It’s a battle that pits unusual alliances of interests against one another. On the one side, the Business Council, big retailers, the Labor Party, former Australian Competition and Consumer Commission commissioners and the economic rationalists of the government, led by (for the moment) Treasurer Joe Hockey. On the other side, the Nationals, the Greens, Small Business Minister Bruce Billson, the Australian Competition and Consumer Commission and one of Canberra’s most respected lobbyists.

The conflict looked to have been put off under Tony Abbott, a default win for the big business/Hockey/Labor forces, but under Turnbull it’s now back on. It’s the effects test proposed by the government’s competition review, led by Ian Harper.

As Harper and co noted, this issue has been around forever. It springs from a core question of competition policy: how do you stop firms with significant market power from using their power to damage rivals (say, by predatory pricing, or refusal to supply) in a way that undermines competition, without stopping them from damaging rivals in a way that serves competition and benefit consumers?

Currently section 46 of the Competition and Consumer Act 2010 tries to address this. It stops firms that have a substantial degree of market power from taking advantage of that power for the purpose of eliminating or substantially damaging a competitor, preventing the entry of a person into a market, or deterring or preventing a person from engaging in competitive conduct [my italics].

But section 46 in its current form doesn’t work. The ACCC says it frequently gives up on the idea of prosecuting firms because of the need to prove the purpose requirement, which is almost impossible unless a firm has left a nice paper trail of executives referring to the need to destroy a competitor. The take advantage wording is also legally problematic — the Harper review explores a number of cases where courts have differed over how that applies to particular conduct. And referring to damaging a competitor or person is out of step with the rest of competition law, which uses the idea of “a substantial lessening of competition”. You can damage a competitor without damaging competition. Indeed, the whole point of competition is that you damage your competitors by being better than them.

The ACCC has long backed switching to what is called an “effects test”, which removes the challenge of proving intent and replaces it with something more objectively provable. It’s also, the ACCC says, more in step with international approaches to the issue.

A number of previous competition reviews and inquiries opposed an effects test, but Harper and co agreed with the ACCC: they recommended an amendment to s.46 that would not merely add an effects test to the purpose test, but switch the focus from damaging competitors to damaging competition.

The proposal enraged big businesses, which think it will capture their efforts to drive smaller competitors out of business. The argument from big business and their backers is that an effects test will create uncertainty and chill genuine competitive conduct, and that it’s overreach in the name of looking after small business and agricultural producers. The ACCC, which strongly backs the recommendation, argues that all a revised s.46 will do is use the same test as the rest of competition law uses, and set a high hurdle for prosecutors to overcome — conduct must damage competition itself, not individual competitors, and it must “substantially lessen competition”. It told the inquiry:

“Damage to competitors, even to the extent of competitors being forced out of business, is not necessarily evidence of a lessening of competition… businesses ‘competing’ through offering better products or services or by undertaking a successful promotional campaign, undertaking research and development which results in better products or more efficient processes, or passing savings through to consumers will be enhancing competition, not lessening it. The application of the SLC test is also likely to be sufficiently flexible to cater for unintended or collateral impacts on markets. Given the SLC test has been consistently applied in line with existing jurisprudence with respect to commercial agreements and other conduct, the ACCC does not consider that the test would ‘overreach’.”

Former ACCC commissioners Graham Samuel and Stephen King, however, disagree, claiming the change would chill competition and halt R&D and aggressive competition. The BCA also aggressively lobbied against the change. In Canberra, the case for an effects test was put by the head of the Council of Small Business Australia, Peter Strong, backed by Master Grocers CEO Jos De Bruin. Strong is well-regarded by all sides in Parliament House and seen as a non-partisan straight shooter; he is widely credited with the strong small business focus of the second Hockey budget in May this year.

Reflecting the views of his constituency, Billson was an enthusiastic champion of an effects test, at one stage accusing Labor of drinking the BCA’s “Kool-Aid” on the issue, but he ran smack into the determined opposition of the economic dries in cabinet, led by Hockey. With cabinet so brittle and his leadership hanging by a thread, Tony Abbott abandoned the idea. When his party abandoned Abbott, the Nationals, who also back an effects test, moved to assert themselves: as part of their Coalition deal, Warren Truss and Barnaby Joyce got an effects test back on the cabinet agenda, with a promise of support from Turnbull. Hockey will be dealt out of the equation courtesy of his looming removal from Treasury. On Tuesday, National senators crossed the floor to support a Greens motion supporting the effects test.

Given the reality that the substantial lessening of competition test works well in other areas and is unlikely to capture genuine competition, Turnbull may see an effects test as an easy win in building his relationship with the Nationals, however much it may upset the top end of town.

Peter Fray

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