Snapshot

• The Government’s response to the Harper Review was released today.
• There will be an overall simplification of the competition law provisions of the CCA, with a focus on the cartel conduct provisions.
• The price signalling prohibitions in the CCA will be removed, to be replaced with a new prohibition on anti-competitive concerted practices.
• The controversial proposed changes to section 46 of the CCA (misuse of market power) have been hived off and will be dealt with in a separate discussion paper.
• The ACCC will be given additional powers to:

-   authorise mergers, subject to review by the Australian Competition Tribunal;

-   grant exemptions for conduct that would otherwise contravene the competition prohibitions of the CCA; and

-   grant block exemptions in relation to particular types of conduct that could otherwise be authorised individually.

• In exercising many of its powers, the ACCC will not be limited to applying a competition test, but may also assess whether the public benefit of a proposed merger or proposed conduct will outweigh any detriment.
• The third line forcing provisions of the CCA will become subject to a competition test.
• The Productivity Commission’s recommendations in relation to the National Access Regime (made in 2013) have been accepted over those made by the Harper panel in a response to the Productivity Commission inquiry also released today.
• A national body will be created to oversee progress on competition reform following consultation with the states and territories.

Background

On 24 November 2015, the Commonwealth Government released its formal response to the Competition Policy Review chaired by Professor Ian Harper (Harper Review).  The Harper Review released its Final Report on 31 March 2015, and the Government’s response had been expected by September or October but was interrupted by the leadership challenge which saw former Prime Minister Tony Abbott replaced by Malcolm Turnbull and the former Minister for Small Business Bruce Billson, who had instigated and championed the Harper Review, removed from the Ministry.

Bruce Billson announced his retirement from politics shortly before the Government’s response was released, and the response represents in some ways a closing – and in other ways a continuation – of the Billson era.  As Small Business Minister, Billson had a particular interest in reform to the section 46 prohibition on misuse of market power, and somewhat less enthusiasm for persuading the States and Territories to coordinate in broader microeconomic reforms in the mould of the Hilmer reforms 20 years ago.  By contrast, the new Treasurer, Scott Morrison, who now has responsibility for competition policy, quickly embraced the opportunity to work with the States and Territories to push for broader reform, while expressing disappointment that the section 46 debate had distracted from the 55 other recommendations of the Harper Review.

The Government’s response reflects this shift in emphasis.  It supports in full 39 of the Harper recommendations, including those relating to competition in human services, road transport, planning and zoning, retail trading hours and competitive neutrality – noting that some of these are areas of state responsibility – as well as the majority of changes to the Competition and Consumer Act 2010 (CCA).  It supports in part 5 further recommendations, including reform of the National Access Regime in Part IIIA of the CCA and the recommendations relating to intellectual property.  And it “remains open” to the last dozen recommendations, which it will continue to discuss with stakeholders.

Reform of section 46 falls into this last category, and will be the subject of a separate discussion paper to be released in the coming weeks.  This will set out a range of alternatives that span the current poles of implementing the Harper recommendation as drafted and leaving section 46 as it is.

Competition policy

The Government’s response to the Harper recommendations on competition policy reinforces its commitment to a new round of Hilmer-style reforms designed to improve national productivity and involving every level of government.  It has committed to negotiate a new competition principles and reform agreement based on the Harper competition principles and has already begun the consultation process.  At the same time, the Government has shown a degree of pragmatism and resisted a number of reforms that might have unintended consequences for itself or for key industries.

1. Human services

Both Professor Harper and the new Treasurer have identified the introduction of competition in health and human services as the likely single richest area of reform for productivity growth.  The Government notes current and recent reforms in this sector, such as the National Disability Insurance Scheme (NDIS), the Vocational Education and Training (VET) system and recently announced reforms to aged care, and proposes a Productivity Commission review of reforms in different jurisdictions that promote principles of choice, competition and contestability.

The proposal to introduce competition in human services was met with some concern during the Harper consultation process, and the Government is likely to tread carefully in this critical area.  The Productivity Commission itself recommended that careful consideration be given in determining whether competition or other policy options are appropriate for the human services sector, and can be expected to deliver a thorough and considered report.

2. Intellectual property

The Government has already referred an inquiry into Australia’s intellectual property arrangements to the Productivity Commission, as recommended by the Harper report.  That inquiry will have particular regard to Australia’s international arrangements, including obligations accepted under trade agreements such as the recently concluded Trans-Pacific Partnership (TPP).

