The Shoeshine Column: Will Labour's off-the-peg merger law make a nation of dwarves?

Friday 4th May 2001

Somewhere in the bowels of parliamentary process lies a beast with an innocuous name but a potentially poisonous nature.

The Commerce Amendment Bill No 2, reported back from the commerce select committee in March, will shortly be allocated the order paper number it needs to get a second reading in the House on its way to becoming law.

Until now it has received scant attention from the media but its passage has been debated vigorously by lawyers, academics and the business community. The select committee itself was split 4:4.

As it has the blessing of the coalition government it's likely to become law later this year but there's a strong case for giving it a more searching scrutiny.

The most important change by far sounds pretty academic. The test the Commerce Commission will apply to determine whether firms should be allowed to merge will be changed from whether the merger will result in a firm "acquiring or strengthening dominance" to whether there will be "a substantial degree of market power or a substantial lessening of competition."

The government members supporting the bill have put forward a two-fold argument. First, they say, we need to harmonise our legislation with that of our major trading partners. And second, the "light-handed" regulatory regime installed in the late 1980s hasn't stopped some firms from gaining dominant positions and gouging their customers.

Both these contentions need careful examination.

The "market power" word change is essentially taken from the laws under which the Commerce Commission's counter-
part, the Australian Competition and Consumer Commission, operates.

But Australia, with an economy seven times the size of our own, is a very different place to do business, as a long list of local companies have found out over the years.

The mooted law change will presumably oblige the Commerce Commission to look at mergers in much the same way the ACCC does. A recent case in point is Vodafone's attempts to gain clearance to buy third-ranking telecommunications player Optus' mobile business.

The ACCC's answer was a blunt "no." Under Aussie rules the commission considered the third-ranking player provided a valuable competitive restraint, putting pressure on both the first and second-ranking players.

That may well be so. But Australia is big enough to sustain not only three but four, five, or six major mobile players.

Here in New Zealand it's moot whether, in some industries, we can sustain even two. Clear Communications has struggled to make profits ever since it started. Certainly it has never seen it as worthwhile to set up its own mobile service, preferring to resell the services offered by Telecom and Vodafone.

The second domestic flier, Qantas New Zealand, made money only once in its 13 years, prompting Shoeshine to wonder why others are so interested in replacing it. Nor do CanWest's TV3 and TV4 channels make money in opposition to incumbent broadcaster TVNZ.

These cases could be used to argue we need more stringent competition laws. After all, Telecom, Air New Zealand and TVNZ are steadily profitable in the domestic market.

But a growing body of studies suggests our economy is simply too small to allow more than a few firms - in some industries, maybe only one - to get an adequate return on the capital they employ in the business.

A recent study by the Wellington-based Institute for the Study of Competition and Regulation found, among other things, that New Zealand firms use relatively more capital per unit of revenue than firms in the same industries overseas.

They therefore need higher operating profit per unit of revenue to cover the cost of capital (which is in itself high relative to larger economies).

Now Shoeshine would be the last person to suggest we should hand price-gouging monopolies their profits on a plate.

But there is growing evidence we need a competition regime that fits our circumstances, not those of Australia or the US.

On his recent retirement Commerce Commissioner Peter Allport declared that, looking back over the years of his tenure, he couldn't think of a single merger the commission approved that subsequent events had shown it shouldn't have.

Perhaps he would say that. But the evidence bandied about by the "market power" advocates hasn't made much of a case to the contrary.

In fact this seems to rest on only two commission-cleared mergers - BP's application to buy Top Energy, a case so old Shoeshine can't recall it, and TransAlta's clearance to buy the controlling stake in Contact Energy (which in fact went to Edison Mission Energy).

The latter definitely looked dodgy. Even so, two cases in 15 years hardly supports the notion the current regime has allowed wholesale monopoly profiteering.

But isn't more competition always a good thing? Not necessarily - even the government members of the select committee were able to agree, as their report puts it, that "competition is not an end in itself but a means to increasing consumer welfare in the long term."

And that, in the words of the Institute for the Study of Competition and Regulation, is exactly what we risk if we get our competition laws wrong.

"To force firms in New Zealand to be small by New Zealand standards - say, by having low thresholds for mergers - is likely to raise costs for consumers or make it difficult for New Zealand firms to compete with exports."

Harmony's great but some things you have to do solo.

Comments from our readers

No comments yet