Promoting Competition

Transcription

1 The Business Growth Agenda Promoting Competition Part of Building Innovation August 2017

2 Ministers Foreword The Business Growth Agenda () sets out the Government s work to build a productive and competitive economy, focusing on the six key inputs businesses need to succeed, grow, and add jobs: export markets, investment, innovation, skilled and safe workplaces, natural resources, and infrastructure. Overall, our competitiveness has been steadily increasing, with New Zealand rising to 13th in the World Economic Forum s 2016/17 ranking of global competitiveness a ranking based on the set of institutions, policies, and factors that determine the level of productivity of an economy and the level of prosperity that the country can achieve. This reflects a steady, year-on-year increase from 23rd in 2012/13. Competition is one of the key drivers of economic success, encouraging businesses to innovate in order to win customers and supply better quality goods and services at lower prices. Lifting competition will help us continue our march up the global competitiveness rankings and translate this into benefits for end consumers. Maintaining the effectiveness of our competition laws remains an important objective. The Commerce (Cartels and Other Matters) Amendment Bill contains a number of changes to the Commerce Act that are intended to support a more competitive business environment. In order to check that we have the most appropriate and effective settings the government has also reviewed section 36 of the Commerce Act (which contains a prohibition against the misuse of market power) and whether a market studies power should be introduced. The government is introducing a market studies power for the Commerce Commission to enable the workings of competition to be properly examined in various markets. We are conscious that there is limited data on competition in New Zealand. This makes it difficult to make informed decisions on how alternative policy options might affect the process of competition. To address this we are kicking off a number of research projects alongside our active policy work. These projects will examine the level of competition in New Zealand and its impact on businesses and consumers. International connections are likely to be an important source of competition for small economies like New Zealand. To make the most of these we are actively seeking open trade and investment policies which can mitigate the fact that competition is likely to be less intense in a relatively small domestic economy like ours. Finally, we are increasing our focus on taking active steps to lift competition in the parts of the economy where it will have the greatest impact. Introducing a market studies power for the Commerce Commission will enable the Government to properly examine the workings of competition in New Zealand markets. This report is an extension to the Building Innovation workstream, providing a detailed picture of the Government s work to promote competition in New Zealand. We look forward to the benefits that will flow to all New Zealanders from a sustained, cross-government effort to lift competition in New Zealand. Hon Simon Bridges Minister for Economic Development Hon Jacqui Dean Minister of Commerce and Consumer Affairs 2

3 Greater competition enhances international competitiveness Building a productive and competitive economy is one of the Government s key priorities to deliver a stronger and more prosperous New Zealand. Our international competitiveness is steadily increasing, with the World Economic Forum s 2016/17 Global Competitiveness Index ranking New Zealand 13th out of 138 countries (up from 23rd 2012/13) 1. The index is an annual assessment of the factors driving productivity and prosperity, with one of the drivers being the competition faced by domestic firms. Competition lowers prices, raises quality and stimulates innovation Effective competition from domestic and international firms gives New Zealand businesses an incentive to increase their efficiency and innovate, leading to improvements in productivity and consumer welfare. Businesses competing for customers and market share leads to outcomes such as: lower prices and better quality goods and services; businesses that are in an even better position to compete on the international stage; and higher living standards driven by higher productivity, higher incomes, and greater consumer choice. Competition is a dynamic process, and the optimal level of competition in a market changes as conditions change. In a small economy like New Zealand, market concentration (the number and size of firms) is not necessarily the best indicator of whether competition is operating as it should. Rather, we know that competition is likely to be working well when we get the outcomes mentioned above. Bolstering domestic competition could lift our competitiveness further New Zealand s competition law and our Commerce Commission are important contributors to domestic competition and are well regarded internationally. Our productivity, however, remains relatively low compared to other OECD countries. We are also not seeing all the benefits that we might expect if competition was a stronger force in our domestic economy. New Zealand prices, for example, are on average about 15 per cent higher than other countries in the OECD. And while our innovation performance is improving, our business expenditure on research and development is still lower than many other advanced economies. 1 The World Economic forum defines competitiveness as the set of institutions, policies, and factors that determine the level of productivity of an economy, which in turn sets the level of prosperity that the country can achieve. A set of 14 competition-related indicators are included in the index. New Zealand is a small, geographically distant economy. In some sectors and markets this limits the process of competition and constrains our ability to realise productivity gains. For instance: Our small domestic market limits the number of firms that can efficiently operate and the size that they can attain (unless they export). This reduces opportunities for the efficiency gains that become possible in markets with a greater number of consumers and businesses. Our small domestic markets mean that imports are one of the key ways of exposing our businesses to competition. However, our distance from trading partners and location off the main global trade routes make imports relatively expensive. Our size and distance make international connections particularly important for our businesses. International (and broader domestic) connections give productive firms the room to grow while at the same time exposing unproductive firms to competition. In this way, businesses and consumers can benefit from the positive impacts of global competition in a way that our small domestic market alone would struggle to replicate. We need more than just world class competition laws and institutions While our international competitiveness is increasing, domestic consumers aren t benefitting as much as we might expect in a more competitive domestic economy. To maximise competition and realise the benefits that it brings we need a consistent, cross-government approach that systematically minimises barriers to competition and drives our businesses to be agile, resourceful and innovative. 3

