Saturday, 22 July 2017

Highlights of second day's play

The second day of the Commerce Commission's Competition Matters conference led off with Richard Feasey's keynote address on the latest tectonic shift in the telco markets - where the underlying physical infrastructure will still be owned by what's left of the old traditional telcos but will be largely a 'dumb and blind' set of gear, operated and run by a new generation of internet service providers. He talked about the implications for regulation, especially around the incentives for the infrastructure owners to keep upgrading the gear, and how hence and otherwise governments were taking a closer interest in how to keep the networks in reliable shape.

Linked to that, he also felt that competition was playing a smaller role in the sector, partly because it hadn't delivered all the (maybe unrealistic) expectations placed on it earlier, and partly because competition has a fairly fragile hold on the public and policy mindset at the best of times. I'm not entirely sure he's being fair to the potential scope for competition - well, I would say that, wouldn't I - when even tough competition nuts like the 'last mile' of copper access to your house may be yielding to things like fixed wireless. In this area, however, you'd be mad to make any strong futurist predictions.

The consumer protection end of the competition policy spectrum isn't usually my bag, so the panel discussion 'Browser beware' on the risks of online buying and selling was unexpectedly interesting. John Dixon QC spoke about how the law is adapting precedents set in pre-digital days for modern circumstances, which was an unlikely springboard for the witty speech John actually gave (complete with domestic rhinoceros). Anne Callinan also spoke to the law, particularly around whether it can catch digital behaviours as occurring "in New Zealand", and left me (and others) wondering why the extra-territorial reaches of the Commerce, Fair Trading, and Consumer Guarantees Acts aren't lined up with each other. And Jon Duffy spoke about how platforms like his TradeMe try to keep trade legal and honest, partly by working with the myriad of product regulators (such as Medsafe) and partly on their own initiative (like making car dealers disclose when imported cars have been write-offs in their home country).

Then we got to choose from the menu. I went to Professor Michal Gal on 'Competition policy in small markets'. She went through the research showing how small and remote economies suffer competitive disadvantages of scale, and some of the responses they can adopt (particularly exporting, and especially high-value niche exports). From a regulatory point of view, she said, a small economy is going to be in a tight spot (and as commenter Professor Ralph Winter pointed out, will be also suffering from diseconomies of scale in the regulatory resources available): there'll always be pressure to allow mergers to get closer to scale levels of efficiency, but potentially at the expense of reduced domestic competition.

She was certainly no fan of a 'national champions' approach, and she suggested - an idea I'd never thought of, but seems sensible - that if nonetheless you're backed into the corner of allowing uncomfortable levels of industry concentration for efficiency reasons, maybe you ought to mitigate the domestic competition issues with behavioural undertakings (which as you likely know the Commission can't currently accept). And she also said that in that high-concentration case you'd be even more concerned to ensure that 'abuse of dominance' provisions are effective: s36 policy analysts within MBIE, please take note. She's also a big fan of 'market studies', and indeed her journal article survey was one of the resources I quoted in my little quest to assist the case for introducing them in New Zealand.

My next choice was the panel on challenges in telco markets. A short post can't do justice to a very full session so I'll just pass on a couple of thoughts. Professor Stephen King had some (typically?) provocative ideas: why, he wondered, are we all relaxed about the vast store of data the credit card companies hold about us, but when Google holds it, it's suddenly a federal case? And do we - us competition wonks - even know if the highly personalised pricing online companies can show us poses any competition problem at all? Sure, we absolutely hate it when we rumble someone making off with all out consumer surplus, but is it an overall welfare problem? And I was taken with the work of Dr James Every-Palmer QC -  here's a bit of background on his Law Foundation project - who's been beavering away on whether regulation is ready for today's world of rapid tech change, and he's found a nice way to approach it by generalising from the impact of the smartphone.

And then I opted for George Yarrow's 'Regulation in small markets'. My heart sank at the beginning when I found that it was going to be largely about Guernsey and a bit about the wider (but still tiny) Channel Islands group: what's the good of a sample of one from the set of micro-states? I needn't have worried: an excellent general principle came out of it. I'm not sure whether the wording came from George or from Andrew Riseley, general counsel on the regulation side of the Commission, who was the commenter on George's presentation, but what smaller country regulators should do is LNBTW - a Limited Number of Biggish Things Well. And Andrew suggested that in our own #8 fencing wire way, we'd been doing that. Two good examples: the 'initial pricing principle' in telco regulation, where we use the price of a service overseas as a quick (and in my view effective and practical) first stab at the local regulatory price, and 'default paths' for electricity lines businesses that avoid the whole intricate company-specific price control machinery.

We reassembled for the final plenary panel session, 'The anti-competitive potential of industry groups', where the Commission's Katie Rusbatch used a clever hypothetical example (New Zealand nuclear power companies getting together in response to news of a levy on their industry) to explore what is or is not okay to talk about or agree on. The short answer is, be very careful - even (as Professor Spenser Waller suggested, and not entirely in jest, either) to the extent of making an ostentatiously dramatic exit from iffy industry meetings. There are airlines all over the world ruing that they didn't do the same when the agenda got to the item on air cargo surcharges. And don't think it couldn't happen to you. The industry association economist who gets up and does the supply and demand forecasts for next year almost certainly doesn't mean to facilitate collusive output management, but it may not look like that in the High Court.

Another really good conference: it's been a very useful initiative by the Commission, and highly popular. Too popular to be held in Wellington, maybe - I gather the constraint on attendance (and the resulting waiting list, and the fairly crowded room at Te Papa) is the absence of any larger venue. I suppose the good news is that Wellington, unlike some cities, hasn't lumbered itself with yet another white elephant conference centre. But the bad news is that it can't quite handle this size of event, either.

Thursday, 20 July 2017

I've been to another conference...

...which sounds like that's all I do with my time, but it's just a strange coincidence that two of my three must-do conferences fell within a week of each other: last week's NZ Association of Economists' conference and this week's Competition Matters conference, the latest in the Commerce Commission's every-other-year get-togethers. The third, by the way, is the Competition Law and Policy Institute workshop in October - you will be going, won't you?

It's been a solid first day for what is a (literally) standing room only event. Mark Berry, the Commission chair, led off with some good news: the Commission will in the future be publishing those 'letters of issues' and 'letters of unresolved issues' that are part of the merger approval process. In the past they've sometimes been public, sometimes not, so that's a move towards more transparency. And it will be making the information on regulated industries more accessible for a wider audience, which is another good move. Information disclosure regimes are all very well, but currently it's a bit of an exercise to find the data and make effective use of it. It's there, and it's comprehensive, and the people who compile it are friendly and informed and helpful, but it's not yet really got the traction it might have.

The big keynote addresses were an interesting mix. Professor Spencer Weber Waller talked about 'The isolation of US antitrust': where once American legal and economic thinking about competition were state of the art and readily adopted elsewhere, now they're increasingly idiosyncratic and debatable (you could, sadly, say the same about a lot of other American policies too). And while I would normally pay good money not to go to another lecture on the 'internet of things', Professor Harry First gave a fascinating talk showing that the internet age does, in fact, pose new competition problems. Why (he started off) does the price of a packet of mini marshmallows go up and down so much, and why, recently, has it been so persistently high on Amazon - much higher than you'd pay in the corner dairy? This shouldn't be happening when the internet, in theory, gives consumers so much more ability to compare prices. And he went on from there into knottier issues, such as the potential for businesses to coordinate their online price-setting algorithms.

Professor George Yarrow -  a strong candidate in any Terry Pratchett Impersonator competition - talked about the outlook for incentive regulation. The short answer is, we don't know, and maybe the best approach is to experiment with what might work (it doesn't always). I'm a huge fan of incentive regulation: it's always seemed to me to be that our rate of return regulation is a step backwards from quicker, cleverer, simpler, cheaper approaches like CPI - X. After his speech I put that to George: his view was that things like CPI - X can take you a long way at the beginning of a regulatory regime, but to make further progress you're inescapably driven to delve deep into the details of a firm's costs, revenues and balance sheet. Maybe he's right, though I haven't completely given up on simple alternative ideas, particularly ones focussed on return on equity.

