As the ACCC pursues BlueScope in court over alleged price-fixing, the regulator’s chair is pushing for far-reaching reforms to merger laws. By John Durie.
Monopoly money: Australian market concentration under scrutiny
While Rod Sims’ merger reform debate was bubbling along this week, former BlueScope executive Jason Ellis, the son of former BHP chair Jerry Ellis, was before the Federal Court defending himself against charges of attempted price-fixing.
The Ellis camp rejected the case from the Australian Competition and Consumer Commission (ACCC) as “quite misconceived” – but the behaviour alleged is a classic example of what can happen in Australia’s concentrated markets.
The ACCC is alleging that in 2013-14, Jason Ellis, then a senior executive of the monopoly steelmaker, had attempted to force steel distributors to comply with an agreed price list.
The company rejects the allegations, but, depending on the outcome, the findings could be explosive. At the time, Ellis’s immediate superior was current BlueScope chief Mark Vassella and the then company chief is the now Commonwealth Bank director Paul O’Malley.
The increasing concentration of Australian industry is the reason Rod Sims, chair of the ACCC, is calling for increased merger powers. His campaign comes in the final year of his 11-year term, which is due to finish next July.
Some say the 70-year-old would not mind another two years to help prosecute the campaign and also to clear the way for his preferred successor, Sarah Court, who could then serve an appropriate time in her present job as deputy chair of the Australian Securities and Investments Commission.
Sims argues that “market power can contribute to economic inequality by promoting the interests of the few with power over the interests of many”. He says: “It also undermines trust in the operation of markets, and encourages wasteful rent-seeking activities to protect monopoly profits.”
The debate comes as United States President Joe Biden has started an antitrust revolution in the US, with a series of high-profile appointments, including 32-year-old Lina Khan as head of the powerful Federal Trade Commission, former News Corp lawyer Jonathan Kanter as head of the antitrust division in the Justice Department, and Tim Wu as a White House adviser.
The revolution comes as platform giants such as Amazon, Google, Facebook and Apple are under fire around the world.
Khan made her name speaking out against the big digital platforms, saying, “As consumers, as users, we love these tech companies, but as citizens, as workers and as entrepreneurs, we recognise that their power is troubling. We need a new framework, a new vocabulary for how to assess and address their dominance.”
That is where Sims is coming from. Globally, Sims made his name through his work on the media bargaining platform that forced Google and Facebook to compensate media for content used on the platforms. Since those reforms, the US, European Union, France, Germany, South Korea and others have taken the fight further.
Not surprisingly, the early commentary on Sims’ merger reforms has come from big business and its cheer squad. Former ACCC chair and investment banker Graeme Samuel has suggested that the regulator “should first undertake a rigorous review of its merger analysis and litigation management to determine whether its losses in court are simply the result of picking the wrong cases to litigate and poor case management”.
That is the prevailing view of the big-business lawyers who are known in the trade as the mafia.
Clifford Chance partner Dave Poddar told The Saturday Paper, “The real point is even if the ACCC was given the additional powers it seeks, would it have made any difference facing these global tech giants?”
He added: “The question always arises as to a request by regulators for more power, whether the existing powers are being used effectively and in relation to the right matters?”
Treasurer Josh Frydenberg has already expressed misgiving about the Sims reforms, arguing the Covid-plagued economy is not the right one in which to be increasing regulation. “I do not want to put more regulatory barriers in front of business,” he said.
Opposition spokesperson Andrew Leigh said he was “astounded the treasurer would react like that given the growing concern around the world about the dampening effect on innovation from a concentrated industry”. He added: “The more dynamism you have the better.”
In a paper this year titled “Product Market Power and its Implications for the Australian Economy”, Treasury official Jonathan Hambur said, “This focus on competition is likely to become even more relevant as the economy recovers from the Covid-19 economic shock.”
In his speech to the Law Council in August, Sims said: “We have serious concerns about the level of competition in our economy and our ability under the current law to prevent further consolidation via anti-competitive acquisitions.”
