Commerce (Cartels and Other Matters) Amendment Bill — Second ReadingText is incorporated into the Bound VolumeCommerce (Cartels and Other Matters) Amendment Bill — Second Reading[Sitting date: 24 June 2014. Volume:699;Page:18849. Text is incorporated into the Bound Volume.]Commerce (Cartels and Other Matters) Amendment BillSecond ReadingHon CRAIG FOSS (Minister of Commerce):I move That the Commerce (Cartels and Other Matters) Amendment Bill be now read a second time. The National Government supports New Zealand’s business growth both in domestic and international markets. This bill will improve the competition regime provide greater protection for consumers and encourage innovation—all key elements of our Business Growth Agenda. New Zealand is a small economy dependent upon export markets. Often this means we have to find innovative ways to do things. The Commerce (Cartels and Other Matters) Amendment Bill enables this.Effective competition enables and drives innovation and productivity. In contrast anti-competitive conduct including hard-core cartel conduct lifts prices above competitive levels to the detriment of consumers. One of the bill’s objectives is to deter hard-core cartel conduct by clarifying the scope of prohibited behaviour. More specifically it prohibits price fixing market allocation and output restrictions between competitors. Bid-rigging is also prohibited but this conduct is generally considered to fall within the definition of price fixing.A key feature of the regime is the new collaborative activity exemption which enables businesses to assess for themselves whether a proposed collaboration falls within its scope. The first element of the new exemption asks whether there is a collaborative activity. This is an activity carried out cooperatively for a legitimate collaborative purpose. A collaborative activity could include joint research and development sharing risk in a long-term infrastructure investment or delivering an efficient marketing and distribution system through a franchise agreement.The second element of the exemption asks whether engaging in cartel conduct is reasonably necessary for the purposes of the collaborative activity. This element is important because it allows businesses and the Commerce Commission to test whether the participants could achieve a comparable outcome through practical and significantly less restrictive means. I would be looking to the courts to draw on comparable US and Canadian case law when thinking about how the test should be applied in the New Zealand context.Through their usual practices of analysing the options and objectives of their activities businesses should be able to determine whether they meet the exemption requirements. Where businesses are unsure whether an activity might risk breaching the Act they can apply to the Commerce Commission for clearance. Over time as the commission documents its reasons for decisions these clearance decisions should form a body of precedent.The Commerce Committee suggested a number of useful amendments to the bill. These included clarifying the relevant point in time at which a collaborative activity is assessed. The committee also suggested allowing the Commerce Commission to revoke determinations that give clearance to a proposed collaborative activity where there is a material change of circumstances. This is a helpful amendment because it ensures that consumers are not harmed as a result of material changes in market conditions while at the same time it provides procedural safeguards for businesses to undertake long-term investments. The onus would be on the commission to show that the change was material. In addition the commission would be required to give interested parties the opportunity to make submissions.Another important change to the clearance regime allows the commission to assess the arrangement to determine which provisions might be cartel provisions. Notably the committee endorsed the introduction of criminal sanctions for hard-core cartel conduct. This change aligns New Zealand with Australia and some of its major trading partners. The committee noted the view that criminal sanctions should be reserved for conduct that is truly culpable. I am pleased with where the bill has got to on this issue. To attract criminal sanctions a person should have acted with intent or at the very least with a disregard for the consequences. In terms of process where conduct is sufficiently serious the commission would make a recommendation to an independent panel convened by the Solicitor-General. The panel would then determine whether prosecution was appropriate. The process recognises that only serious or recidivist conduct should be subject to criminal sanctions.I turn now to the Commerce Committee’s recommendation to transition the regulation of competition in international shipping to the Commerce Act. I invited the committee to consider the transport issues alongside the bill. Work on this issue was initiated by the Productivity Commission in its international freight services inquiry. The commission recommended that the exemption for international shipping be removed. The committee called for submissions on whether safeguards built into the Commerce Act and the bill would provide sufficient flexibility for international shipping lines to collaborate. Submissions to the committee informed the Government’s decision to transition international shipping to the Commerce Act regime. The changes will bring the industry into line with general competition law. It also puts international shipping in the same position as coastal shipping. This should ensure effective oversight of an industry that is vital to our exporters. It is pleasing to note that the committee endorsed this decision.With a review of the Civil Aviation Act already in progress the committee recommended that transition to a Commerce Act regime be considered as part of that process. I look forward to the outcome of that review.The National Government champions competition. Exemptions from competition law may be considered on a case by case basis but they should always be justified on public benefit grounds. I would like to thank members of the committee for their work. I am very pleased with the outcome and look forward to further enabling firms to compete innovate and trade successfully. This Government understands that a competitive and innovative economy is the best way to build sustainable economic growth which creates jobs and grows incomes. I commend this bill to the House.Hon CLAYTON COSGROVE (Labour):Although the Labour Party again in the spirit of most of these pieces of legislation will support the Commerce (Cartels and Other Matters) Amendment Bill I have got to ask the Minister of Commerce—and I am sure that