I wasn't entirely convinced by Professor Ralph Winter, either, who spoke on 'Competition policy in two-sided markets'. They're all the rage in competition economics - our recent, declined, NZME/Fairfax authorisation is a classic example - but Ralph's argument was (in my words) that courts have been bamboozled by this two-sided guff, when traditional one-sided analysis would have been perfectly adequate and would have found anti-competitive effects that a two-sided perspective would have okayed. He was summarising a longer, learned journal article, and maybe I should go and read that, but for now I'm sticking with the One Big Thing we've all learned about two-sided markets, which is that you shouldn't - can't - draw competition conclusions from looking at conditions on only one side.

It's a multi-track conference: I opted for the panel discussion on 'Merger hot topics'. The main takeaway for me was that competition authorities should keep a close and sceptical eye on mergers foreclosing potential sources of heightened competition, if (for example) the company being bought might (under alternative ownership) have been more combative in the market. It's a theme that surfaced, for example, in the 2015 Z / Chevron decision, where the dissenting Commissioner felt that the merger shut down the option value in Chevron being acquired by someone who might set out on a more competitive strategy.

We finished up with another good panel session, on 'Effective ways of engaging with a regulator'. This is something dear to my heart: some companies do it well, some fluff it badly. There were lots of good ideas: engage early, take efforts to explain your industry, be consistent in your engagement and your point of view, don't be selective or late with your data, be realistic about your expectations from the process and in particular try to understand the regulator's scope and objectives, don't let your advisors dominate your show. And (a point made by ACCC Commissioner Roger Featherston), if you end up on the pointy end of enforcement action, do a proper internal investigation, rather than be embarrassed by revelations later, and if you're bang to rights don't fight it all the way and then offer concessions late in the piece. It won't endear you to anyone.

All applehood and mother pie, you might think, and who needs an expensive conference to be told the obvious? But some companies still need to be told. I was comparing notes with some regulators at the drinks afterwards: we all had war stories of how Company X had sworn black was white in Australia, and then sworn white was black in New Zealand. Could have been naïveté: did they really think no-one would notice? Could have been incompetence: the Aussie end of the operation wasn't coordinating internally with the Kiwi one. Could have been sheer opportunistic cynicism. But the end result was the same: the company's regulatory credibility scored a spectacular own goal.

Saturday, 15 July 2017

I've been at a conference...

Last week's annual conference of the NZ Association of Economists went off well - particularly the big four keynote addresses: William Strange (University of Toronto) on the agglomeration benefits of cities, Lisa Cameron (University of Melbourne) on randomised control trials and natural experiments in development economics, Andrew Atkeson (UCLA) with a historical perspective on regulating big banks and preventing GFC-style episodes, and our own John Gibson (University of Waikato) with his "Quantity and quality redux", about how even professional economists forget that consumers adjust both quantity and quality in response to price changes.

That sounds at first blush like something only a professional microeconomist would care about, but it is surprisingly relevant across a variety of contexts. A local topical example is whether the likes of soda taxes (to curb obesity or rotten teeth) will work: no, is the answer, if, in response to a tax, people keep up their previous soda intake, and can afford to, because they also trade down to slightly less attractive and cheaper quality (eg 1.5 litre plastic bottles rather than smaller-volume cans).

It got me thinking about other possible applications, too. Competition authorities, for example, fret about potential price rises after mergers that reduce competition: 5% is often bandied about as a threshold price increase that you'd start to be concerned about. But what if consumers can easily defeat the 5% increase by small compensating changes in the quality of what they buy? Should we be more relaxed about mergers? Or should we be focussed on the welfare losses (potentially quite large if they really, really liked the quality they had before) of not quite getting what they used to have? Quality isn't always forgotten - it was a big theme in the proposed NZME / Fairfax merger that got turned down - but it can be.

All thought provoking stuff, and even if you had no prior interest in any of these topics, they were all fascinating to listen to. The keynote speeches aren't up on the NZAE's conference papers page yet, but keep an eye out for them when they do go up.

I was also pleased to see another 'Commerce Commission themed' session of three papers. This is a recent innovation, and a good one, and it's great to see the Commission getting behind the NZAE conference. It's good outreach, and a fine way of encouraging and facilitating the professional development of staff (all three presenters are at the Commission). Competition and regulation didn't always get much of a look in at NZAE conferences, and the limited coverage didn't line up with the number of economists engaged in the area or indeed with the importance of the topic. Your broadband, mobile phone and electricity bills, for starters, are all heavily influenced by the Commission, not to mention the policing of mergers like NZME / Fairfax or SkyTV / Vodafone.

It was a solid session, too. Catherine Corbett had a paper on "Flipping markets": no, not in the sense of "sod 'em", nor in the sense of "tipping" where network effects lead to one player becoming dominant, but the unusual situation where sometimes a buyer pays for its inputs but sometimes charges for its services. Her example was a meat waste product collector (a "renderer"). Sometimes a renderer will find the butcher's waste is worth paying for, sometimes the butcher is prepared to pay to have it taken away. How should you think about a merger of renderers? Does it say anything about how competition authorities should think about mergers between buyers? At the moment Catherine and I have come to different conclusions, but I'll wait to see the final paper before I get too entrenched.

Stephen Hudson talked about "Pass-through analysis in dynamic markets with differentiated products", which was largely about the Commission's recent fossick into whether internet service providers (ISPs) had passed on cuts in regulated input prices. The Commission got Aaron Schiff to look at a thumping great sample of phone bills, and the answer was that roughly 90% of the cut got passed on. And that in turn would lead you to be reassured about the state of competition in the ISP market, given that the standard wisdom is that only half of a cut would be passed on by a monopolist, but progressively more gets passed on as markets get more competitive.

And finally there was Diego Villalobos, with "Regulated firms in unregulated markets: friends or foes?". This was mainly about electricity, and maybe I can best explain it with an example. Suppose your friendly local electricity lines business says, listen, we'll sell you a battery, put it in your garage, and we'll charge it up when it's cheap to, and run it down when otherwise you'd have paid high prices. Sounds good, right? And it is good: there are economies of scope (the company that transmits your power also does your battery), and you and your lines business get to split some savings.

Except that independent battery providers risk getting shut out. The lines business, if it is allowed to put the battery into its 'regulatory asset base', gets a nice, guaranteed return. Whereas your Cheap And Cheerful Battery Company has to run the risk that if nobody buys its batteries, it's kaput, yet is trying to compete against someone who doesn't run the same risk. So would you be as enthused about the lines company's offer, if you knew that the guy who'd actually supply the cheapest battery, can't get a look in?

Diego got to the point (as I did, in a bit of client work), that this is a horrendously difficult area, and one that's getting trickier as technology advances: it's not just batteries, but also those solar panels on your roof, and who knows what down the pike.

And there were also interesting competition/regulation papers in other sessions. I went along to AUT's Lydia Cheung and her paper on "Divestiture as Conglomerate Merger Remedy, with Case Study of 2005 P&G-Gillette Merger". Procter and Gamble were made to divest some deodorant brands when they bought Gillette's ones: how'd it work out? I'm a huge fan of these after-the-event studies: how else are we going to find out what works and what doesn't? In this case, it's still not entirely clear. Sometimes it is, but whether you can find a smoking gun or not is a bit irrelevant: the point is to look, rather than rely on unquestioned assumptions about the efficacy of regulatory decisions.

