Tuesday, September 22, 2015

If the Abbott government was paralysed by something as simple as the effects test...

By the end, Abbott couldn't govern.

Obliged to respond to a report it had commissioned, his cabinet froze.

Pressuring it from one side were small businesses and the Australian Competition and Consumer Commission, the body charged with protecting consumers and advancing competition. They backed the finding of the Harper competition review, that it had become next to impossible to successfully prosecute big businesses for monstering small ones.

Pressuring it from the other side were Australia's biggest businesses, among them the big banks and Woolworths and Wesfarmers (which owns Coles). Backing them were the Business Council, some big-business-friendly unions, and the Australian Labor Party.

Abbott's initial instincts were oppose the Labor Party, the unions and big business. Almost by definition, anything they agreed on had to hurt someone. His minister for Small Business Bruce Billson strongly backed the Harper review, as did the National Party.

Harper had found that Section 46 of the Competition and Consumer Act lacked force. In Billson's words, it was "a dud" – "like a hunting dog that won't leave the porch".

The section prohibits a corporation with substantial market power from taking advantage of that power for the purpose of eliminating or substantially damaging a competitor.

Which sounds fine, until you consider the loopholes, as lawyers do.

One is that the corporation has to "take advantage of that power" for the purpose of eliminating or substantially damaging a competitor.

It would be perfectly legal for a big firm with market power to sell its products for next to nothing and run up huge losses in order to force a competitor out of business, so long as it did not "take advantage of its market power" to do it.

Alan Fels, a former head of the Competition and Consumer Commission, points out that there have been cases where the Federal Court has found that blatant anti-competitive behaviour by big businesses is lawful because there was no "taking advantage".

"The lawyers and economic consultants representing big business have had a field day, earning a king's ransom in fees, by producing Houdini-like escapes from the law based on reasoning about the meaning of these words."

The other loophole is the words: "for the purpose of"...

Under Australian law, appalling behaviour that destroys competition and competitors is quite OK, so long as it is not for the purpose of destroying competition and competitors.

Short of a confession, the purpose of an action is almost impossible to prove. It involves looking inside someone's mind and asking why they did something rather than looking at what they did.

Only two of the 129 countries with competition laws build them about intent. The rest look at effects.

"No other economy in the world has such a weak provision dealing with dominant businesses able to use their economic muscle – not to win the contest to delight customers, but to take out businesses or to fortify their positions so that new entrants don't get a chance," Billson said this month shortly after Abbott's cabinet rolled him.

Actually, it didn't roll him. It decided to shelve the decision on Section 46 indefinitely.

Harper wanted it reframed to prohibit a corporation with substantial market power from engaging in conduct that had the purpose, "effect or likely effect" of substantially lessening competition.

Harper recommended the effects test in March. For the entire six months since – right up until his last day – Abbott was unable to decide what to do, becoming cooler and cooler about the idea the more that big business lobbied. The Business Council is reported to have threatened a public relations campaign that would have said that $2 milk was under threat, or something like that; $2 milk would indeed have been under threat if its effect had been to take out competitors, eventually resulting in higher prices.

So too would the behaviour of Qantas, which in 2001 helped push Ansett over the edge by taking out full-page ads showing the sea of red seats it was preparing to add to routes all over Australia just as Ansett's receivers were negotiating with a buyer that might have saved it. It would have been hard to prove intent, but it would have been easier to prove effect.

Business lobbyists warned of a "lawyers' picnic" if it became easier to convict big businesses for destroying competition (putting to one side the role that lawyers already played). And they warned of a "chilling effect" if the boards had to consider the effect of their actions on competition in the same way that they did in other countries.

Labor's Chris Bowen backed them, insisting that sometimes big businesses needed to trample on small businesses in order to get big enough to take on Asia.

"As you seek to grow scale to compete in Asia in the coming decades, I could think of nothing worse than a group of competition lawyers saying you have to be a little careful," he told an industry function. An effects test was "one of the most dangerous economic ideas considered by a cabinet in living memory".

Labor's pro-big business stance is easier to make sense of when you realise that big businesses are more unionised than small ones. Unions want them to take out non-unionised competitors.

Turnbull's cabinet is going to have to make a decision, and not only about that. There are scores of completed inquiries that have been piling up in Abbott's in-tray, among them the financial system inquiry which reported in December. With Billson out of the cabinet, and with Labor almost guaranteeing not to attack him, he'll find it easier to back the big guys.

In The Age and Sydney Morning Herald