4 A dynamic, competitive New Zealand We want New Zealand to be a dynamic market environment. In a dynamic market, competition drives the innovation and productivity improvements that lead to higher incomes and better quality goods and services at lower prices. Where are we now? 13th in the WEF s global competitiveness index ( ) 1st In the world for whether competition legislation is efficient in preventing unfair competition (IMD 2016) New Zealand compares favourably in international surveys of senior executives perceptions of factors affecting competition. The International Institute for Management Development s (IMD) 2016 competitiveness rankings place New Zealand first in the world for competition legislation that efficiently prevents unfair competition. The World Economic Forum s (WEF) Global Competitiveness Report ranks New Zealand second in the world for the effectiveness of our antimonopoly policies. New Zealand is also fourth out of 45 countries in the OECD s Product Market Regulation indicators that measure the extent to which policy is supportive of competition. These survey-based measures provide a business person s perspective on competition. To enhance this perspective, the government is aiming to also establish regular measures of competition in New Zealand that can be used to build a more complete picture of competition in our markets. Market entry is one of the drivers of competition. In general, barriers to starting and running a business are low in New Zealand. For 2017 the World Bank (WB) has rated New Zealand 1st in the world for ease of starting a business, and 1st for overall ease of doing business. 2nd in the world for the effectiveness of our anti - monopoly policies (WEF ) 2nd in the world for subsidies not distorting fair competition and economic development (IMD 2016) IMD s 2016 competitiveness rankings place New Zealand: first in the world for whether competition legislation is efficient in preventing unfair competition first in the world for the time it takes and number of procedures required to start a business second in the world for subsidies not distorting fair competition and economic development second for state ownership of enterprises not threatening business activities third for the legal and regulatory framework encouraging the competitiveness of enterprises third for low tariff barriers first for protectionism not impairing the conduct of business fourth for public sector contracts being sufficiently open to foreign bidders Source: The International Institute for Management Development s (IMD) 2016 competitiveness rankings 29th in the world for the intensity of local competition (WEF ) 1st in the world for ease of starting a business (WB 2017) Many businesses across the economy are actively competing with others When asked how they would describe their business s competition, Around 72 percent of businesses reported that they have many competitors. This suggests that many parts of the economy face healthy levels of competition. However, a significant proportion of businesses (around 22 per cent) state that they have either no effective competition or no more than one or two competitors. Self-reported business competition in 2015 (businesses with 6+ employees) 53% 5th out of 47 countries in the OECD s Product Market Regulation indicators (2013) 17% 5% 5% Captive market or no No more than one Many competitors, Many competitors, Don t know effective competition or two competitors several dominant none dominant 19% Source: Statistics New Zealand data, calculations 4

5 The intensity of competition varies across the economy The geography of New Zealand means that we have many relatively small and insular domestic services markets. As the Productivity Commission notes, there is evidence that these locally-focused firms face limited competition, are unlikely to export and are dispersed across the country. In contrast, firms with more of a national focus face greater competition and are more likely to export and be based in Auckland, particularly if they produce tradeable services. Competition also varies across New Zealand industries. Sectors with the highest competition intensity include Communication Services, Manufacturing and Construction. Sectors with the lowest intensity include Agriculture, Forestry and Fishing, Finance and Insurance, and Wholesale Trade. Some differences are to be expected because different sectors and industries have naturally different market structures and business models, with demand varying substantially for different goods and services. Competition intensity can also vary significantly over time, depending on domestic market conditions and the international business environment. The intensity of competition in New Zealand, by sector ( ) (As measured by profit elasticity and weighted by gross value added) Communication Services Construction Manufacturing Cultural and Recreational Services Health and Community Services Profit elasticity Hospitality Transport and Storage Education Retail Trade Mining Property and Business Services Personal and Other Services Wholesale Trade Finance and Insurance Electricity & Gas Supply Agriculture, Foresty and Fishing Source: (2016), Competition in New Zealand Industries: Measurement and Evidence Note: The profit elasticity measure of competition used here looks at the sensitivity (elasticity) of profits to changes in costs. Profit in sectors with more intense competition is likely to be more sensitive to changes in costs. So far this profit elasticity measure of competition intensity has only been calculated for a few countries, making international comparisons difficult. However, there is evidence that competition in New Zealand is more intense than in Portugal (a less developed EU country) but significantly less intense than in the Netherlands and Finland (more developed EU countries). Differences among countries in the intensity of competition are likely to be explained by a number of factors including product and labour market regulation, proximity to international markets, openness to trade and the role that domestic industries play in international supply chains. 5