We all know that the internet is changing everything, and in its little way the NZAE conference is another example. Organisers can now go on the web and see if someone can give a good presentation. Up to now you could rely to some degree on (say) graduate students who were in a professor's course, and they could tell you how well it went across. It's a good deal better, though, to watch it for yourself via say a TED talk. So someone like William Strange from Toronto gets onto the agenda, as he should: a brilliant presenter of his big set piece, and just as good in Q&A afterwards. He told me afterwards, modestly, that he'd put more effort than usual into his speech. The fact is, he's a natural (or has put a lot of effort into becoming one), and he could read the bus timetable and we'd all find it interesting. We've only begun to scratch the surface of matching up good suppliers with interested buyers.

And I'm pleased to say I've helped nudge the NZAE into the age of social media. In principle, all presentations each year have been on a 'Chatham House rules' basis. In Wellington, in particular, you can see the point, where public servants might have wanted to contribute to a policy debate without landing their organisation or their Minister in it. But otherwise it is a nonsense. NZAE publicly publishes a programme, with abstracts of what the speaker is going to say, but social media are supposed to play along with the fiction that nobody knows? And remind me why there's a #nzae2017 hashtag, if you can't tweet who said what?

I don't think so. And neither did the membership at this year's AGM when I proposed (and folks like Eric Crampton at the NZ Initiative supported) that the default setting of Chatham House rules should be junked. If speakers still want Chatham House, they can say so, and commenters can still safely comment without being fingered. But the default now is, on the record. As it should be: I'd tweeted, for example, about the session on this new 'CORE' curriculum for economics. Someone who'd never heard of it picked up on it, and found that CORE was just what they'd been looking for. Payoff for them, payoff for the value of the NZAE conference: Pareto would be pleased.

Friday, 7 July 2017

The good bits from the half-baked cake

It's a shame that MBIE's inquiry into the petrol industry was semi-botched. The commissioned report did some good stuff, but was unable - and was always going to be unable, given the time and resource constraints it was lumbered with - to get to the only answer that would have really mattered: are the returns ('WACC') earned by the petrol companies excessive compared to what is reasonable for an industry like petrol retailing?

That, self-evidently, requires a set of standardised financial information so the companies can be assessed in a sensible way. But as the report team found the data wasn't always there at all, let alone reported on an industry-wide consistent basis, and it would have involved a good deal of heavy-duty financial analysis to make it consistent, as anyone involved with price regulation under Part 4 of the Commerce Act knows. The back end of Chapter 4 of the report lists all the knotty issues: they weren't going to be put to bed in the few months the report team were given.

I'm no great fan of finger-pointing with the benefit of hindsight, but on this occasion I think that the government and MBIE should have known there was a high risk that the profitability numbers, key to any definitive answers, weren't going to be forthcoming given the time and resources allotted.

And I'm also uncomfortable with this kind of judicial limbo. The petrol companies are neither clearly off the hook, nor clearly convicted. I'm not sure governments should be publishing reports, about anyone, effectively saying "you could well be up to something". That can't be right: prove something, or clear off.

That's another benefit, by the way, of properly resourced market studies rather than hurried half-measures. People tend to think that market studies are mostly used to find rorts and abuses, and of course they can and have, but equally they can clear companies of popular misconceptions. In New Zealand (and even more so in Australia) there is always going to be somebody having a go at some industry or other. Sometimes the go is well-founded, sometimes it's basely political: properly run market inquiries can put the facts to bed and see off the uninformed muckrakers. This half-baked time round, we ended up with just about the worst outcome, for everyone, of suspicions left unresolved. And we're now going to have to do the full, proper inquiry that should have been done in the first place.

More positively, the report did find some interesting non-WACC results. This pattern of regional petrol margins, for example, confirmed a lot of what the Commerce Commission's Z / Chevron decision had also found.

This is consistent with Gull constraining profitability where it operates (only north of Wellington). As the Commission put it (para 205), "The evidence suggests Gull is acting as a significant competitive force driving prices downwards".

What's happening in the rest of the country? Three of the Commissioners in Z / Chevron kicked for touch: they said (para 231.2) that in non-Gull areas, "it is unclear whether, viewed in the round, individual local market conditions can be said to be conducive to a coordinated outcome. There are a range of market features, that do not all point in the same direction", and anyway Z acquiring Chevron wouldn't make any difference to whatever was happening. The dissenting Commissioner, Dr Jill Walker, felt (para 10 of her dissent) that "there is currently evidence of such tacit coordination among petrol retailers which follows a leader-follower pattern".

She'd also argued (para 13, footnotes omitted) that "The increase in margins...appears to have come about from Z’s different strategy from Shell. Z has told us that Shell focused on generating volumes of sales and led prices down. Z has shifted to a strategy focused on increased margins at the expense of volume ".

This latest report found the same, as this graph (on p63) shows.

In the bottom half of the chart, Shell often used to take the lead in cutting prices: it never led prices up (BP tended to be first). In the top half, these days Shell, now Z, still does a fair amount of being first to cut prices, but it is now also prepared to lead prices up (it's slightly more active at it than Caltex and BP).

I'd stress there is nothing wrong from a Commerce Act point of view with any of this: any of these companies can pursue any independent pricing policy they like, even if it is follow-my-leader. And as the report notes (page 63) about the change in pricing strategy, "Z Energy – and some other interviewees – maintain that this was necessary, due to margins being too low because of Shell’s approach". But as I argued yesterday the excessively short-term focus of the MBIE enquiry - what's happened to margins since 2011? - meant that the question of whether margins had merely returned to more normal longer-term averages could not be explored properly either.

Finally, there's the finding that the pre-tax price of petrol is high by international standards, as this graph (on page 3) showed: the report said that "New Zealand is now an outlier when it comes to the pre-tax price of fuel".

Well, strictly true I suppose, depending on how "out" you need an "outlier" to be. Here's the same data graphed a bit differently (it's here on MBIE's website). Some countries are a bit higher than the average, some a bit below, nobody is a zillion miles out of line, so I wouldn't necessarily make a song and dance about "outliers".

That said, we are where we are. And while the pre-tax price isn't the be-all and end-all of anything - as the charts show (and the report also notes), taxes tend to make up most of the retail price - it's still an interesting fact that our pre-tax price is on the high side. If indeed it is a permanent fact at all, and not some unlucky draw of prices in particular one quarter at one particular set of exchange rates.

If it is a genuinely ongoing thing, 15 US cents a litre above the OECD average is worth a squizz. Is it transport costs? Some sort of inefficiency? And what on earth explains the grouping of New Zealand, Korea, Mexico, Australia and Switzerland down the dearer end, and the grouping of the Czech Republic, the UK, Slovenia, Ireland and Finland down the cheaper end? Damned if I can see any obvious common explanatory feature among that lot.

Yet another thing that an under-resourced inquiry wasn't able to look at properly.

Wednesday, 5 July 2017

The dog that sort of barked

MBIE's commissioned report on petrol prices has left everyone up in the air. The petrol companies have been sort-of fingered for profiteering - the report (page i) says "we cannot definitely say that fuel prices in New Zealand are reasonable, but we have reason to believe that they might not be" - but there's no smoking gun. "They could be ripping you off, maybe are, but who really knows" is an unsatisfactory outcome for the petrol companies, consumers and policymakers, and probably the report authors themselves.

I'll be coming back to this report over the next few days because I'm not especially happy with the outcome, but I'll just start with three observations to be going on with.

The first is that the report indirectly makes the case for 'proper' market studies, which the government has finally agreed to. That's no criticism of the people who carried out this report - Cognitus, Grant Thornton, and the NZIER, all capable and experienced folks. But it's frankly impossible to get to the bottom of anything without information-gathering powers that the report authors didn't have (but the Commerce Commission likely will when it gets going with its own reports). They got a lot of cooperation from the petrol companies, but that only takes you so far. Nor were they given the time the Commission would likely have been allowed (inquiry announced February 9, report delivered May 29).

The second is that the terms of reference hobbled the report from the git-go, with their heavy emphasis on short-term trends: "what is the return on average capital each year since 2011?", "What are the annual gross and net margins of each of the major businesses...What trends are apparent since 2011?" (my emphasis).

