Australia: Federal government releases its response to the Harper Competition Policy Review

On 24 November 2015, the government released its response to the Competition Policy Review chaired by Professor Ian Harper (Harper Review).1 The response is largely supportive and recognises the potential for significant productivity and profitability gains arising from improvements to our national competition law and policy.

Of the Harper Review's 56 recommendations, the government supports 44 in full or in part and "remains open to" the remaining 12 recommendations subject to further review and consultation.

Arguably the 12 recommendations in relation to which decisions have been deferred represent some of the more controversial and politically sensitive recommendations in the report. They include, the proposed introduction of an "effects test" for misuse of market power (section 46 of the Competition and Consumer Act 2010 (CCA)), the question of the interaction between intellectual property rights and competition law, the creation of a separate access regulator and pharmacy remuneration and location rules.

Some of the most significant changes foreshadowed by the government's response are:

  • amending the CCA to include a prohibition against concerted practices with the purpose or effect of substantially lessening competition. This will reduce the threshold for anti-competitive conduct in the CCA. Accordingly, conduct falling short of a "meeting of minds" may be illegal if it has the purpose, effect or likely effect of substantially lessening competition. The government intends to prepare an exposure draft of its proposed amendments to section 45 (recommendation 29);
  • significant changes to the third line forcing prohibition. To the extent that section 47 of the CCA (exclusive dealing) is retained, third line forcing will no longer be a per se offence. It will instead only be prohibited if it has the purpose, effect or likely effect of substantially lessening competition. However, if the Harper Review's recommended changes to section 45 (anti-competitive contracts, arrangements or understandings) and section 46 (misuse of market power) are adopted, section 47 may be repealed in its entirety(recommendations 32 and 33);
  • expanding the joint venture exception to cartel conduct to cover a broader range of conduct and also less formal arrangements (recommendation 27);
  • granting the ACCC the power to create block exemptions protecting certain categories of conduct from the operation of Part IV of the CCA if it would be unlikely to result in a substantial lessening of competition or there is likely to be a net public benefit (recommendation 39); and
  • combining and streamlining the merger authorisation and formal clearance processes. The ACCC would be the first instance decision maker in all cases and could clear a merger if it is unlikely to result in a substantial lessening of competition or there is a net public benefit (recommendation 35).

A more detailed consideration of the government's response to the Harper Review is set out below.

RECOMMENDATIONS FOR REFORMING AUSTRALIA'S COMPETITION LAW (RECOMMENDATIONS 27 - 39)

The Harper Review's final report makes it clear that its key objectives in terms of competition law reform were to achieve a balance between simple, flexible legislation capable of adapting to the fast pace of change in the economy and providing sufficient certainty for stakeholders. This approach is discernible in the Harper Review's recommendations on Part IV of the CCA and is broadly endorsed (with some exceptions) in the government's response.

To the extent that the government supports the Harper Review's recommendations, it has indicated that exposure draft legislation will be prepared for public consultation. However, the timing of its release remains uncertain at this stage.

The government's responses to key recommendations are dealt with below.

RECOMMENDATION 27: CARTEL CONDUCT

The government supports the recommendation that the cartel conduct provisions be simplified. It also supports the recommendation that the joint venture exception be expanded to:

  1. apply to joint venture provisions in less formal documents (e.g. management or operating protocols) in addition to the current exemption for provisions within contracts; and
  2. cover additional categories of joint ventures, specifically, joint ventures for the acquisition or marketing of goods or services, as well as production and supply joint ventures.

RECOMMENDATION 29: PRICE SIGNALLING AND PROHIBITIONS ON CONCERTED PRACTICES

The government acknowledges that the current price signalling provisions are complex and unnecessarily burdensome for business. Accordingly, it has adopted the Harper Review's recommendation that the price signalling provisions be repealed and section 45 of the CCA be extended to prohibit engaging in concerted practices with the purpose, effect or likely effect of substantially lessening competition.

This recommendation will bring Australia closer to other jurisdictions such as the EU that also prohibit concerted practices in some circumstances.