he is going to stay and hang on every word. I am going to make a couple of comments about Supplementary Order Paper 408 which I have proposed to replace section 36. This is quite important because the Government has just said—we have just heard the Minister say—that the National Party is the champion of competition. To a large extent like all parties in this Parliament that would be true except there was a big issue that was raised in this House earlier this year in respect of the grocery trade which the Minister rubbished from the then Hon Shane Jones who was a member of this Parliament and whom he rubbished. He basically went into denial over it.Then it was found out that the Government had been well-informed about the concerns about this issue as far back if memory serves me correctly as the Minister’s predecessor Simon Power in 2009. The current Minister then met with the chief executive officer of the grocery suppliers association Katherine Rich. The file note that he authored in his office or that was authored by his officials at his request or instruction notes the conversation and notes the gravity of the issues. If the issues were not of sufficient gravity one wonders why this Minister would have instructed his officials to make a file note of the conversation to go and rehearse various options and to note that in the file note. Then nothing happened. He stood in this House and said: “I know nothing.” Like Sergeant Schultz he said: “I know nothing. I see nothing. I hear nothing.” So although the Minister stands up and says he is the champion of competition that is limited to only those aspects that interest that Minister.We have proposed a pretty substantial amendment in Supplementary Order Paper 408 in respect of section 36 of the principal Act. I have to say that there are some very eminent entities in this country including the chair of the Commerce Commission the Productivity Commission and many in the telecommunications industry who have called on section 36 to be amended in the way that my Supplementary Order Paper 408 does.Clare Curran: We’re in tune.Hon CLAYTON COSGROVE: My colleague says: “We’re in tune.” Hell yes we are in tune.Before I go into the nature of the Supplementary Order Paper I will just deal with the Minister’s response. I sent the Supplementary Order Paper—as is the wont to do in these commerce bills; there is cooperation pretty much—to the Minister on 10 December 2013. He then turned up at the Commerce Committee for the 2014-15 estimates a couple of weeks ago and I asked him whether he would support it. He has had it for nigh on 7 months. He said he would get his officials to look at it. I asked him in the select committee whether he would support it and the answer was no. It was not because he did not agree with it but simply because he wanted to put it through some sort of full policy process. OK fair enough—that is a logical step to undertake. However he had 7 months to do it—7 months to do it—and he did nothing as this bill progressed through. Such is his commitment to stamping out anti-competitive behaviour.Then we see the letter that he wrote me which I received on the 24th of this month. In it he says that although he rejects the Supplementary Order Paper “to this end the Government recently announced its intention to review section 36 as part of its Business Growth Agenda Future Direction 2014 report.” So now we know that the Minister had our idea endorsed by the Commerce Commission and endorsed and called for by the Productivity Commission the telecommunication industries and others for 7 months and he decided to do nothing about it until he got a prod. And then the excuse was that National was going to put it through a full policy process. Given the Minister’s track record on getting a policy process expedited through the bureaucracy the Parliament and the select committee God only knows how long it will be before we actually see if at all any proposed changes to section 36 as called on by external entities. You would think that we were going to write things on tablets of stone.What we are actually changing in the proposal for section 36 is that as it stands the Commerce Commission has to prove the intent of monopolies abusing market power rather than the effect of that behaviour. To give a rather coarse example but a simple one for one or two members opposite it is a bit like saying that in a car accident where somebody injures somebody—breaks their legs runs them over or what have you—we will look at the intent. The intent was not actually to do that to maim the person because it was an accident but we will not look at the effect of the fact that that person may be permanently injured unable to work unable to earn an income—i.e. there is a series of negative impacts on that person’s life. So that is the sort of basic example for Mr Young opposite. In essence the Act looks at the intent but it does not actually look at the impact and actions around the impact of anti-competitive behaviour. It is a simple change but it is an important change. We think that looking at that effect or that impact—actually what happened who got done over why they got done over how that had an impact on that entity or person and what the anti-competitive behaviour was—is extremely important. It is actually the practical outcome of the exercise.As I say the Productivity Commission has called for this the Commerce Commission has called for this and various other industry players have called for this. Given that these bills are relatively non-contentious and are generally almost always supported by the parties we sent the Minister the Supplementary Order Paper 7 months ago in the hope that this could be helpful. We did not make a big song and dance about it. We told the world that we were doing it. We hoped the Minister would take it seriously and 7 months later when he could have embarked upon his major root and branch policy process all we get is a letter dated today that says: “We are going to look at it at some future time as part of a fancy growth and industry agenda and mix it up in the politics of the day.” I think that says more about the Minister than it actually does about what we want to do here tonight. There is an opportunity to pass a simple Supplementary Order Paper to have a major impact on anti-competitive behaviour and give the Commerce Commission particularly some really good grunt in terms of going after this sort of stuff.There is a question I would just like to ask the Minister and I am sure he will give another dissertation as we move through this. Rather than him just saying: “Policy process—that’s what we have to do.” I would like an explanation as to why he did not embark on that 7 long months ago—7 long months ago. He says on the one hand he