The report team politely pointed out (p92) that this didn't help:
The study period was also reasonably short – 2011 to 2015 – in an industry that is characterised by long-term pricing cycles. This carried a risk that those long-term trends would not be captured in the data we were using. We have had to bear this in mind when reaching our conclusions.
They did however have the wit to smuggle in one longer-term chart on the performance of the petrol industry (there are two other long series graphs in the report, on the world real oil price, and the link between the world price and the domestic price, but other than this one I'm about to show you, nothing on the local industry itself). Here it is, from page 1 of the report. It splits the petrol price into the petrol companies' costs (lighter blue) and their margins (dark blue) since 2004, expressed in real terms (2016 prices).

You'll notice that margins virtually vanished in the very difficult GFC period, and it gets you wondering about a cyclical explanation of petrol margins. Perhaps the petrol companies do well (like many other companies) when times are good (like now), but have to sharpen their pricing pencils when household and business budgets are stretched? Wouldn't it be nice to see a longer picture, over more cycles than just the GFC and the current expansion?

And there is one. On MBIE's own site. Here it is.

There's quite a plausible case that the strength of the business cycle is part of the explanation for variations in petrol margins. You can see the fall in margins after the '87 sharemarket crash (possibly conflated with anticipation of imminent deregulation), low margins again in the '90-'91 recession, better margins in the good years in the early to mid 1990s, and the sustained rise in the current expansion.

It's not a complete explanation. There was a sustained fall in margins in the good years of the early 2000s, so cycles can't be the full answer: there must be other longer-term trends going on, too. I'd be minded to dig out the HHI index for the industry, for example, as one of my first candidates to get added to the regression.

But either way the longer sweep of history clearly has something powerful to say about the state of margins at any single point in time: would there even have been an inquiry, if someone had pointed out that current margins are pretty much the same as they were twenty years ago? Quarantining the scope of the report to the last few years was a poor decision which prevented the report from developing the full value it might have had.

Finally, the report sensibly says that even if you harbour dark thoughts about what's going on, you'd want to be mighty careful about whatever regulatory sticks and carrots you reach for. Requiring some greater price transparency, for example, sounds good, but can backfire (page 87, emphasis in original):
While at first glance this type of regulation seems attractive and pro-consumer, it is a double edged-sword, although the second edge is not obvious. While these schemes give greater information to consumers, they give the same information to suppliers. That is, they increase the ability of suppliers to coordinate their prices.
One study of the German scheme found that prices for petrol increased by between 1.2 and 3.3 euro cents per litre as a result of the scheme, while the price of diesel increased by about 2 cents per litre.
And in general, the report says (p90)
Overseas experience suggests that even the most well-intended regulations can lead to perverse outcomes and unintended consequences.
Which is something else that the long-run MBIE graph shows: deregulation put a permanent dent in petrol margins. They've never returned to the regulation era levels. And it's a reminder, for those still minded to revisit the reforms of the 1984-90 Labour government, that these days regulation is at least intended to benefit the consumer. Before 1984, it was designed to enrich the producer.

Friday, 30 June 2017

MBIE's slick new collection of data

I'd headed over to MBIE's website to see if that inquiry into petrol stations had come out yet - it hadn't - but by happy accident I found that MBIE had come out with something else, its new Labour Market Dashboard. The announcement is here and the thing itself here.

It's a pretty impressive effort at gathering and displaying a variety of labour market data into the one spot. Here's just one interesting graph as a sampler: it shows the different ways companies recruit (there's another one showing it by firm size rather than by industry). It's in the 'Workplace' section, below the health and safety graphs.

Isn't it fascinating? Top of the list is 'Word of mouth', which in a small, informal, high-trust economy doesn't surprise me at all. And as in so many other areas, the internet has changed everything - TradeMe and Seek are now more commonly used than the traditional print job ads. Plus there's a useful self-help lesson here too: 'Candidate approaching us' is the fourth most common way jobs get filled.

I've wondered for a while whether we're any good at 'active labour market policies', programmes designed to make the labour market match up people better, usually with a focus on getting unemployed people back into the game. I'm leaning towards the view that we aren't, and the low prevalence of jobs sourced through Work & Income rather points that way. Not that other potential allies in the fight show up much better: on this showing, there are few school or university offices getting on the blower to employers and saying, "Listen, I've got this student who'd be just the right person for you".

I don't know who did the donkey work on the software, but it's pretty slick. I especially liked the automatic rescaling of the Y axis when you replace one X variable with another, which might be small beer to you pro dataviz types but wowed me (if there's a way to do it in Excel, I've not found it). And yes, whoever the uncredited developer is, I did notice your 'mbienz.shinyapps' heading for the site.

MBIE is looking for feedback. I've suggested the site could carry the unionisation data that the HLFS is now picking up, and I've just also had the thought it would be interesting to see the distribution of people on the minimum wage. You'll have your own ideas: why not help out this useful source and get in touch, the e-mail address is

Just  noticed that this is the second nice thing I've written about MBIE this week. We'll be picking out curtains next.

Thursday, 29 June 2017

Where is the market?

What's the geographical extent of a market? And why should we care? And why am I writing about it?

Usually the geographical dimension is a no-brainer: in the case of petrol stations, for example, the Commerce Commission found in its Z / Chevron decision that "the evidence we have viewed suggests that in general the greatest competitive threat is from nearby service stations...The appropriate geographic market differs for each location. On a conservative basis, we have used a 2km radius as a starting point to identify problem areas" (paras 132-3).

In its NZME / Fairfax authorisation the Commission found there were ten separate geographical markets for local newspapers that would be affected by the proposed merger, but a national market for the reach of internet news sites: "as both NZME’s website and Fairfax’s website are available and published nationwide, it is appropriate to consider the competition impacts of the proposed a national level" (para 286).

All very reasonable, all pretty obvious. And you'd think the geographical dimension of a market would usually be one of the less controversial and easier bits of the puzzle.

Why do we care? Two reasons, one economic, one legal. The economic one is that it doesn't matter if a petrol station in Mairangi Bay merges with one in Manurewa. There'll be no competitive effect. And the legal one is that the Commerce Act applies (my emphasis) to a "market in New Zealand": if a market isn't in New Zealand, the Act can't apply to it.

But here's a hypothetical question for you.

Suppose widget manufacturers in New Zealand use specialist widget-moulders made only in Germany. The moulders contain electronic components which need a rare earth, widgium, found only in Zaire. Nobody in New Zealand buys raw widgium. Is there a market in New Zealand for widgium?

Your first reaction could well be, no there isn't. There's certainly no one on the supply side of the market based in New Zealand. On the demand side, Kiwi companies could e-mail Kinshasa, and order some widgium direct, and in that case there would be a market in both Zaire and New Zealand, but they don't, and so there isn't.

But would it change your mind if the Zairean mining companies advertised to the widget makers in New Zealand, saying moulders containing their particular grade of widgium were better than the other guys' (a  bit like those 'Intel inside' stickers on PCs)? What if the local widget makers make up a significant proportion of the global demand (via the moulder manufacturers) for widgium, such that variations in the local moulder demand from widget makers affect the prices the widgium miners get - doesn't that make New Zealand part of the widgium market?

And the reason I raise it is that we may, finally, have had the last word in judicial guidance on how to think about it. It came earlier this month in this case in the Australian High Court (their Supreme Court), and it was (I hope) the last act in the long running air cargo price-fixing cases. And by long running, I mean long running: the events go back to the early 2000s. Plus we traversed exactly the same set of issues, on air cargo services into New Zealand, in our High Court back in 2011: the case is helpfully available here on the Commerce Commission's website.

Hence the analogy: the widget-makers are importers, the moulder makers are airlines, the widgium miners are freight forwarders, and Zaire is the hinterland of various airports in Europe and Asia. Airlines, charged with putting the fix in over various components of the air cargo price (such as fuel surcharges), had said that the only place you can get air cargo services from (say) Frankfurt to Sydney or Auckland is Frankfurt. No market in Australia or New Zealand. End of story.