This broadening of section 45 is likely to result in an increase in prosecutions by the ACCC. Until now, the ACCC was required to prove that there was a "meeting of minds" and a "commitment" between competitors in order for conduct to be illegal under the CCA. No such requirement is necessary under the Harper Review proposal – rather it would only be necessary to show that the conduct had the purpose, effect or likely effect of substantially lessening competition.

RECOMMENDATIONS 30, 32 AND 33: MISUSE OF MARKET POWER AND EXCLUSIVE DEALING INCLUDING THIRD LINE FORCING

The Harper Review recommended the introduction of an "effects test" prohibiting a corporation with a substantial degree of market power from engaging in conduct that has the purpose, effect or likely effect of substantially lessening competition in a market. The Harper Review's model drafting also dispensed with the current concept of "taking advantage" of market power. More detail about what the Harper Review recommended in relation to section 46 can be found here.

These recommendations have proved highly controversial with the Business Council of Australia at loggerheads with small business interests, the Nationals and former Minister for Small Business, Bruce Billson. In this context, the government will release a discussion paper on options for reform, with Treasurer Scott Morrison expecting submissions by 12 February 2016 and a final position to be reached in late March 2016.

Recommendation 32: Third line forcing

The government's decision on whether to repeal section 47 will be dependent upon the outcome of its further review of the section 46 reforms. However, if section 47 is retained, the scope of the existing prohibition against third line forcing will be narrowed so as to only apply to conduct with the purpose, effect or likely effect of substantially lessening competition.

RECOMMENDATIONS 38 AND 39: AUTHORISATION AND NOTIFICATION PROVISIONS AND BLOCK EXEMPTION POWER

The government has undertaken to streamline the authorisation and notification processes so that:

  1. a single authorisation will cover all potential contraventions of the CCA in relation to the same course of conduct (rather than requiring separate forms as currently occurs);
  2. the ACCC may grant standing exemptions from the application of sections 45 (anticompetitive agreements), 46 (misuse of market power) and 47 (exclusive dealing – if it is retained) if it is satisfied that there is unlikely to be any substantial lessening of competition or that there will likely be a net public benefit;
  3. the ACCC is empowered to create block exemptions or "safe harbours" protecting certain categories of conduct from the operation of Part IV of the CCA if the conduct is unlikely to result in a substantial lessening of competition or there is likely to be a net public benefit. These safe harbour provisions have the potential to result in more creative industry solutions for conduct that has net public benefits. It will certainly be important given the repeal of Part X of the CCA that provided for safe harbours for liner shipping and may be utilised in the event that certain exemptions currently available for intellectual property owners are repealed. It may also be utilised with certain industries such as health and primary industries where collective arrangements among groups of less than a certain size may be granted exemptions.

MERGER REVIEW PROCESSES (RECOMMENDATION 35)

Currently, parties seeking approval for mergers may select from one of three processes:

  1. informal merger clearance, a widely used administrative process with the ACCC as decision maker;
  2. formal merger clearance by the ACCC, a process which is yet to be used; and
  3. merger authorisation, involving a decision on net public benefit grounds by the Australian Competition Tribunal (Tribunal).

While the government believes merger clearance arrangements are effective in their present form, it supports the following changes set out in recommendation 35:

  1. a single, streamlined formal merger review process be introduced (combining the current formal clearance and merger authorisation processes) with the ACCC as the initial decision maker in all cases. The ACCC would be empowered to clear a merger if it is satisfied that there is unlikely to be any substantial lessening of competition or that there will likely be a net public benefit; and
  2. post-merger assessments to be conducted analysing the effectiveness of the ACCC's processes for past mergers and the extent to which its competition assessments prove accurate, with a view to improving outcomes going forward.

Post-merger evaluations are intended to be done by the Australian Council for Competition Policy (ACCP - discussed in more detail below).

INDUSTRY SPECIFIC RECOMMENDATIONS

The Harper Review has recommended that regulation that harms competition should be minimised, unless it can be shown that:

  1. the public benefit of any given restrictions outweighs the costs; and
  2. the legislative objectives can only be achieved by restricting competition.