However, the Government has understandably resisted the Harper recommendation for a further review of Government processes for establishing negotiating mandates in relation to the intellectual property provisions of these agreements.  It considers that it already has robust arrangements in place to ensure appropriate levels of transparency while protecting Australia’s negotiating position, as well as processes following signature and before ratification.  It further rejects the Harper recommendation that an independent cost-benefit analysis be undertaken before treaty negotiations are concluded.

The Productivity Commission’s review is likely to assess the net benefits of intellectual property obligations and may well reflect directly or indirectly on the Government’s processes in negotiating these arrangements.

3. Transport

The Harper recommendation to introduce cost-reflective road pricing drew concerns from a broad section of the community – many expressed in strikingly similar terms – and the Government has sensibly committed to accelerating heavy vehicle road reform before investigating the costs, benefits and potential next steps of options to introduce road pricing for all vehicles.

The Government remains open to the Harper recommendation to repeal Part X of the CCA, which provides broad exemptions for liner shipping agreements.  It will work with the ACCC and stakeholders to investigate options for using the ACCC’s new block or class exemption powers to ensure that shipping routes to Australia are reliably and competitively serviced without imposing undue burden on the industry.

The Government is well advanced on coastal shipping reform, which will simplify the process for both Australian and foreign vessels to transport goods domestically around Australia.  It does not plan to change aviation cabotage arrangements, which restrict international airlines from flying domestic routes, noting that it is committed to ensuring that aviation is safe, reliable, efficient and competitive.

4. Unfinished business

A number of the Harper recommendations revive the concerns raised by the Hilmer Review.  The Government supports the renewed recommendations to reform protectionist planning and zoning regulations, retail trading hours, and restrictions on taxi licensing – while noting that these are areas of state responsibility.  It also notes the recommendation to reform restrictive pharmacy ownership and location rules, confirms an independent review to examine those location rules, and encourages States and Territories to consider the ongoing appropriateness of the ownership rules.

5. Competition payments

To help the States and Territories consider these restrictions objectively, the Government notes that it is willing to consider payments for reforms that improve productivity and lead to economic growth.  It recognises the role that incentive payments played in the post-Hilmer reforms – and it is worth noting that reform quickly stagnated as soon as those payments ceased – while emphasising that payments would only be made on the basis of actual implementation of reforms, and not simply promises.

Competition law

1. Simplification

The Government has responded to complaints about the complexity of the competition law provisions of the CCA, much of which was introduced during the amendments to the old Trade Practices Act 1974 in 2009 and 2011.  It will implement the Harper recommendation to simplify the competition law provisions of the CCA, including by removing overly specific provisions and provisions that are redundant.  As will be discussed below, this will particularly be borne out in amendments to the cartel conduct prohibition.

2. Cartel provisions

It appears that one of the more significant amendments to the CCA will be in relation to the cartel provisions, which are considered both overly complicated and confusing in their current form.  The Government has supported the Harper panel’s recommendation to overhaul these provisions and to provide an exemption for joint ventures.

(a)  Exclusionary provisions

The Government accepts that the prohibition of exclusionary provisions is unnecessary and increases the complexity of the law.  In particular, it has noted that the definition of exclusionary provisions overlaps substantially with the definition of market sharing, a form of cartel conduct.  Accordingly, the prohibition on exclusionary provisions will be removed and the cartel provisions amended to ensure that this form of conduct is covered.

(b)  Joint venture exception

The Government has promised to amend the current exception for joint ventures to provide appropriate exemptions for demonstrable and deliberative joint venture activity.  It will release exposure draft legislation that broadens the joint venture exemption so that it does not limit legitimate commercial transactions, such as through vertical supply arrangements.

(c)  Vertical arrangements exception

The Harper Report also recommends that vertical arrangements be exempted from the cartel provisions and addressed by sections 45 or 47 to the extent that they have the purpose, effect or likely effect of substantially lessening competition.  The Government’s response suggests that the joint venture exception may be broadened to include vertical supply arrangements, which would be a novel expansion.  It may be that a separate exception for vertical arrangements is introduced in the exposure draft as recommended.

