10th annual Competition Law and Regulatory Review Conference

Thank you, Brent, for the introduction and for welcoming me to the 10th Annual Competition Law and Regulatory Review Conference.

The theme of the conference is 'The way forward for competition and regulatory policy', so I'll focus on the Government's objective of a Single Economic Market with Australia, and how this will shape expectations of competition and regulatory policy.

I'll spend some time explaining our work exploring cartel criminalisation, and I'll close with a description of the other initiatives the Government is taking to enable and encourage deeper harmonisation between Australia and New Zealand competition law and policy.     

This Government has an ambitious reform agenda which seeks to lift New Zealand's productivity growth rate. Competition is a vital part of this. 

Other things fundamentally matter for this, too - stable interest rates, low inflation, disciplined budget policy, and openness to international trade and investment.

However, I'm of the view that a crucial ingredient in sustaining improvements in New Zealand's growth rate is that we maintain open and competitive markets.  

I don't need to espouse the case for competition in this forum.

Competition ultimately reduces costs for businesses and for consumers. 

That is, competitive pressures force companies to ensure they find more efficient ways of producing and delivering goods and services.

I'm firmly of the view that well functioning competitive markets are sustained by effective competition legislation and an effective Commerce Commission. 

It's probably apt at this time for me to commend Dr Berry and the commission for their hard work over the past year.

I'm committed to ensuring the commission remains a strong, credible, and effective regulatory body.

I note that Dr Berry and the commission's efforts over the past year strongly echo this sentiment.    

So, where does the Government's Single Economic Market objective fit in to all of this?

The SEM objective is an important part of the Government's work to foster our international competitiveness and improve the environment for doing business - whether it be here or in Australia.

Many businesses are already doing business in both countries and dealing with suppliers, customers, or investors from both countries. 

The easier we can make it for them to operate by removing unnecessary compliance costs, the better it'll be for New Zealand's productivity.

We are at an exciting time in the trans-Tasman relationship, with both Governments highly committed to achieving significant progress over the year ahead.

Last year, both Prime Ministers announced a framework of principles and a tangible set of shared outcomes to further drive Trans-Tasman integration. 

We've pushed hard on progressing these outcomes over the past year, and you can be sure we'll push even harder this year. 

There are currently 27 outcomes specified in the SEM Outcomes Framework.

They span a range of aspects of business law and regulation. 

This includes financial reporting, insolvency proceedings, consumer policy, and intellectual property law. 

However, the outcomes I want to concentrate on today are the three competition policy ones:

• First, firms operating in both markets should be faced with the same consequences for the same anti-competitive conduct.

• Secondly, competition and consumer law regulators in both jurisdictions should be able to share confidential information for enforcement purposes.
  
• Thirdly, we should establish cross-membership between the Commerce Commission and the Australian Competition and Consumer Commission (ACCC).

I'll spend a bit of time discussing the first of those - the work exploring cartel criminalisation.  

Cartels

As most of you will know, the penalty regimes in the Commerce Act and the Australian Trade Practices Act are broadly aligned, with one glaring exception - cartel conduct.

Australia criminalised cartel conduct last year.

However, I don't want you to think the New Zealand Government is pursuing cartel criminalisation just because Australia has.

I expect most of you will have seen the discussion document on cartel criminalisation I released in January. 

This canvasses the arguments for and against criminalisation and considers how we could do this. 

I'm keen to hear your views on the issues and, in particular, how we can get this right.

My view is that there are compelling reasons to criminalise cartel behaviour. 

I've already highlighted the trans-Tasman dimension, but that's not the only reason.

Hardcore cartels are deliberate, deceptive, and secretive agreements designed to manipulate prices and markets to gain at the expense of buyers.

The sanctions should be consistent with other "white collar" crimes, such as fraud.

Cartels are condemned internationally. 

Cartel behaviour such as price fixing and bid rigging is considered the most egregious form of anti-competitive conduct. 

Cartels cause considerable economic harm.

They reduce economic output, undermine trust in markets, slow productivity growth, and distort investment signals by making them appear more profitable than they would be in an unrigged market. 

Cartels affect both final consumers and the businesses that buy from cartels at inflated prices. 

This is not just a consumer story. Internationally, the majority of cartels sell industrial goods, rather than household goods.

The scale on which many cartels operate means the current financial penalties may be seen as just a cost of doing business, rather than a deterrent.

