Seeing eye to eye

In my post the other day, about the progress of our latest effort at competition law reform, I noted that the Select Committee dealing with it had reported unanimously supporting a range of law amendments, but apparently not unanimously supporting the overall Bill. 

Turns out that in fact the committee was unanimous about the Bill and the initial statement that it had been passed "by majority" was a mistake by the Committee. Last Thursday it updated the record here and now says: 

"In our final report to the House, we recommended, by majority, that the bill be passed, with all amendments recommended unanimously. This was incorrectly recorded and does not accurately reflect the committee’s resolutions. We wish to correct our recommendation to the following:

The Economic Development, Science and Innovation Committee has examined the Commerce (Promoting Competition and Other Matters) Amendment Bill and recommends that it be passed. We recommend all amendments unanimously".

At one level this is all just technical detail. More substantively, however, it does raise the probability that the unanimous view of the Committee will in fact carry through to the final form of the legislation.

The shape of things to come?

Last month the Economic Development, Science and Innovation Select Committee produced its report on the Commerce (Promoting Competition and Other Matters) Amendment Bill, which "amends the Commerce Act 1986 to modernise and strengthen competition settings". The marked-up Bill from the Committee, incorporating its report, can be found here. 

In principle the recommendations could be over-ridden by the whole House, and I frankly don't know how often that happens. But my guess is that given that the recommendations were unanimous, a complete overhaul is rather unlikely (that said, the Committee recommended "by majority" rather than unanimously that the Bill be passed, so I may be overdoing the degree of political harmony). In all likelihood, though, I think we have a decent steer on what the ultimate Act will look like.

By and large the Committee endorsed the thrust of the Bill as it stood, though it made a substantial number of amendments to various proposed sections. Only two elements of the Bill were thrown overboard: the proposal to allow the Commerce Commission to carry out market studies of pro-competitive regulation, and the proposal to repeal s46 of the current Act.

Giving the heave-ho to pro-competition market studies wasn't because the Committee didn't like the idea, but rather because it reckoned the existing market studies power in Part 3A of the Act already allows the Commission to do them. And just to be totally clear about it, it proposed incorporating, after the existing s51B(3), a new subsection 3A, "To avoid doubt, the [market study] recommendations may, without limitation, be made for the purpose of (a) reducing regulatory barriers to competition; or (b) the development of regulation to promote competition".

Junking the unnecessary new kind of market study power also dealt to one of its more questionable elements. Originally the Bill would have allowed the Commission to require third parties "(a) to prepare and produce forecasts, forward plans, or other information and provide them to the Commission; and (b) to apply any methodology specified by the Commission in the preparation of forecasts, forward plans, or other information". The Committee didn't like the sound of that, and neither had I in my submission: the Committee asked me about it in my Zoom session. In the end the Committee said that "Some submitters opposed enabling the Commission to compel parties to create new information, such as forecasts, describing it as overly intrusive and inconsistent with established disclosure principles. We are also concerned that this proposed information-gathering power may not be justified".

The other proposal to get the chop was repeal of s46. In the Committee's own words, "Section 46 is one of a number of provisions that provide for exceptions to the application of Part 2 of the Act (Restrictive trade practices). It draws a bright-line boundary by providing that acquisitions of assets of a business or shares are dealt with through the merger regime in Part 3 (Business acquisitions) rather than also being able to be challenged under Part 2 ... A number of submitters argued that repeal of section 46 would expose ordinary merger activity to Part 2 scrutiny, chilling legitimate commercial activity. We recognise that submitters value a clear and statutory boundary. We therefore recommend deleting clause 8 of the bill, to retain section 46".

Otherwise the proposed changes went through, albeit with some amendments. Here are my personal highlights.

There will be a new statutory notification regime to better support collaboration between businesses, and along similar lines the Commerce Commission will be able to grant class exemptions for categories of low-risk conduct, staring with collective bargaining by small firms (the Committee set $3 million in annual revenue per firm as the 'small' criterion) and retail price maintenance. 

