Comment
18. It is recognised that as a system, a competition framework is more likely to provide the participants with incentives to work hard and seek out new products, services and technologies which give consumers greater selection and better products. It also drives down prices and encourages efficiency. Absence of competition or the threat of competition is generally thought to lead to underinvestment, high prices, less innovation and reduced efficiency (cost-plus operation – some of the benefits of high prices are dissipated internally in comfortable or secure operating conditions and higher salaries, rather than in high profits for the owners). To ensure the benefits of competition, the Commerce Act restricts or controls the level of some forms of cooperation between companies.
19. The purpose of this proposal is to address a concern that the Commerce Act goes too far in restricting cooperation and collaboration between CRIs and SOEs by deeming them not to be subsidiaries of the Crown. While it is recognised that competition has an important role to play in the economy, regard must also be had to wider issues such as:
- the benefits from cooperation, which enables more efficient use of people and assets;
- a company's position and negotiating power in the wider international market; and
- the costs of business disruption and social dislocation (job losses, redundancy payments, restructuring and rehiring costs, etc) that can arise from aggressive competition.
20. The problem is well-illustrated by the recent case of NIWA and MetService. There has been a longstanding concern about duplication of resources and effort. As a result of ministerial intervention, in August 2006 the companies entered a process of mediation under a facilitator. This resulted in a report to ministers that:
- set out agreed national benefit objectives for weather climate and environment;
- established a memorandum of understanding (MoU) between the two companies to share information on a commercial basis (and some information including forecasts of severe weather events on a non-commercial basis); and
- requested that there be legislative ring fencing establishing areas of interest of both companies.
21. The MoU was required because ministers were unable to issue a direction to the two companies to collaborate without risking a breach of the Commerce Act. Similarly, the last point recognises that any ring fencing of areas of interest would, in the absence of legislation, likely fall foul of the Commerce Act.
22. If the MoU operates effectively, it will largely address the concerns about duplication. However, the proposal for ring fencing comes from a concern that the MoU could break down should information provided by one party to another be used against it. For example, if MetService were to provide real time weather data to NIWA which was used by NIWA to develop forecasting services marketed to MetService’s private clients, then the willingness to provide the data would quickly break down.
23. Ministers are concerned that the SOE/Commerce Act framework may inappropriately prevent them from issuing directions to SOEs and CRIs where the direction would have, or be likely to have, the effect of substantially lessening competition in a market. There should be competition between SOEs and CRIs where this was intended (as with the electricity companies) but not in cases where ministers consider that cooperation is in the public interest.
24. There is also a concern that the Commerce Act framework, as it relates to CRIs, acts contrary to the requirements within the Crown Research Institutes Act 1992 for CRIs to undertake research for the benefit of New Zealand and facilitate the application of technological developments, where collaboration between firms is often a key requirement of these activities being successful.
25. Recent reforms within the publicly funded science sector have sought to encourage enduring research collaboration and commercial linkages between organisations undertaking research activities. This may include greater use of formal business arrangements between the CRIs and firms. As CRIs and SOEs are often significant actors within specific parts of the economy the Commerce Act framework as it stands may work counter to the government’s aim of encouraging collaboration.
26. In the private sector, many companies derive their strength from being subsidiaries of larger conglomerates and from having committed and supportive owners, who will ensure that competition between subsidiaries of the same group is avoided and cooperation maximised. (Ideally such avoidance of competition should be subjected to a Commerce Act test, but as indicated in paragraph 11 above, such a requirement does not exist probably because it could be structured around and would therefore be of little effect.)
27. NIWA/MetService was not the first case that raised these kinds of concerns. Others include Agriquality and Asure, where ministers were unable to direct AgriQuality not to compete with Asure in providing export red meat inspection services because of the risk of breaching the Commerce Act. This issue was resolved by merging the organisations. Looking forward, there are also concerns that there may be some duplication of capability across CRIs, that redundancies resulting from inappropriate competition between them could undermine the development and maintenance of nationally important science capability, and that they will not collaborate as much as would be optimal as the current Commerce Act framework disincentivises cooperation even if it is in the national interest.
28. More broadly, lack of cooperation arises either from a concern that cooperation would put SOEs and CRIs in breach of the Commerce Act, or from a concern that cooperation would reduce their competitive advantage where they might see themselves being in competition with each other.
29. While at times it will be in the national interest for CRIs to operate separately in the same area, there will be other times when there will be a strong case for non-competitive collaborative arrangements between CRIs and/or SOEs combining different capabilities. There is a need for ministers to be able to provide some direction without risking a contravention of the Commerce Act.
30. Ministers have therefore developed a proposal that would allow them to issue directions to most SOEs or CRIs where they consider this to be in the public interest without running the risk of being in contravention of the Commerce Act (directions to SOEs and CRIs must be tabled in Parliament). The electricity generators should be excluded because of their importance in the electricity market. The consequences of electricity SOEs not perceived to be competing with each other would include the following:
- Increased public concern that reduced competition will result in price increases (international experience suggests that competition between 5 major firms seems to be the minimum number necessary to address the main concerns about market power);
- Investors in private sector electricity generators may interpret this as an indication that the regulatory framework is prone to change in ways that they find hard to predict. In particular, they may become concerned that further changes may be made that favour SOEs at the expense of the private sector companies. This could result in reduced investment in new generation.
31. It should be noted that the ability to issue directions related to commercial matters is limited: Both the Crown Research Institutes Act and the State-Owned Enterprises Act provide that CRIs and SOEs can only be directed in relation to two matters: one is the amount of a dividend, and the other is to include in, or omit from, a statement of corporate intent certain specified kinds of provisions. These include the objectives of an organisation and the nature and scope of its activities. A direction can define the scope of activities so it does not overlap with the scope of activities of another SOE or CRI, thereby removing the basis for competition and providing the basis for cooperation.
32. It should also be noted that while such a direction could increase the market power of an SOE or CRI, the proposed legislative change would not exempt the SOE or CRI from s. 36 of the Commerce Act which prevents companies from taking advantage of any such market power.
33. Other options that were considered include:
- Seeking an authorisation from the Commerce Commission on a case-by-case basis. This was rejected because of a concern that the Commerce Commission may take too narrow a view, and the uncertainty of the outcome of the authorisation process.
- Introducing specific legislation on a case-by-case basis. This was rejected as being too cumbersome.
- Pre-emptive merger of SOEs or CRIs where more cooperation might be desirable. This was rejected as potentially going too far in that in some cases cooperation may only be desirable in respect of some of their activities and not others. It could also potentially result in joining organisations that are more efficiently kept separate.
- Removal of the provision that prevents SOEs and CRIs from being recognised as interconnected bodies. This was also considered to go too far as it does not allow for specific cases where competition is of more benefit than cooperation.
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