We cannot raise the legislative level of the fines any higher without risking bankrupting offending firms.

Criminalisation, and particularly the possibility of imprisonment, provides strong disincentives for businesses and their executives to engage in cartel behaviour. 

For example, the United States has found evidence of cartels targeting Europe while avoiding the US, because of the risk of jail sentences in America. 

Together with leniency policies, criminalisation provides a strong destabilising influence on cartels, which allows for greater detection.     

Criminalisation

I now turn to three common arguments that have been raised against criminalisation.

The first is that cartels are relatively unstable and short-lived.

This argument is derived from the theoretical predictions of economic models.

The empirical data does not support this argument.

The University of Purdue, in Indiana, has studied international hardcore cartels.

They found that the median duration of the 516 cartels in their data set is just under 5 years.

The average duration is just under 7 years.

A handful of cartels lasted more than 25 years!

Even if we heroically assume these cartels were detected only at the end of their "natural" lives, this seems remarkably durable for so-called "unstable" arrangements.

Another argument which has been advanced is that New Zealand is affected mainly by international cartels, and that they are prosecuted by overseas competition authorities so we don't need to bother.

However, every other country has a problem with domestic cartels. 

There is no reason to assume New Zealand is any different.   

Some may argue that overseas agencies such as the US Department of Justice and the European Commission already break up cartels and punish them. 

However, overseas regulators break up cartels and punish them for activity in their own jurisdictions.

They cannot hold businesses to account for the damage they have done to New Zealand consumers.

They can't stop them operating in New Zealand.

Cartels will stop operating in New Zealand only if we have effective sanctions against them.

A third argument raised against criminalisation is that the full range of penalties in the Commerce Act hasn't yet been used, and that if they're untested then we shouldn't change them. 

The problem is we don't have a lot of data on the effectiveness of the penalty regime because our size and court system means we don't have many cartel cases go through the courts, and the investigation and litigation phases can be quite long.

That means we could wait 20 years to assemble good data, and if the settings are wrong, 20 years is a long time to wait before putting things right.

The fact that so many jurisdictions have criminalised cartels suggests criminalisation is an effective approach.

If we don't follow suit, we risk being seen as a soft touch, and that would make us a greater target for cartels.

I note that some expert commentators agree that hardcore cartel behaviour is criminal.

One has even gone so far as to suggest this Government is being soft on white-collar criminals and should just "crush ‘em and crate ‘em".

I emphasise that criminalising cartel behaviour is not easy.

The issues are complex and hard to get right.

Black and white boundaries are tricky to define in a world where there are many shades of grey.

Though we may all "know it when we see it", defining cartel activity in legislation is difficult.

It's important to ensure the definition is not so broad as to have a chilling effect on pro-competitive business activity.

Uncertainty in the law can also stifle legitimate business activity.

That's why we're taking a pro-active approach to seeking your views on the approach to cartel criminalisation.

Before I conclude, I will touch on the other two SEM competition policy outcomes. 

These seek to enable and encourage deeper co-operation between the Commerce Commission and the ACCC. 

This recognises that even with broadly similar laws, differences in the way regulators enforce these laws may have very different impacts and costs for business.

It also recognises that in the modern world, businesses increasingly operate across borders.

In this environment it's clear that effective and efficient enforcement requires international co-operation.

We need to enable our competition agencies to work across the border just like our businesses. 

Right now we have a bill in Parliament which enables greater co-operation between the Commerce Commission, the ACCC, and other overseas regulators.

It provides for the provision of investigative assistance and sharing of information between the commission and similar overseas agencies.

The Government intends to pass this bill in the second half of this year.

Australia has passed similar legislation enabling the ACCC to share information with us and other international regulators.

We are also committed to facilitating cross-appointments between commissioners of the ACCC and the Commerce Commission.

The ACCC and the Commerce Commission co-operate on many levels already.

This initiative ensures and formalises working together at the top level.

I hope cross-appointments at the commission level will improve co-operation in merger approvals, particularly those with a trans-Tasman dimension.

The relevant markets are obviously different for the two authorities but the analysis and legal tests are broadly the same.

Altogether, these three SEM competition policy outcomes will be a significant step forward in progressing greater trans-Tasman harmonisation in competition law and creating a seamless environment for businesses.

I note there are interesting discussions to be held over the next few days around specific competition and regulatory issues, and I welcome this in informing policy debate and thinking on these issues. 

Enjoy the rest of the conference.