It didn't, ahem, fly as an argument in our High Court. Three expert economists had backed the airlines' view, two the Commission's contrary view that there was a market in New Zealand. The bench could see the airline economists' argument: the economists had given widgium-style analogies and the court said at [145]
On the basis of such examples, the argument that the market could not extend beyond the place of origin had persuasive force. The way they put it, the market was defined at the moment when the competition for the particular service concluded. In the case of air cargo services that would be when the waybill [the key bit of transaction documentation] was entered into by the origin freight forwarder and the airline.
But it ultimately decided at [182] that
we do not accept the airlines' argument that the geographic location of the market is where supplier/customer transactions for the airline services are physically initiated and agreed. It is not limited to the "factory gate" or in this case the "cargo door"...It extends beyond the cargo door to the geographic locations of the persons whose demands will drive the place and terms of the end contract of carriage. The exporters and importers in those circumstances do not just constitute general upstream or downstream demand. They are the parties whose decisions as to what they want, and how and when they need it, directly drive the service provided by the airlines, with the freight forwarders as intermediary parties.
Oddly, none of this was drawn to the attention of the Aussie judges, who reasoned the whole thing out again for themselves from first principles. They too had seen views all over the place: the first hearing went the airlines' way, the full Federal Court split 2 - 1 in favour of the ACCC over the airlines. As the judgement says at [14]
Reconciling the abstract notion of a market with the concrete notion of location, so that they work coherently, presents something of a challenge. Particularly is this so because "competition" describes a process rather than a situation
In the event the High Court broke 5 - 0 against the airlines. Key bits were, at [32]
The circumstance that the demand from Australian shippers was usually articulated to suppliers in Hong Kong by freight forwarders does not deny that, as a matter of commerce, the interplay of the forces of supply and demand encompassed Australia. That this was so is confirmed by the fact that, as the primary judge found, the airlines pursued sales and marketing strategies in Australia promoting their services to shippers in competition for orders to provide freight for their cargo
 and, at [109]
There were large or substantial shippers in Australia. Those large shippers were regarded by the airlines as not only a potential source of demand, but the ultimate source of demand, for their supply of the air cargo services from ports in Asia to ports in Australia. Certain shippers had particular preferences and were able to influence the choice of airline and flight. As a result, the issue of which airline to use need not have arisen at the port of origin; the decision of the large shippers in Australia was likely to be made in Australia.
In competition economics, you can never say never - you've no sooner tacked down one bit of the carpet than it lifts up in another corner - but with a bit of luck none of us will ever again have to spend too much time over the geographic reach of a market.

Tuesday, 27 June 2017

Very good news from MBIE

I'd just got off the plane from Dunedin and turned on the phone and there it was in my inbox - the press release from Jacqui Dean, the Commerce and Consumer Affairs Minister, saying that the Commerce Commission will be able to conduct proactive 'market studies' and suss out any potential competition issues in the economy.

I'm delighted. Various groups have been banging on about this for the past few years - the Productivity Commission, me on multiple occasions (if you're a competition wonk, search this blog for 'market studies'), the Commerce Commission itself - and it's good to see MBIE took the case on board. It's clearly the right thing to do: it brings us into line with best practice in most developed countries, and remedies some policy absurdities. There is the obvious nonsense that a competition authority cannot investigate the state of competition. But perhaps the worst one was that one part of the Commerce Commission is required to report on the state of affairs in telco markets - which it most recently did this month, when it found that regulatory cuts to fixed line prices were indeed passed on to consumers rather than trousered by your internet service provider - while the rest of the Commission is forbidden to look at anything else.

So full marks to the Minister and to MBIE for implementing this sensible reform. I hope it won't take too much gloss off the praise if I say that the policy development process took too long for what was at the lay down misère end of the policy spectrum. But we're there now, and that's what matters: as the release said, the change will enhance competition.

The press release also said that 'cease and desist' orders are getting the chop. I didn't have a strong opinion on this: I sympathised with the initial intent of the things, which were meant to be a quick way to stop anti-competitive harm until the full pitched battle took place in the courts later on. There's a policy development lesson here, too: the original 'cheap and quick' design got overloaded with so many checks and balances that the whole thing became a non-starter as a practical option. If you want something quick and simple, then make it quick and simple.

The other big news is that reform of our 'abuse of market power' legislation (section 36 of the Commerce Act) has been kicked down the road; as the press release said, "While the consultation process has demonstrated that Section 36 does not work perfectly for some types of conduct, it is not yet clear whether an alternative test would benefit competition or consumers. Officials will continue to look into this and will report back in mid-2018 before decisions are made regarding section 36".

While I'm a tad disappointed that the Minister didn't go the whole hog and change s36, too, I'm actually not that surprised by the punt for touch. It's a complex decision, with decent arguments on both sides - though better ones on the side for change - and even the Aussies, who had their big 'Harper' review of competition policy, also took two bites at the cherry, with the Harper review followed by a separate consultation on their equivalent of our s36. And it's politically hard, too, as the Big End of Town tends not be look too kindly at the most likely alternative to our current arrangements.

But at least the debate goes on - I hope the "officials will continue to look into this" bit will allow for some further input from those involved in the debate - and mid 2018 isn't too long to wait. Though frankly if the Aussie Parliament signs off on the 'effects test' reform to their Act, we would have very few options left other than to follow them. Quite apart from the desirability of trans-Tasman standardisation where appropriate (and I think it would be in this case), standing pat with our current legislative wording and case law would leave us all alone in the western world with an idiosyncratic law of our own that's incapable of controlling any Six Hundred Pound Gorillas that go rogue.

Wednesday, 21 June 2017

Bums on diggers

The other day I was poring over the NZIER's latest compilation of consensus forecasts - an invaluable resource from many perspectives, not least for establishing the base scenario underpinning current financial market pricing - and I came across something really interesting*, which I've highlighted in the table below. It's the one that helpfully shows not only the consensus expectation, but also the high and low stabs at each variable.

That's a pretty remarkable range of views on the outlook for housebuilding. At one extreme you've got a scenario where - I'm abstracting here, but I think it's okay - the wind-down of the Canterbury rebuild will outweigh new housing starts in Auckland, detracting from overall GDP, while at the other end the Auckland market will go gangbusters, growing far more than Canterbury will contract, and boosting GDP.

To put some numerical perspective on it, the cumulative difference between the bullish and bearish housebuilding scenarios is $4.9 billion by March '20, which is equivalent to 2.1% of our current annual GDP. That's the difference between an expansion that's vigorous enough to keep the unemployment rate trending down, and one that would see it drift back up again.

If we assume that the wind-down in Canterbury is the relatively predictable moving part, then much of the forecast uncertainty boils down to differing views about the likely strength of house construction in Auckland. Presumably the bearish view is based on either low starts to begin with, or capacity constraints of one kind or another (labour, land, planning chokepoints) preventing potentially higher numbers of starts from getting underway.

And then this morning I saw MBIE has just published the latest vacancies data. Here it is, showing vacancies by occupation (there's a similar pattern by skill level). There's strong and rapidly increasing demand for the occupations you'd likely be looking for on the building site.

It could be that employers are having no trouble filling these vacancies: all we know for sure is that the hiring signs are out, and we don't know whether they're actually finding the people they're advertising for. And so far the Auckland numbers aren't flashing red lights: as the table below shows, Auckland is in the middle of the pack for year on year increases in vacancies.

It's also encouraging (although it was a few months back now) that the NZIER's March quarter Quarterly Survey of Business Opinion found that
Building a continued easing in the shortage of unskilled labour, although skilled labour remains very difficult to find. With the surge in net migration driven by an increase in the numbers of people coming in on work visas in the trades profession, this is helping to alleviate some of the labour shortages as construction activity continues to grow.
Though the QSBO can be read different ways: as the Reserve Bank put it in its latest Monetary Policy Statement (p21)
As suggested by the March Quarterly Survey of Business Opinion (QSBO), capacity constraints are tightening. Firms are reporting labour shortages and, more recently, some increased difficulty in obtaining finance. This appears to be related to the tightening in bank lending standards for residential property development and pressures created by rising construction costs
My instinct is that capacity constraints in Auckland are likely to be a worry. I'm not temperamentally inclined to restrict immigration in the first place, but if people are minded to, they ought to be careful about the risk of impeding the housing build we need to do, and the equally necessary infrastructure build, which calls on much the same labour force skills.