The Bill proposes introducing corrective action orders for contravention of Part 2 of the Act (restrictive trade practices). I couldn't agree more. As I said in my submission (p3), "This is a splendid idea and frankly I’m surprised that we all hadn’t thought of it long ago. Fines (the current penalty) are a deterrent and a punishment, but I’m perfectly sure that what consumers would value most is a putting right of the rort they were exposed to". The Committee clarified that private parties, and not just the Commission, will be able to apply for these orders.

The merger control regime is being beefed up in a number of significant ways. 

While there will still be a voluntary merger notification system, the Commission will (if it hears of one) be able to "call in" a merger that might be of concern, and require the parties to suspend it and to hold the businesses separate for 40 working days. 

The concern over "killer" acquisitions - allegedly buying out prospective competitors before they become a real issue for incumbents - is addressed by expanding the definition of a post-merger "substantial lessening of competition" (SLC) to include "creating, strengthening, or entrenching a substantial degree of market power" (I'd guess the 'strengthening' and, especially, 'entrenching' limbs will be doing the heavy lifting). This new SLC definition is in play only for the merger bits of the Act: the Committee said that "We consider that applying the clarification across the Commerce Act [as a whole] may create uncertainty about legitimate competitive responses, because such conduct could be framed as "strengthening" or "entrenching” a firm’s position".

And the concern about "creeping acquisitions" - allegedly where an incumbent quietly hoovers up market influence in successive bite-sized chunks - is addressed by allowing the Commission to look at a new merger in the context of acquisitions over the past three years, and not just from a standalone perspective. The Committee clarified that they can't be any old acquisitions but must involve "the same, substitutable, or otherwise competitive goods or services".

All of these changes can be seen as a toughening up of the merger regime, to prevent anti-competitive mergers sneaking through the cracks. But there was one recommendation that can be thought of as a liberalisation, and that's the proposal to allow the Commission to accept "behavioural undertakings" as part of a merger approval. 

For those new to it, currently (from my submission, p2), "s69A [of the Commerce Act] allows the Commission to accept only one kind of undertaking from an applicant for a merger clearance or authorisation – an undertaking "to dispose of assets or shares specified in the undertaking", i.e. a promise to divest some assets so that a post-merger competitor can acquire them and act as a more effective competitive constraint on the merged entity. The Commission is specifically forbidden in s69A(2) from accepting any other kind of undertaking, even if some other kind of behavioural, rather than divestment, undertaking would solve any competition issues".

"This", I concluded (and a fair few of the folks in the competition game have the same view), "doesn’t make a lot of sense, and isn’t standard international practice". So behavioural undertakings will now be acceptable in principle, and the scope for the Commission to accept them has been widened a bit. They could kick in where, for example, divestments of the scale needed to address competition concerns are simply not reasonably practicable.

And finally there's predatory pricing. which is proposed as a new s36C of the Act and which involves anyone with market power "(a) pricing below Average Variable Cost or Average Avoidable Cost (b) pricing above Average Variable Cost or Average Avoidable Cost but below Long-run Average Incremental Cost or Average Total Cost if the pricing is for an exclusionary purpose", with all these cost  terms defined in the proposed Act. 

I can see why this has been proposed: I'm still ambivalent about its necessity or practicability. We'll see. In any event it may crop up again: the Labour and Green members of the Committee, in a "differing view" at the end of the report, said that "The proposed use of long run average cost as an objective benchmark was consistent with established international competition practice and would have been a small step forward". I read that as saying they would have preferred a cost test that would have led to more prices being found predatory, but if predatory pricing is your main thing, maybe you should read Russell McVeigh's commentary on the Committee's report as they see it as reflecting some debate within the committee about whether to go with predatory pricing or not. 

Those members would also have liked to have seen industry-specific codes of practice brought in - so would I - and also wanted to see "amendments ... that would have provided contractors initiating collective bargaining with a safe harbour from retaliatory conduct by contractees, despite concerns raised during submissions that without such protections the right to collectively bargain may exist in theory but not in practice". So while we are undoubtedly nearer the end of our lengthy and rather slow competition reform journey, there's probably a bit more change still to come.

Unexpectedly critical

This week's Performance Improvement Review (PIR) of the Treasury took me aback. 