Consistent with this principle, the Harper Review proposed sweeping changes across a range of industries including road transport, electricity, gas and water, taxis and ride-sharing, and retail trading.

In the government's response, this broad principle, as well as certain industry specific recommendations have been generally accepted. The exception to this is recommendation 14 in relation to easing the restrictions on pharmacy ownership and locations which has simply been 'noted' by the government. In relation to pharmacy location rules, an independent review of the industry will follow in 2017 to assess how best to ensure continued, timely and dependable access to PBS medicines, especially in rural and remote areas. In addition, the government has urged the states and territories to review their respective regulatory arrangements in terms of pharmacy ownership.

The government's responses in relation to the following industry recommendations are also of particular interest.

Recommendation 2: Human services

The government supports the recommendation that each Australian jurisdiction should incorporate principles of choice, competition and contestability in the domain of human services. It is intended that this issue will be further addressed by the Productivity Commission review into human services and ongoing engagement with the states and territories.

Recommendations 6 and 7: Intellectual property

The government supports the recommendation that the Productivity Commission undertake an overarching review of intellectual property and has already instructed the Productivity Commission to commence work.

Further consideration of the repeal of the intellectual property exception in the CCA will be deferred pending the outcome of Productivity Commission's review (expected in August 2016).

COMPETITIVE NEUTRALITY (RECOMMENDATIONS 15 - 17)

The government supports the Harper Review recommendations for a review of competitive neutrality policies by all governments, and the increased transparency of competitive neutrality complaints processes. The government will update its policies and encourage the states and territories to follow suit. Federal competitive neutrality complaints are currently considered by the Government Competitive Neutrality Complaints Office. However, the government supports the establishment of independent complaint bodies in all states and territories without equivalent bodies.

Further consultation will be given to the Harper Review recommendations that:

  1. government businesses be required to include a competitive neutrality compliance statement within annual reports; and
  2. the proposed ACCP report on the application of competitive neutrality policies to human services markets in different jurisdictions.

The government will also seek advice from the Productivity Commission on how competitive neutrality can be improved in human services sectors.

GOVERNANCE (RECOMMENDATIONS 43 - 52)

The Harper Review proposed an overhaul of the government's competition, regulatory and policy functions, including:

  1. the establishment of the ACCP to be responsible for policy reform and undertaking competition studies;
  2. the introduction of a separate Access and Pricing Regulator to oversee access in industries regulated by the Commonwealth, including telecommunications, water, energy and gas; and
  3. reform to the ACCC Board to encourage a wider range of views in decision making and oversight.

In response, the government has indicated that it supports the establishment of the proposed ACCP, but has given no commitment to establish the Access and Pricing Regulator at this stage. The government will continue to have discussions with the states and territories to determine the most appropriate framework, design and funding model for these bodies.

The specific recommendations that Commissioners should be appointed on a part-time basis and that the requirement for one Commissioner to have a background in small business be removed have not been adopted. Moving in the opposite direction, the government has confirmed it will introduce an additional requirement for one Commissioner to have a background in agriculture.

COMPETITION PAYMENTS (RECOMMENDATION 48)

The government has also agreed to consider the proposal for competition payments to be made to states and territories. These payments are intended to both:

  1. provide financial incentives for state and territory reform; and
  2. ensure proportionate revenue gains flow to reforming states and territories.

The government has acknowledged that competition payments were a significant factor in the success of the competition reforms following the Hilmer Report and could be similarly effective here.

In many cases, implementation will require ongoing cooperation with state and territory governments. In addition, the changes to the CCA will be the subject of an exposure draft, the timing of which is still uncertain at this stage. It is therefore unlikely that implementation, even of the recommendations that have received unqualified support, will be complete prior to the upcoming federal election which will probably take place in the second half of 2016.

Footnote

1Australian Government, 'Australian Government Response to the Competition Policy Review' (2015) ( see here).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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