Stephen King, a current Productivity Commissioner and a former ACCC commissioner, told The Saturday Paper, “The level of concentration is one thing, the real question is whether it is causing harm”.
Anecdotally, the evidence is clear: a recent Business Council pitch for better Covid-19 recovery time lines included 91 companies, 76 per cent of which were either monopolies or oligopolies.
Woolworths and Coles control 76 per cent of dry groceries in Australia. Telstra has 45 per cent of telecommunications and together with Optus and Vodafone, that figure goes to 87 per cent. Qantas has more than 65 per cent of the domestic market. Anheuser-Busch and Kirin control more than 90 per cent of the beer market. Medibank and Bupa together control 52 per cent of the private health insurance market. The Big Four banks have more than 70 per cent of the lending market. The list goes on.
Andrew Leigh notes that “there is growing evidence that market concentration causes a drop in growth”.
Ironically, as Sims’ recent speech to the Law Council went into specific reforms, it quickly became clear the early winners would be the lawyers in the audience.
The switch to mandatory clearance would apply to all big companies with the emphasis on filing complete evidence up front, to clear deals rather than the present lengthy dribble of data by negotiation.
If the lawyers benefit, investment bankers are potentially losers because they rely on deal certainty.
Most big deals already go to the ACCC and when there is a competition concern the Foreign Investment Review Board refers it to the ACCC before deciding.
Still, lawyers are opposing Sims’ plans because they want to be seen as protecting their clients’ interests.
The new arrangement would mean the competition laws would be breached even where there is a “possibility that is not remote” the transaction would substantially lessen competition.
This compares to the present definition where “likely” is taken as a “real chance”.
The substantial lessening of the competition test would be retained but with special rules for merger parties with existing market power, as well as for acquisitions by large digital platforms.
By definition this would mean every time a long list of companies – including Bunnings or Woolworths or major banks – wanted to buy something they would need to seek clearance and show why the merger laws were not breached.
This reversal of the onus of proof worries some, but the reality is – when pressed – merger parties happily accept the challenge.
TPG and Vodafone successfully took the ACCC to court last year. They argued there was no breach of merger laws in their deal because TPG dropped plans to enter the mobile market when the government banned its preferred equipment supplier, Huawei.
Under Sims’ plans, the factors that must be taken into account in assessing the competitive effects of a merger would be revised to focus on the structural elements of competition that are changed by the acquisition.
He is also proposing a new deeming provision, where one of the merger parties has substantial market power and, as a result of the acquisition, that position of substantial market power would be likely to be entrenched, materially increased or materially extended.
This would apply in cases like Woolworths’ recent acquisition of food services supplier PFD, which supplies pubs, restaurants and corner stores.
The deal, cleared by the ACCC this year, effectively extended Woolworths’ control over small food suppliers
Sims is promising to release an analysis of recent deals to show how competition has been affected, which is widely welcomed.
The BlueScope steel case also hinges on market dominance. The prosecution argues that Ellis presented to Vassella and others internally a PowerPoint presentation that summarised a recommended resale price project.
The defence says there is no evidence Ellis told Vassella the strategy was about procuring commitments from distributors.
BlueScope is the only supplier of flat steel products in Australia and runs the largest distribution network, with imports the only source of competing supply. The allegation is that threats of dumping action were used to attempt to force compliance.
Ellis was convicted by the NSW Local Court last year, after pleading guilty to inciting others to obstruct the ACCC’s price-fixing investigation.
Sims declined to comment on the BlueScope case as it is before the courts, but noted that the fewer companies there are in an industry the easier it is to get agreement on issues.
The hearing into alleged price-fixing has three weeks left to run before Justice Michael O’Bryan.
This article was first published in the print edition of The Saturday Paper on September 11, 2021 as "Antitrust issues".
A free press is one you pay for. Now is the time to subscribe.