out of oomph in the past few years.

Meanwhile the Aussies just press ahead: I read in today's Australian Financial Review that their government is "ordering the competition watchdog to conduct a review into retail electricity prices" (article here though it may be paywalled). No judicial nitpicking for them over asking their competition authority to do something that should obviously be within its remit.

It's possible that the change of bums on seats as Minister of Commerce may be holding things up. The previous Minister, Paul Goldsmith, had gone round the traps and taken soundings about the mini-review of the Commerce Act, and may well have been on the verge of pressing some buttons. It's possible that the new Minister, Jacqui Dean, is still forming her own views.

But once everyone's got their heads around the issues, could we, finally, see some progress on some long overdue improvements to our competition regime?

Friday, 24 March 2017

Take advice? Moi?

Most years - they skipped 2016 - the OECD comes out with one of its Going For Growth reports. They're a big thing for the OECD: its Director General says that "Going for Growth is the OECD’s flagship publication on structural policies. Its purpose is to help policymakers set reform agendas for the wellbeing of their citizens and to achieve strong, sustainable, balanced and inclusive growth".

Don't know why they bother, frankly, if New Zealand's reactions are typical. We give the reports close to zero coverage in the media, and our governments sleepwalk on, taking too little heed of the OECD's advice. From time to time we do some patchwork or catch-up improvements, but rarely if ever deal to the issues properly. All of the recommendations in the 2013 version, for example, were still there in the 2015 one (if you want to see previous years, they're here).

And that's a real shame, because if you're in New Zealand's position, where we seem to be doing quite a lot of good things but getting little payoff by way of faster productivity growth, you'd think that we would be lapping up informed ideas on how to get more traction.

So, what are they saying we should do?

The OECD's got two approaches. One is a "what everyone should do" piece, which you can read here, and the other is a country-specific piece, which for New Zealand is here.

At the "everyone" level, the OECD has a long shopping list, some of which don't apply a lot to us, because - while we've still things left undone - we did a pretty good reform job in the Eighties and Nineties. But some do, and I was especially interested in their recommendations on infrastructure. As I've mentioned before, we're currently chronically unable to roll out enough infrastructure in good time: the OECD says that

The most direct contribution of policy to growth of the whole-economy capital stock comes from public investment and recent empirical work suggests a large positive effect on productivity. Solving infrastructure bottlenecks, such as those in transport, can also contribute to stronger labour utilisation, through enhanced labour mobility, and to better environment protection, through lower carbon emissions. Considering the post-crisis fall of government investment as a share of GDP...and the current macroeconomic context, enhancing core public capital, and in particular the capacity and regulation of infrastructure, is a priority for both member and non-member countries.

Everything we do (and we're not alone in this) is a dollar short and at least a decade late, and I have a strong suspicion that it's one of the bigger reasons for our relatively poor productivity performance by international standards (have a look here). With financing costs at historically low levels, we ought to be getting on with it in any event, but it would be nice to think that the OECD's advice will give a further rark up to the government's Budget plans on the infrastructure spend.

For New Zealand, the shopping list is:

  • Reduce barriers to FDI [foreign direct investment] and trade and to competition in network sectors
  • Improve housing policies [a new one added since the 2015 report, and no surprise given what's happened to house prices]
  • Reduce educational underachievement among specific groups
  • Improve health sector efficiency and outcomes among specific groups
  • Raise effectiveness of R&D support

There are detailed policy recommendations under each of the headings. On housing, for example, the report says by way of preface that "Reducing the scope for vested interests to thwart land rezoning and development that is in the public interest would result in greater agglomeration economies and housing affordability, which would disproportionately benefit lower-income households", and it says we should

Implement the Productivity Commission’s recommendations on improving urban planning, including: adopting different regulatory approaches for the natural and built environments; making clearer government’s priorities concerning land use regulation and infrastructure provision; making the planning system more responsive in providing key infrastructure; adopting a more restrained approach to land regulation; strengthening local and central government emphasis on rigorous analysis of policy options and planning proposals; implementing pricing to reduce urban road congestion; and diversifying urban infrastructure funding sources.

That's a pretty good summary of the choke points - each of us might emphasise one rather than another, but they're all there - and of what to do to relieve them, and the same goes for their other detailed recommendations.

But our track record on responding quickly and fully is, sadly, poor. Oscar Wilde said he could resist anything except temptation: New Zealand governments can take anything except advice.

Postscript (March 24): Michael Reddell has also written about this latest Going for Growth report in his post, 'What does the OECD really have to offer us?'. As his title suggests, he's less enthused about the OECD's ideas. And that's okay: opinions make markets.