3. Price signalling and concerted practices

In a move likely to result in a significant uptick in proceedings commenced by the ACCC, the Government supports the amendment of section 45 of the CCA to capture concerted practices that substantially lessen competition.  The amendment will prohibit persons from engaging in a ‘concerted practice’ that has the purpose, effect or likely effect of substantially lessening competition.  While the Harper report considered that the meaning of “concerted practice” did not require any legislative definition, the exposure draft legislation may well attempt to provide some additional clarity.

Consistent with the overall simplification of the CCA, the current price signalling provisions will be repealed as they will be replaced with this broader prohibition.  They have never been used and are unlikely to be missed.

4. Vertical arrangements

(a) Third line forcing

A significant change to the third line forcing provisions of the CCA has been accepted by the Government, whereby such conduct will be subject to a competition test.  This will bring Australian law in line with comparable international jurisdictions and other provisions of the CCA.

(b) Resale Price Maintenance

By contrast, resale price maintenance will remain prohibited on a per se basis, that is, it will not be subject to a competition test.  It will, however, be notifiable to the ACCC, whereby notified conduct will not be prosecutable.  In addition, an exemption will be developed for RPM conduct between related bodies corporate.

(c) Section 47 simplification

The Harper Report recommends that section 47 be repealed and its role taken over by its revised section 46 and section 45, which together would address conduct by a business with market power, contracts, arrangements, understandings and concerted practices that have the purpose, effect or likely effect of substantially lessening competition.  If not repealed, section 47 should be simplified to improve its legibility and expand its coverage.

The Government response notes the recommendation and will consider simplifying (but apparently not removing) section 47 as part of its broader commitment to simplification of the CCA.  Since the outcome of the section 46 recommendation is not yet known, removing section 47 may well leave a gap in relation to refusals to deal that would substantially lessen competition.

5. Misuse of market power

The most controversial aspect of the Harper Review was its recommendations in respect of the misuse of market power provision of the CCA.  Harper recommended that the primary prohibition should be reframed to prohibit a corporation that has a substantial degree of market power in a market from engaging in conduct if the proposed conduct has the purpose, or would have or be likely to have the effect, of substantially lessening competition in that or any other market.  This recommendation has been strongly opposed by businesses who may be considered to have market power, as it represents a significant broadening of the current provision and has the potential to capture or deter a wide range of pro-competitive conduct.

The Government has noted this recommendation and intends to consult further on options to strengthen the misuse of market power provision.  A discussion paper will be released shortly with submissions due by 12 February 2016.

6. Merger processes

There will be some significant changes to the formal merger process, following the Government’s acceptance of the Harper panel’s recommendation to combine formal clearance with authorisation.

(a) Informal clearance

Whilst the Government has indicated that it believes the informal clearance process is working quickly and efficiently, it has accepted that there should be consultation between the ACCC and business representatives with the objective of delivering more timely decisions in the informal merger review process.

(b) Combined formal clearance and authorisation

In a more dramatic change, the formal merger exemption processes (i.e. formal merger clearance and merger authorisation) will be combined and reformed to remove what Harper saw as unnecessary restrictions.  The Government has accepted the structure proposed by the Harper panel whereby:

• the ACCC will be the decision maker at first instance and be able to authorise a merger if it:

-   does not substantially lessen competition; or

-   would result or be likely to result in a benefit to the public that would outweigh any detriment;

• this process will not be subject to any prescriptive information requirements, but the ACCC will be empowered to require the production of business and market information;
• strict timelines will apply, which can only be extended with the consent of the merger parties;
• decisions of the ACCC to be subject to review by the Australian Competition Tribunal under a process that is also governed by strict timelines; and
• the Tribunal will make its decision based upon the materials that were before the ACCC, but will have the discretion to allow further evidence or to call and question a witness.

A review of past merger decisions should be conducted determine whether the ACCC’s processes were effective and tis assessment borne out by events.

7. Authorisation, notification and block exemptions

In line with Harper and the Government’s overall approach to simplification of the CCA, amendments will be made to the authorisation and notification process to ensure that:

• only a single authorisation application is required for a single business transaction or arrangement;
• the ACCC can grant exemptions from sections 45, 46, 47 and 50 of the CCA; and
• the ACCC can grant ‘block exemption’ in respect of classes of conduct unlikely to raise competition concerns.

In determining whether to grant authorisation or exemption, the ACCC will be able to take into account both competition and public benefit considerations.