I've met many people from Treasury over the years in various contexts, and have a high opinion of them. And while I was aware that in recent years hiring had appeared to downgrade the importance of bringing professional economists on board, in favour of some sort of 'broadening perspective' or 'flexibility' approach, I hadn't noticed any drop-off in quality in the Treasury people I've personally encountered. In some areas I thought Treasury had actually upped its game, notably in starting to engage more with the public about our various fiscal and productivity challenges.

But the PIR told a different story about Treasury as an institution. Despite good work in some areas - including the "public engagement to raise awareness of New Zealand’s long-term fiscal challenges" that I'd noticed for myself - "Nevertheless, the consensus of stakeholders interviewed is that the Treasury’s performance has not consistently met expectations in recent years" (p5).

Here are some examples.

The PIR included ratings of Treasury, across 23 different dimensions, on how prepared it is to up its game (p31). There wasn't a single 'Leading' (the top rating). There were six 'Embedding' (loosely, Good). But by far the most common rating was 'Developing' (loosely, Middling/Adequate), with 16. And there was one outright 'Weak', which, worryingly, was for its effectiveness at one of its core functions, providing economic policy advice. 

And then there was this remarkable level of turnover (the chart below is from p65) - high in outright terms and, significantly, relative to the wider public sector. How could it do well when in the worst year Treasury was having to replace a third of its staff? With people voting so strongly with their feet you have to wonder about both staff management and the longer-term impacts of Treasury's recruitment focus. As the PIR found, "Historically, the Treasury was widely regarded as a high-profile training ground for public sector leaders. Interviewees described it as “the gate you had to get through” and “a real place of debate and challenge that the brightest and best went to”. That is no longer the common perception. Many interviewees questioned how the Treasury could reestablish itself as an employer of choice in a more competitive labour market" (p61).

Recent recruitment, whatever it was meant to achieve, hasn't turned out well. The PIR found (p62) that "A strong theme from interviewees was concern that the Treasury has lost specialist expertise. While the Treasury is aiming for a flexible and agile workforce, external stakeholders in particular were concerned that flexibility and generalism are not yet balanced strongly enough with the depth needed in key areas, pointing to the loss of “wise owls” and thinning commercial and economic depth. Internal interviews reflected this more indirectly, highlighting capability pressure, key-person risk, and the need to rebuild depth in selected areas". In passing I'd note the recurrent criticism of the UK's Treasury, that it over-relies on clever generalists with no subject matter expertise, further aggravated by too-early rotation out of roles which people had just got comfortable with. 

One final and rather sad pair of points. Treasury has a system role in the public sector: it's where agencies go for specialist advice on how best to run their organisations. But Treasury isn't eating its own cooking. When it comes to performance reporting (p57), "The Treasury’s performance and accountability system is still developing and is not yet strong enough to drive improvement or provide clear assurance about results ... In that context, the Treasury is expected to model a coherent and credible approach to performance and accountability itself". The same applied to strategic planning (p50): "The Treasury provides guidance to departments on Strategic Intentions as part of the Public Finance Act performance reporting framework, and would be better placed if it more clearly modelled the clarity it expects from others".

There are pluses. The Treasury Secretary made a brave and useful call to have a PIR team come in. The PIR itself has come up with what look from the outside like plausible diagnoses and has produced a comprehensive list of sensible recommendations (pp6-8 and repeated as Appendix 1, pp73-5). And Treasury itself showed some self-awareness and had already got the ball rolling in the right direction with its own internal change programme.

The PIR didn't prioritise its recommendations, and maybe it's right to try and move ahead on all fronts, but for my money I'd particularly like to see the Recommendation 3 bullet points addressed early in the piece. They're about enhancing the impact of Treasury's economic policy advice. 

For one, that's the area rated worst at the moment. And for another, we're never going to get a lot of economic progress if an important national direction setter isn't pulling its weight. It's a bit strange, for example, that although we've been talking about New Zealand's low productivity growth for decades, we're still at the stage of a recommendation to "Refresh the Treasury’s diagnosis for unlocking higher rates of productivity growth (e.g. integrating the potential of AI) and maintain a set of actionable ideas grounded in commercial realities for engagement with Ministers as opportunity presents". 

Memo to whoever is the next Opposition finance spokesperson: diarise a Parliamentary Question for a year's time and let's find out if we're getting the policy impact progress the PIR and the rest of us want to see.