Executive Summary
SOEs and CRIs are required by the Commerce Act to behave as if they did not have a common owner. They are therefore prevented from entering into "ontracts, arrangements or understandings" that "ave the purpose or are likely to have the effect of substantially lessening competition in a market"
As a consequence, they are not able to cooperate to the extent that private sector bodies with a common owner can, and ministers cannot restrict SOEs or Crown entities from competing with each other unless ministers apply to the Commerce Commission for authorisation.
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.
It is therefore proposed to allow shareholding ministers to give directions to 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. The electricity generators are excluded because of their importance in the electricity market.
Adequacy Statement
The Treasury has reviewed this regulatory impact statement and considers that it is adequate according to the adequacy criteria.
Status Quo and Problem
SOEs and CRIs are required by the Commerce Act to behave as if they did not have a common owner. They are therefore prevented from entering into "contracts, arrangements or understandings" that "have the purpose or are likely to have the effect of substantially lessening competition in a market".
The implications of this are that SOEs, CRIs and other Crown entities are subject to the provisions of the Commerce Act and are not able to cooperate to the extent that private sector bodies with a common owner can, if that co-operation would be a restrictive trade practice (e.g. it would substantially lessen competition in a market) and the public benefit does not exceed the detriment from the reduction in competition.
A further implication is that ministers cannot restrict SOEs or Crown entities from competing with each other, if that would have the effect of substantially lessening competition in a market, unless they apply to the Commerce Commission for authorisation. The Commission would authorise the restriction if the public benefit exceeded the detriment from the reduction in competition.
These implications have not been tested in Court or by the Commerce Commission and therefore are not without doubt. For example, it is not certain that ministers directing an SOE not to enter a particular market would be treated as the Crown "engaging in trade".
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. Indeed, there is strong empirical evidence of a positive relationship in developed economies between effective competition policy and innovation, productivity growth and economic growth.
However, the Commerce Act goes too far in restricting cooperation between CRIs and SOEs, by deeming them not to be subsidiaries of the Crown. It does not enable the Government to play the same role as a private sector parent company of giving strength to its subsidiaries by being a committed and supportive owner. This would require that shareholding ministers are able to influence the behaviour of the subsidiaries in some cases without coming into conflict with the Commerce Act.
Objectives
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 social dislocation (job losses, redundancy payments, rehiring costs, etc) that can arise from aggressive competition.
It is therefore considered that in some situations at least, shareholding ministers should be able to play the role of a supportive owner, as described above. But it remains important to ensure that competition between CRIs and SOEs is only restricted where the other factors mentioned above outweigh the benefits of competition. Indeed, the default position should be that the provisions of the Commerce Act should continue to apply. It is therefore proposed that the above objectives should only be implemented where ministers have made an explicit judgement that a specific set of cooperative activities are in the public interest, and that they should do this transparently by tabling in Parliament a direction that sets this out.
It should be noted that 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. However, these include the objectives of the organisation and the nature and scope of its activities. The scope of activities can therefore be defined so it does not overlap with the scope of activities of another SOE or CRI.
Alternative Options
The following alternative options were considered:
- Shareholding ministers or the companies could seek an authorisation from the Commerce Commission. This is essentially the status quo position. This was rejected because of a concern that the Commerce Commission may take too narrow a view.
- Specific legislation could be introduced on a case by case basis. This was rejected as being too cumbersome.
- SOEs or CRIs could be merged pre-emptively where more cooperation might be desirable. This was rejected as going too far.
- S. 2(7A) of the Commerce Act (which states that no body corporate shall be regarded as a subsidiary of the Crown) could be repealed. This was also considered to go too far.
Preferred Option
The preferred option is to allow shareholding ministers to give a direction to SOEs or CRIs (except the three electricity generators) where they consider this to be in the public interest, without running the risk of being in contravention of the Commerce Act. Directions are required by the State-Owned Enterprises Act 1986 and the Crown Research Institutes Act 1992 to be tabled in Parliament.
Implementation and Review
Implementation of the proposal requires an amendment to S.2(7A) of the Commerce Act 1986.
Consultation
The ministries of Economic Development and of Research, Science and Technology, the Treasury and the Crown Company Monitoring and Advisory Unit were consulted.