is the champion of going after anti-competitive activity. He says he is the champion of business. He says he supports this bill. He says he wants to cooperate with other parties and get the best possible piece of legislation out. Yet when he was given the opportunity to do so nothing happened. We would have supported a truncated policy process I have to say and I believe that the industry would have the Commerce Commission would have and the Productivity Commission would have. If we had all come together and said: “Look we think it is the right thing to do but we want to health check it. I am sure we will consult but we do not want to mess around with this. We want to get it done because it is the right thing to do.” this side of the House and I am sure other parties as well would have supported that. But nothing happened.The silence is deafening from this Minister. It is the same Minister who got up and rubbished the grocery issue. He said it was all a lot of hot air and then suddenly the Commerce Commission put seven or eight investigators on the case subpoenas flew around this country like lightning bolts witnesses were brought in and they are taking that issue extremely seriously. But it is a worry when the Minister of Commerce the highest officer within that portfolio decides in an arbitrary way to simply rubbish it and then criticises others by the way for putting up suggestions prior to the Commerce Commission reporting and then sneaks round to the back door and cuddles up to the very organisation that is being investigated by the Commerce Commission in order to do some sort of slipshod deal on a voluntary agreement to in some way prove to us that he is on the case and he is actually doing something. Well the arguments that the Minister puts up round this are riddled with holes. We expect some accountability and at the very least we expect an explanation as to why he will not support Supplementary Order Paper 408.JONATHAN YOUNG (National—New Plymouth):Well I think just in response to the comments of the honourable member Clayton Cosgrove it is important to understand that the regulator is doing an investigation that must not have political interference and so the Minister of Commerce has made it quite clear that this situation is in the best hands and the proper hands and the appropriate hands. I believe that in due course we will hear back from the Commerce Commission.The Commerce (Cartels and Other Matters) Amendment Bill here in its second reading is one of those bills that are full of complexity. On the one hand we want to allow pro-competitive collaboration between firms but on the other hand we want to deter anti-competitive hard-core cartel conduct. We want to encourage that sort of cooperation where firms can work together. I think that the underlying test is that it must be of benefit to the consumer and not have predominant benefit to those who collaborate.Obviously in collaboration there is benefit. But in terms of competition we know that competition is a process of rivalry between firms. Firms compete on the basis of price and quality to sell products to customers. The process of competition between firms drives firms to lower costs improve quality or develop better products in a competitive market and these benefits are passed through to consumers.Cartels on the other hand are formed when rival firms agree not to compete with each other by fixing prices or restricting output or allocating markets or rigging bids. Cartels allow firms to raise their prices above the competitive level without fear of losing customers to rivals. This increases the profits of the participants but it does nothing to create a countervailing benefit to consumers through more efficient business operations.So those are the two positions that the Commerce Committee investigated and heard about through submissions that came to our committee. We heard 16 oral submissions even though we received 41 submissions in all. We also received advice from the Ministry of Business Innovation and Employment and from the Ministry of Transport particularly around shipping and of course airlines. One of the things we have been relentless on is working through the whole suite of Acts of Parliament that have needed to be updated in order to be fit for purpose for a modern growing economy.This bill is very important because we know that if we can strip out unnecessary costs in our economy then the benefit that is going to come through to our economy is going to translate into businesses being able to afford to employ more people and being able to give a stronger and more secure future for their employees. That is because the margins of their profitability will increase. It is important that as companies look at their bottom line we have an environment where competition causes them to become more efficient.We have to compete not just here domestically but globally. We have to become a country that competes efficiently and effectively. We have to have companies that can compete against companies in Australia in Asia in North America and in Europe. So if we are hampered and held back by anti-competitive behaviour that continually inflates prices makes the cost of doing business high and passes down those costs to consumers then what we are going to find is that the inefficiency in our economy is going to take away our competitive edge.We are a small nation. We are always faced with the tyranny of distance. We are an export nation so the efficiency of our companies is paramount. I believe that in this bill we have found a good balance. Companies can cooperate together and work together knowing they are all part of the supply chain of a product or service and they can do that in such a way that the consumer benefits. We have also found a balance where we can identify those companies that are anti-competitive and have cartel behaviour. The Commerce Commission has been given a set of tools to be able to work in this particular area.I am very pleased to stand in support of this bill. I want to thank the members of the Commerce Committee for their hard work on a very important piece of legislation. I commend this bill to the House.CLARE CURRAN (Labour—Dunedin South):I would like to take a call in the second reading of this bill the Commerce (Cartels and Other Matters) Amendment Bill. There is a lot to say in response to the chair of the Commerce Committee Jonathan Young in terms of the existing situation in New Zealand around anti-competitive behaviour whether or not we are creating a pro-competitive environment and whether or not this legislation goes far enough which we seriously contend it does not. Unfortunately the Minister of Commerce is refusing to consider a really important amendment to this bill.Debate interrupted.