Criminalising cartels - Nice one, sort of...
It’s a strange feeling to be impressed and underwhelmed at the same time. That mix of feelings is how I reacted to newly‑minted Minister for Commerce and Consumer Affairs Kris Faafoi catching the New Zealand competition law community on the hop last week when he introduced proposed legislation to the House to criminalise cartel conduct. While a change of this nature should not be unexpected from a left‑leaning government, the timing of the change and the fact that it came without warning were factors that caused surprise. This is a major change to New Zealand’s competition law, and the announcement suggests that the Minister has some firm views on the issue and the current Government sees it as a priority. That’s the immediate context for a policy debate that will unfold over the coming weeks and months.
But as I said, I have mixed feelings about the proposed reform. Let’s start with the bouquets. In my view, Minister Faafoi’s instinct on this matter is clearly right. Hard-core cartel conduct is fraud at best and outright stealing at worst. The type of conduct I have in mind is when businesses that should be competing with each other secretly agree to not compete. The result is that (for example) what you and I think is a competitive price for a product or service actually isn’t, so we pay too much. That behaviour cheats consumers out of their money and the sanctions for it should be serious.
It’s worth remembering that a similar proposal to criminalise this sort of behaviour was initially floated by the previous National‑led Government, but it balked at the idea at the last minute due to pressure from the business community. Minister Faafoi (and the current Government) thinks the previous Government got that call wrong, and I am inclined to agree. Donal Curtin makes the case for reform in his usual compelling way here, and I broadly agree with him. In that sense, the Minister’s decision to seek to criminalise cartel behaviour is, to use the current political phraseology, strong and decisive. Well done.
But for all that, I find myself a little underwhelmed – perhaps even disappointed – with what the announcement might mean for the Government's general approach to competition law reform. What I would have loved to have seen from a government serious about competition law is (1) a clear, coherent policy justification for what is a major change of approach to competition law enforcement, and (2) a link between that policy and a broader plan to lift New Zealand's economic performance. My disappointment is that those things don't appear to be part of the thinking behind the reform. Let's briefly discuss each in turn.
Let's start with New Zealand's economic performance. Competition law and policy matters to economic performance. That law and policy shapes the market, which in turn supplies the incentives on businesses to innovate, lower cost, and raise quality in ways that benefit consumers. When businesses succeed at doing this they grow their business. When enough businesses do this, they grow the economy. And we all benefit. That's the theory, and its pretty easy to grasp. But the practice is much more difficult. New Zealand's domestic markets and small and isolated, and this means that (1) often competition is limited no matter how hard we try to promote it, and (2) businesses often lack the scale necessary to really invest in innovation or drive meaningful cost efficiencies. How we manage those disadvantages to ensure that markets still work reasonably well is what competition law and policy is all about.
So, how are we doing on that front? Without mincing words, New Zealand’s current approach to competition law is something of a shambles. The rules around what constitutes cartel behaviour are extremely unclear and difficult to apply in practice, monopolisation offences routinely go unenforced by the regulator, the courts are reluctant to intervene in 'economic policy' matters that they feel they don't understand, and the success rates of enforcement action are variable at best. In short, our competition law regime tends to underperform and that underperformance matters. In a small economy, an effective competition law is vital to increasing productivity and, over time, economic growth. Because incentives on businesses to compete on the value they offer to consumers is soft, we don’t currently have a competition law regime that delivers on these productivity and economic growth objectives reliably.
For that reason, I would love to have seen the Minister advance these proposed reforms as the first step of a wider plan to clean up competition law and lift our economic performance. Demonstrating how criminal sanctions for cartel conduct contributes to that lifting of our economic performance would then be the key policy justification for the proposed change to our competition law. But that policy justification is missing at the moment. Instead, we have an 'on balance I would do things differently' approach. That sounds to me like tinkering rather than the game-changing reform we need.
And unfortunately I don’t hold out a lot of home for this hard policy work on the relationship between competition policy and economic performance being done behind the scenes. The justification for the current proposal relies on the policy work undertaken in support of the original proposals of the National‑led government. That’s unfortunate, because that policy work (at least to the extent it was made public) was never sufficiently robust to credibly support the proposed changes. The main reason for this lack of compelling policy work was that the key driver for the reforms was not the merits of competition policy but the goal of simply bringing New Zealand in line with the policy position in Australia regardless of the merits.
That's not a best-practice approach to competition policy. In fact, there are plenty of factors that ought to be tested in a New Zealand context before we say we can support these reforms. Off the top of my head, key policy factors to consider would include (1) the additional costs of criminal enforcement over and above civil enforcement and the disproportional impact of those costs on a small economy, (2) the need for significant additional funding for the regulator and the implications of the regulator's limited litigation fund, (3) the risks of increased failures of enforcement action due to the higher standard of proof required to be met, (4) the different incentives around settlement of claims once enforcement discretion shifts from the regulator to the Crown prosecutor, (5) the profound lack of understanding of the nature and purpose of competition law among the New Zealand business community, which would tend to mitigate efforts to increase deterence, and (6) the actual impact of the change given the balance of domestic and international cartels that are identified, given that international cartels tend to self identify (as they are notified to or discovered by other competition authorities around the world).
Now remember, I'm in favour of harsh sanctions for cartel conduct. But I'm fallible and my instincts may not be right. So we need credible policy justifications for this type of reform rather then shibboleths like "alignment with trading partners" and "increased deterrence" . If our competition law is determined on this under‑cooked basis, it really doesn’t bode well for the success of our markets or our economic performance.
I would have thought that criminalising cartel conduct would be an easy policy win. The justifications for it have been tested internationally and simply need to be updated for the New Zealand economic environment, and other areas of corporate compliance have been criminalised in recent years providing an evidnece base to work off. I genuinely do think the Minister has got this one right, but in the long run my view doesn’t actually count for much. It would have been great to see an objective and compelling case for this reform, both to reassure those who may be subject to the new sanctions and to demonstrate that a key driver of our economic success is in capable hands. For now, I guess all we can do is hope the Minister's instinct is right.