The Labour Party in its latest immigration policy at least had the wit, albeit in a clunky Gordon Brownish micromanagement way, to realise there's a potential issue here. It proposed that
Residential construction firms could hire a skilled tradesperson on a three-year work visa without having to meet the Labour Market Test if they pay a living wage and take on an apprentice for each overseas worker they hire. The number of places will be limited to 1,000 to 1,500 at a given time, which we expect will be additional to the construction work visas issued under the existing rules.
At the moment, I wouldn't give two hoots about Labour Market Tests and apprenticeship quotas. If there's an Irish lad on his gap year after secondary school, or anybody else prepared to get the roof on the house or pour the cement on a road, bring it on.

*Bearing in mind that this is an economist's idea of  'interesting'

Friday, 16 June 2017

Three cheers for the OECD

Some people wonder about the point of the OECD: an expensive talking shop? A rich countries' club? A hand-wringing observer on the sidelines? I'm generally more positive: lots of good ideas and solid research come out of Paris, even if member governments don't always pay them the attention they should.

Which even the OECD itself recognises: here, for example, is a rather sad graph from the handout that came with the OECD's latest Economic Outlook, which looks at how many of the growth-enhancing reforms the OECD has suggested that countries should undertake have actually been carried out.

Conversely, governments can sometimes smuggle policy ideas into the OECD (and the IMF, and other institutions) and can then give themselves the protective cover of "See? This isn't me and my political agenda, this is the international experts talking".

But in any event, I was delighted to see the OECD (prompted or otherwise) picking up on some good ideas about improvements to our competition policy. They're in the OECD's latest Economist Survey of New Zealand, which you can read online here.

First, they've endorsed the idea of the Commerce Commission being able to conduct proactive "market studies" in a well-designed way. As they put it
market studies...would help markets work better, especially when obstacles and distortions to competition are not caused by competition law violations...Clear definition of the purpose and goals of market studies, the involvement of stakeholders, adequate funding and the capacity to demand information (including confidential information) will be important to drive the success of this initiative (p105)
I've been banging on about this for the last couple of years (here and here and here and...) as has the likes of our Productivity Commission. This is an idea that's obvious, simple, desirable, cheap, best practice, and well-canvassed (MBIE's done an exhaustive tyre-kicking consultation), and it's high time for MBIE Minister Simon Bridges to fire the starting gun.

The OECD has also had something to say about our "abuse of market power" legislation (the vexed section 36 of our Commerce Act). It's a bit disingenuous of the OECD to say "The legislative treatment of firms with market power should be reviewed" (p106), since they must know that MBIE's tyre-kicking has included a review of s36: they probably mean it more pejoratively, with a heavy emphasis on the should. In any case they go on to say
Currently, New Zealand's (and Australia's) treatment of firms with market power is unusual. Firms are prohibited from taking advantage of market power only if they are doing so for the purpose of restricting entry, preventing or deterring competitive conduct or eliminating a competitor. Framing the law around intent can be problematic as proving the purpose of commercial conduct has proven difficult for competition regulators. In Australia amending legislation has been drafted to add a mechanism that brings firms under scrutiny based on the effect of commercial conduct on competition (an "effects test") (p106)
There must have been a very funny backroom editorial debate before they settled on our "unusual" regime: "unorthodox" and "idiosyncratic" must have been plausible contenders, but however you phrase it, we're in a policy backwater of our own, and we need to get out of it.

This isn't, to be fair, as much of a walk in the park as the case for market studies: every competition policy regime struggles with these issues. But if the general tone of the OECD's advice is, go the Aussie route with their 'Harper' amendments, I'm fully behind them, for reasons I've also been pushing over the years (especially here, but also here and here and...). Another one for Minister Bridges to put to bed. And he might as well get on with it, as we'd be better off with the Aussie scheme than the European one, which we might end up having to consider if we're serious about the proposed NZ - EU free trade agreement.

There's other good competition stuff in the OECD's report. It says
Other actions to support competition include passing the Commerce (Cartels and Other Matters) Amendment Bill, which would clarify the scope of prohibited cartel behaviour and remove exemptions from the Commerce Act that allow price fixing in international shipping. As argued in previous Surveys, the exemption from Commerce Act provisions for airlines under the Civil Aviation Act should also be revoked (pp105-6)
Totally correct. Why as a trading nation we ever thought it would be a good idea to hobble ourselves with self-inflicted impediments to our freight and tourism is beyond me. It's archaic. Archaic and benign, I quite like: Latin, organ music, stamp collecting. Archaic, inefficient, and anti-competitive, not so much.

Finally, they've got a shopping list of ideas around the Commerce Commission itself, all of which look sensible to me. They've repeated, for example, their previous advice to have "periodic independent assessments of Commerce Commission decisions" (p106). The Commission has been quite good at doing its own, even though some folks (not me) believe it's a waste of space: they say, you can't easily see what would have happened, absent the Commission's decision. It's nonetheless worth attempting, and making it independent would be an improvement.

And they've got various other good governance ideas. "There are no limits", they say on p106, "on reappointment of Commissioners, which is contrary to the OECD's best practice principles. Continuity and institutional memory would be better served through staggered terms for Commissioners and the Chief Executive". As someone who served an, um, unusually long term, I'd have hated it.

But that is why it's such a good idea.

Tuesday, 13 June 2017

The future of the telco regulatory regime

Late last week Simon Bridges, the Communications Minister, reappointed Stephen Gale for a three-year term as Telecommunications Commissioner. It's a good move: like his two predecessors, Douglas Webb and Ross Patterson, Stephen's capable, intelligent and congenial, and - belatedly - a bit of continuity could go a long way.

We've also got a clearer idea of the regulatory agenda Stephen will manage: earlier the Minister had announced the final decisions on reform of our current telco regulation regime and included a helpful Q&A thingie for the non-obsessed. True telco tragics can read the detailed Cabinet paper.

A lot of the agenda had been signalled from afar - you can follow the trail here - and there have been no major last minute surprises. We've known for a while, for example, that from 2020 Chorus and the other companies rolling out fibre networks will  be regulated as utilities, using the same sort of rate-of-return 'building blocks' regulation that has been applied to electricity lines businesses under Part 4 of the Commerce Act.

Can't say I'm enthralled by the form of regulation: it's a clunky and expensive 1950s process, and you'd think we'd have been better off with something off a more modern 'incentive regulation' menu. And as a side effect we're going to get another process where the Commission (as it currently does for Transpower) will need to approve new investments going into the regulated asset base.

I can see the rationale as an anti-gold-plating device, but government agencies choosing which private sector investment projects get the go-ahead is a bit on the medieval side for me, and is another argument for something more hands-off, with a greater role for Chorus (and others) wearing more of the downside but potentially keeping more of the winnings. But here we are. At least we won't have to reinvent the wheel as we've already given the Part 4 process a thorough going over in the courts, and if you're going to go the rate of return route, the Commission's way of going about it is as good as any.

But rate of return regulation aside, there's quite a lot to like in this policy package. There's a useful focus on rolling back regulation when it's no longer needed, most obviously deregulation of the Chorus copper network in areas where fibre has been rolled out, but also more generally. As an earlier 2016 Cabinet paper had said (reproduced in para 73 of Appendix 1 of this latest Cabinet paper)
Another important regulatory design principle is to provide for active deregulation where appropriate. I propose that the Commission be required to review whether any geographic area, service, asset or market should be deregulated prior to each regulatory reset. This would include looking at whether any competition has emerged for rural copper services such that they could be deregulated
Oddly, though, the current requirement  in s157AA to periodically revisit the Telco Act itself  has been dropped. I'm no fan of makework policy analysis, but I do wonder whether the package should have included an ongoing requirement to review the telco regime from time to time.