8. Private actions

The CCA currently supports the bringing of private actions by allowing a party to proceedings to rely on a finding of fact made by a court in civil penalty proceedings as prima facie evidence of that fact.  The Government has adopted the Harper Review’s recommendation that parties to private proceedings will additionally be able to rely on admissions of fact made by the person against whom the proceedings are brought.  This could, for example, enable parties to private proceedings to rely on evidence given by witnesses during cross-examination in civil penalty proceedings.

9. Access to infrastructure

The Government simultaneously released its response to the 2013 Productivity Commission inquiry into the National Access Regime as part of its response to the Harper Review.  It has accepted the Productivity Commission’s recommendations rather than those made by Harper.  In particular, the Government has accepted the Productivity Commission’s proposed amendments to the declaration criteria, including the following:

• instead of assessing whether access would promote a material increase in competition in at least one market, a comparison will be made of competition with and without access on reasonable terms and conditions through declaration; 
• the test for whether it would be ‘uneconomical’ for anyone to develop another facility will be satisfied where total foreseeable market demand over the declaration period could be met at least cost by the facility; and
• the criterion relating to existing access regimes be replaced with a threshold clause stating that a service cannot be declared if it is subject to a certified access regime.

The Government has additionally supported a number of other changes proposed by the Productivity Commission.  The proposed changes include the introduction of a process whereby relevant parties can apply to the NCC to make a recommendation to the Minister for the revocation of certification and the removal of mandatory submission of electricity and gas regimes for certification.

Competition institutions 

The Harper panel recommended extensive remodelling of Australia’s competition institutions, though its Final Report is more moderate than the Draft Report in this area.  The Government’s response leaves open the possibility of significant changes to the regulatory and policy landscape.

1. Australian Council for Competition Policy

The Government supports the need for a body to oversee progress on competition reform, which would take on a role similar to that of the National Competition Council (NCC) following the Hilmer Report, and has been dubbed the Australian Council for Competition Policy (ACCP) by the Harper panel.  Harper envisages that the ACCP would be a national body with the participation of Commonwealth, State and Territory governments, rather than a Commonwealth body like the NCC.  The Government has agreed to discuss the design, role and mandate of the body with the States and Territories.  This discussion will include the circumstances in which the ACCP can undertake market studies – noting that the ACCC will retain its limited market study powers under Part VIIA.

2. Access and Pricing Regulator

One of the more potentially disruptive of the Harper recommendations was the establishment of an Access and Pricing Regulator (ARP) which would take on the role of the Australian Energy Regulator (AER), which currently sits within the ACCC, as well as the ACCC’s telecommunications access and pricing functions, both the ACCC and the NCC’s functions under the National Access Regime, and the NCC’s powers under the National Gas Law – with other functions to be added as further sectors evolve into national regimes.

The ACCC expressed reservations about this recommendation and the Government simply remains open to it, and will continue discussions on how a new national framework could be developed to promote economic growth, and the most appropriate institutional architecture to support reform.

During the consultation period, a number of participants in regulated industries saw some potential in the recommendation, though in relation to the National Access Regime some were concerned about the NCC’s declaration functions and the ACCC’s arbitration functions being combined in the same body.  The consultation can be expected to canvas these issues further.

3. ACCC governance

The Draft Report’s proposal to enhance the governance structure of the ACCC by adding a board or advisory board was replaced in the Final Report by a recommendation to appoint half of the ACCC’s Commissioners on a part-time basis and remove the requirement for Commissioners with particular sectoral expertise.  It further recommended that the ACCC should report regularly to a broad-based committee of the Parliament, such as the House Standing Committee on Economics – which is the only part of this recommendation supported by the Government.

The Government considered that Commissioners could best consider and take action on the varied and frequent decisions of the ACCC if they operated on a full-time basis.  Not only should the ACCC retain its specific small business Commissioner; it should also be equipped with a specialist agricultural Commissioner to engage in particular issues facing the agricultural sector.

However, the Government did support the recommendation that the ACCC should establish, publish and report against a Media Code of Conduct with the aim of strengthening the perception of the ACCC’s impartiality in enforcing the law.  This was also a recommendation of the Dawson Report, and was also accepted by the government of the day, though if a code of conduct was ever developed by the ACCC it was not made public.