The two hot spots that Stephen Gale and his team will have to deal with are the wholesale mobile market, and the bunch of issues around service quality and customer complaints.

On the mobile side, there's no knock-out evidence that the wholesale mobile market isn't working as well as it might: the low level of 'MVNOs' (mobile virtual network operators, who stick their retail brand on a wholesale input they get from the big guys) is suggestive, but by no means definitive. If there are issues, the sticky points appear to be the efficacy or otherwise of colocation and roaming agreements, and the Commission is going to get a more streamlined process for more effective regulation if needs be. Currently colocation is a 'specified' service, which means that the non-price elements are set by the Commission, but it could be tightened up a notch to 'designated', which would also set the price.

The Minister said that he will "be writing to the Commission requesting that they undertake a study of the wholesale mobile market". Good. But that yet again underlines how stupid our current arrangements are on what the Commission can or cannot look at. The Telecommunications Commissioner (who is part of the Commission) must report annually on the state of the telco market. And the Minister (as he's just said he's going to) can also ask him to look at particular telco issues. But the rest of the Commission can't take a proactive look at anything else. The sooner this nonsense collapses under the weight of its own absurdity, the better.

The other hot spot is the sector's poor customer record, and that's something senior management in the industry should have thought harder about earlier on: when you have papers going to Cabinet pointing out that "The telecommunications sector generates more consumer complaints than any other sector in New Zealand", you're positively inviting the government to wade into your industry. As it has: the Commission will start reporting on the level of quality (yet another bizarre example of how it's allowed to look at some things but not others), will have the power to devise and impose codes of conduct, and will periodically review how the industry's own Telecommunications Disputes Resolution Scheme (TDRS) is travelling, with the explicit threat that it will be replaced by a new body if it doesn't hit the spot.

The Cabinet paper says (para 8) that "the current regulatory settings...are over-reliant on industry self-regulation". Maybe that's right in this case, and in any event self-regulation has been falling out of favour as a a consumer protection policy option. Personally I think it's the first option that should be on the table, not least because if there are problems, the onus for fixing them should lie on the problem-makers in the first instance. If that falls over, then of course tougher measures should follow, but we should try and make the light-touch options work first. Hopefully the TDRS will get the message.

Quite apart for doing a better job for their customers, I also think industry sectors ought to get their self-regulatory act together in their own enlightened self-interest. If, for example, the various parties in the electricity sector hadn't feuded among themselves over the shape of an industry-led Electricity Governance Board, they wouldn't have had the price control provisions of Part 4 of the Commerce Act and an Electricity Authority foisted on them.

It's only a minor detail in the whole package, but I was irritated by the flimsy rationale for hiding the increased costs the Commission would face from its new consumer roles. It can't be a huge or sensitive number - might be perhaps a couple of million dollars a year, chickenfeed in the greater fiscal scheme of things - but the dollar number has been redacted from the Cabinet paper.  The excuse is the section of the OIA that says hiding it is "necessary to..maintain the constitutional conventions for the time being which protect...the confidentiality of advice tendered by Ministers of the Crown and officials", which translates into "it's being kept secret because if we told you what we said it wouldn't be secret anymore". Give us a break: we ought to be able to see the cost of what's been proposed.

Thursday, 1 June 2017


All over New Zealand there are High Court judges cowering in corners, whimpering "please don't let it be me, please don't let it be me..."

Because someone's going to get lumbered with the Sky TV / Vodafone appeal against the Commerce Commission*, while someone else is going to draw the short straw for the NZME / Fairfax appeal. You can imagine the goss over the G&Ts in the beaks' bar: "There'll be economists. And counterfactuals. And TSPs and two-sided platforms and a UFB. Why me?"

The Skyfone one shouldn't be too bad. It's essentially a "yes it is", "no it isn't" kind of argument: how could the Commission have drawn the conclusions it did from the evidence it considered? However it goes, I doubt that it's going set any big precedents for how the Commission interprets the Commerce Act.

There is one line of argument that might say something about how the Commission should go about assessing the "likelihood" of counterfactuals. For those fortunate enough not to follow these kinds of cases, the Commission assesses the effect of things like a Sky TV / Vodafone merger by comparing it with what would have happened in any event otherwise (the 'counterfactual'). Sometimes that's not clear: there might be several different but plausible things that might happen. And in that case, as para 2.32 of the Commission's  Merger and Acquisitions Guidelines says, my italics,
If competition would be substantially lessened in the scenario with the merger compared to any one of those likely states of competition without the merger, then the merger will have a likely effect of substantially lessening competition.
The Skyfone appeal argues (at 2(I)(iv) on pp7-8) that the Commission
Failed to stand back and consider whether each of the preconditions for the Commission’s theory of harm would all be likely to occur – which would have led the Commission to conclude that the cumulative probability of these preconditions occurring is remote.
That's a plausible runner about the likelihood of the counterfactual world, and we'll see how it is received. Overall though I'd say the appeal will face heavy going: as a general rule arguing that an expert tribunal has ballsed up its day job isn't the easiest thing to push uphill. But everyone's entitled to have a go, and in Sky TV's case, it's a completely rational thing to do. Sky TV lost some $220 million in market value after the merger decline was announced (share price from $4.35 to $3.78, times 389.1 million shares, equals $221.8 million). That's worth spending quite a bit, even on a long shot, to regain.

The NZME / Fairfax one will be trickier. It does have the same "yes it is", "no it isn't" components that Skyfone has, particularly around the issue of what markets are affected, but it could also lead to new case law on the Commerce Act, and it also questions the Commission's processes.

On the factual bunfight, the Commission said, for example in para 628 of its final decision, that there were three affected markets: online New Zealand news, Sunday newspapers, and community newspapers. The appeal says that each of these should have specifically been analysed as a two-sided market (readers on one side of each platform, advertisers on the other), and that on a proper view of the evidence there would be no loss of competition in any of them. The appeal also runs an alternative line that there might be a single two-sided market for everything: I wouldn't bet the house on that one, guys.

The appeal raises some wider issues. The big one is what should be counted as benefits or detriments, and how. The Commission had said that the big downside would be the loss of editorial diversity, a 'loss of plurality' from two big media groups merging. I had no trouble with that: as I argued here, a loss of product range options can clearly be seen as a consumer detriment. And even if it couldn't, I'm with the Commission when it said (at X39, my emphasis) that "it is clear from previous legal cases and common sense that we can and should take all the consequences of the merger - positive and negative - into account". But it didn't help (although what it said was in my view absolutely right) that the Commission looked as if it was philosophising on what is or is not an essential bit of the social infrastructure of a democracy.

That's been seized on in the appeal, where para 16 argues that the Commission must stick to the economics, and that (as case law puts it) it mustn't go in for "pure speculation" or "mere intuition". Para 17 goes on to say that even if the Commission is allowed to count things like plurality, it didn't do it right, and that other benefits (mostly cost savings) outweighed any plurality losses.

It doesn't throw in (as I would have) that the Commission didn't have any go at quantifying what the plurality loss might look like: the Commission said at para 1654 that "Such effects are unable to be quantified". And it would have been a heroic exercise, yes, we know that. But absent some numbers, an appeal could argue, "The Commission says the loss is significant. It says that implicitly it must be more than $200 million, the top end of the potential benefits. But how does it know? For all the Commission knows, the loss could be big, like the Commission says - $150 million maybe - but that would be less than the benefits. So how does it know the loss is more than $200 million?"

There are also some questions around the Commission's processes. Some of them look unfounded: "granting extensive anonymity and confidentiality to a large number of third parties submitting in opposition" doesn't fly for me, on either the facts or the logic. But there's possibly a more substantive point where the appeal says, you sprung a big surprise on us very late in the day about what counterfactual you had in mind. From the outside it's hard to tell exactly what's going on there, though there was a late flurry of correspondence between the Commission and the applicants well after the Commission's conference last December, which was somewhat unusual. Nobody - including the Commission - wants a process that doesn't tickle out all the evidence and give it a fair go, so the court running a health check on how it operates may be quite a good thing.

There's also an "appearance of predetermination" argument. As an article by Nick Grant in the NBR surmises ('NZME, Fairfax 'go full noise' with StuffMe appeal') it might be a complaint about an ill-judged 'StuffME' hashtag the Commission briefly used: not as professional as it should have been, but not a hanging matter, either. I doubt if it was enough to taint the whole proceedings.

We can't see everything - there's a wholly blacked-out bit in paragraph 19(c), for example, in the 'Natural justice and fairness' section of the NZME / Fairfax appeal - but on what we can see, what are the umpires likely to do with these appeals?

I'll be surprised if I see the Commission trudging back to the pavilion.

*Update July 1 - one of the judges is off the hook. The Skyfone appeal has been flagged away.

Saturday, 27 May 2017

Good books - May 2017

Leading off with economics, George Mason University professor Tyler Cowen's The Complacent Class: The Self-Defeating Quest for the American Dream (with its dedication "To the rebel in each of us") argues that America has become more static and less risk-taking, pointing  for example (on p177) to "lower residential mobility, less building in America's most productive cities, more segregation by income and status, a much greater concern with safety and risk, the coddling of our children, and fewer start-ups and slower growth in living standards, among others", including a reduced willingness and increased inability to undertake grand projects like those of the past (a moon landing, the interstate highway system). He also reckons the current zeitgeist of complacency will have nasty geopolitical results - along Minsky lines, a long period of stability encourages increasing risk-taking, culminating in the GFC in the economic sphere and who knows what in international politics.

I'm not sure what I think about his ideas, though if he's right people should be deeply concerned, in particular, about higher economic and social immobility: for us economic liberals (why, yes I am) high equality of opportunity is one of the bedrocks of a fair - and efficient - society. Could we be going the same way in New Zealand? It's possible: you look at deeply regressive ideas like ever more prevalent, and tighter, school zoning in Auckland, for example, or our inability to progress infrastructure build-out to any defensible timeframe, and you can see aspects of the same issues. In any event, it's very well written and well worth a read.

Not every economist, to put it mildly, writes so well. If you want to improve your own writing style (and want to understand why you should), or you're teaching economics students, who may get little (and possibly no) formal in-faculty communications training, try Deirdre McCloskey's Economical Writing. It's short (only 98 pages including the index), geared to economics examples, spot on in its advice, and (if you've got cash-strapped students), cheap. My copy arrived from The Book Depository for $27.24, delivery included.

In politics, the definitive account to date of the Brexit campaign is Sunday Times political editor Tim Shipman's All Out War: The Full Story of How Brexit Sank Britain's Political Class. It's a big book, and there's a cast of thousands at the beginning to get your head around, but stick with it. It's enormously well informed, and persuasive. One thing I learned is that David Cameron didn't fight the Remain side as hard as he might have, because (a) he thought he was going to win anyway and (b) he was thinking strategically about the embittered and disunited Conservative party he'd have to manage later if everyone had earlier put the boot in hard. Another was that I'd been inclined to blame the European Union for their short-sighted churlishness in not giving Cameron a renegotiation 'win' to wave in front of the UK voters. They're not blameless, but as it happens Cameron never asked for as much as he might have. And finally Cameron himself comes as a decent human being - one of the very few to keep their cool through the dramas of the campaign, even on election night as the shock vote came through - which is more than can be said for practically everyone else involved.

Which leads me to now freelance journalist (and previously with the Daily Mirror and Daily Telegraph) Rosa Prince and her Comrade Corbyn A Very Unlikely Coup: How Jeremy Corbyn stormed to the Labour leadership. Talk about unintended consequences: a Labour electoral system specifically designed to produce a short list of candidates acceptable to the parliamentary Labour party, before going to the wider electorate of unions and members, was subverted to produce the exact opposite. Oddly, at one level, I came away with a somewhat better opinion of Corbyn himself: he's loyal, honest, a hardworking and locally respected constituency MP, and (for the most part) straight up about what he believes in, unlike the trimmers and hedgers he faced in the run-off for leader. But a lot of what he believes in is either misguided or obnoxious: in particular, he strongly believes in "my enemy's enemy is my friend", leading to his support for the likes of the IRA and Hamas.

He's also got one asset that none of the other contenders had, and none of his plausible future rivals have, either: he's paid his dues over decades and decades. No demo was too small, no fund-raiser too insignificant, no campaign too tiny: he turned up for all of them. He's consequently built a devoted, well left of centre, activist supporter base that eats out of his hand, and which got a further big boost from the "three pound vote" feature of the leadership election. My guess is that there's little chance he'll resign if (as seems likely) he loses next month's general election: why would he? His 'Momentum' group has finally succeeded in grabbing control of Labour, where earlier 'entryist' conspiracies had failed. They won't be going away.

We were tweeting each other about something else, and Westpac's acting chief economist Michael Gordon reminded me that I'd never got round to reading Irish Times columnist Fintan O'Toole's Ship of Fools: How Stupidity and Corruption Sank the Celtic Tiger. It does what it says on the tin: it's a devastatingly hard-hitting, and accurate, critique. It perhaps underplays the role of joining the euro, which for already red-hot Ireland meant getting the monetary policy of slow growing Germany (and which helped do for Greece for similar reasons), but is otherwise bang on the mark.

My father used to tell the story of how one Irish MP would find out when constituents were due to receive the old age pension, and would write to them saying, "I've been in touch with the Department, and I'm pleased to be able to tell you that as a result of my inquiry you will get a pension of...". Shabby stuff - but the really shabby thing is that constituents expected MPs to deliver goodies by using 'influence' within the system. In one example in Ship of Fools, a building developer got a biddable politician to change the postal district of his development, so it would be reclassified into a more upmarket area. There are very good reasons for keeping MPs away from micromanagement of personal cases.

In fiction, we've sadly reached the end of the road for Peter Corris's epic Hardy series of Australian private eye stories, with the 42nd and last, Win, Lose or Draw, where Hardy is on the very cold trail of the abducted daughter of a wealthy businessman: she may or may not have been sighted, in very bad company, in Norfolk Island. Corris is flagging it away, after diabetes induced blindness has got too much for him. It's a real shame: the series is one of the classics of the private eye genre.

Joseph Knox's Sirens is a debut novel about police detective Aidan Waits in Manchester, who is called in to help rescue the runaway daughter of an important politician and goes undercover in her drug-running circle. She eventually dies from adulterated heroin as do seven middle class kids at a party (they turn blue). There's vivid detail about drug use and gang wars: one minder is force fed black and white paint, for reasons I'll leave you to discover for yourself. It's a complex plot, maybe almost over complex at the start, but otherwise it's very well written.

Another debut is L S Hilton's Maestra, where a  low on the totem pole woman at a posh art auction house rumbles a crooked art deal, gets fired, but ends up getting her revenge: it  involves a sting on Mafia art dealers (plus a lot else). Violent, with remarkably explicit sex from a female point of view: it ends 'To be continued'. I'm looking forward to the next instalment.

Finally I broke one of my own best rules - don't read private eye books where the private eye has a silly name - but I'm glad I did. George Galbraith, aka J K Rowling, is now up to three in her series about ex-military London private eye Cormoran Strike. Galbraith/Rowling is excellent at characterisation and tension-building: I loved the first, The Cuckoo's Calling; was okay with the second, The Silkworm (which may have elements of a roman à clef in the publishing world), though my wife thinks it's just as good as the first one, so what do I know; but in any event Rowling is back on song in the latest, Career of Evil. I gather there's a fourth on the way. Recommended.

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.