6 Competition intensity has been static or increasing in most sectors Over the decade , nearly all sectors (with the exception of finance and insurance) experienced a net increase in competition intensity. In particular, significant proportions of the agriculture, forestry and fishing sector, the hospitality sector, and the retail trade sector experienced increases in competition intensity. Changes in competition intensity by sector in the period 2000 to 2010 (Changes in the profit elasticity measure) Construction Manufacturing Hospitality Transport and Storage Retail Trade Property and Business Services Wholesale Trade Finance and Insurance Agriculture, Foresty and Fishing -100% -50% 0% 50% 100% Decrease in competition intensity No change in competition intensity Increase in competition intensity Source: (2016), Competition in New Zealand Industries: Measurement and Evidence Note: The figure plots the proportion of a sector s gross value added (GVA) that was in industries that experienced a statistically significant increase or reduction in competition intensity. For instance, the dark blue bars to the left of zero measure the share of the manufacturing sector s GVA produced by those industries within the manufacturing sector that experienced a reduction in competition intensity. Most industries saw an increase in competition intensity between

7 Active removal of barriers to competition is necessary The constraints imposed by our small markets and our distance from trading partners make it particularly important for the government to actively identify and remove barriers to competition. In order to promote competition we need to: Maintain the effectiveness of Identify barriers to competition Actively seek open trade and New Zealand s competition laws and opportunities to promote investment policies which can and institutions competition in specific sectors mitigate the disadvantages of and across the economy small size and distance Periodic consideration of New Zealand s competition laws and institutions is necessary in order to maintain their effectiveness. has recently reviewed the misuse of market power prohibition and related matters, such as whether the Commerce Commission should have a market studies power, in response to the Productivity Commission s recommendations in their Boosting Services Sector Productivity inquiry. Parliament passed the Commerce (Cartels and Other Matters) Amendment Bill on 10 August. This Bill makes a number of changes to the Commerce Act intended to support a more competitive business environment. It clarifies the extraterritorial jurisdiction of the Act and redefines the cartels regime while allowing greater innovation through collaborative activities. Effective competition requires confident and well-informed consumers. Budget 2016 provided an extra $15.2 million of operating funding over the next four years for the Commerce Commission to better protect consumers and promote competition including supporting investigation of increasingly complex merger clearances so that businesses can operate with greater certainty. The Commerce Commission s Consumer Issues 2016 report notes that the number of merger clearance applications has remained relatively static in recent years although the complexity of applications remains a prevalent theme. There are still opportunities to reduce barriers to competition To help realise the benefits that come from competition we need to ensure we have an integrated policy approach across government that allows us to be as competitive as possible. It is necessary to maintain the effectiveness of our competition laws and institutions but it is also important to look beyond competition law, to consider the broader barriers and enablers of competition across the economy. Industry-level evidence across OECD economies shows that regulation restricting competition slows the process through which productivity enhancements are adopted by other firms. 1 Poorly-designed regulation can harm competition while well-designed regulation can enhance it. Whenever the government conducts a review of a regulatory regime, it will be important to consider the impact on competition alongside other objectives for instance whether a regulatory change might limit: the number of range of suppliers, the ability or incentives of suppliers to compete, or the choices and information available to consumers. Regulatory barriers to competition do exist some justifiable, some less so. As we review our regulatory settings it will be important to include a sense-check of whether they are hindering or facilitating beneficial competition outcomes. 1 Conway, P., & Nicoletti, G. (2006). Product market regulation in the nonmanufacturing sectors of OECD countries: measurement and highlights. OECD Economics Department Working Paper no 530. Paris, France: OECD. 7

8 Recent work has been a step in the right direction There have been a number of recent decisions that are likely to either reduce barriers to competition, or prevent the creation of a barrier to competition, particularly: the placing of all small passenger transport operators under one regime that reduces the barriers to entry and levels the playing field in this industry, enabling disruptive entrants such as Uber to legally compete with existing providers such as taxis; the removal of ownership restrictions on pharmacies will better facilitate the entry of competitors that may operate lower-cost business models, be better integrated with other health services, or be more convenient for consumers in other ways; with regard to therapeutic products, agreeing to enable recognition of other jurisdictions assessments/approvals and third party evaluators lowers a possible barrier to entry; and the Trade (Anti-dumping and Countervailing Duties) Amendment Bill, which was given royal assent on 29 May 2017, introduces a bounded public-interest test before anti-dumping duties are applied and will potentially lower the price of some imported goods and increase international competition. Where are the greatest opportunities to lift competition? There is no silver bullet that can be used to lift competition in New Zealand there are many factors that influence competition and these differ for different parts of the economy. To lift competition, a cross-government programme that addresses multiple factors at the same time is necessary. This is why we are looking at both horizontal aspects of competition (such as broad-ranging business regulation, competition law, research into the workings of competition etc.) as well as taking a closer look at vertical segments of the economy (such as barriers to competition in particular sectors). 8

9 Key: Implementing In progress Initiating Promoting Competition A dynamic market economy where competition drives the innovation and productivity improvements that lead to higher incomes and better quality goods and services at lower prices. Action plan for promoting competition Project Description Status Who s involved Maintain the effectiveness of New Zealand s competition laws and institutions Give the Commerce Commission a market studies power A market studies power will enable detailed research into markets where there are concerns regarding the state of competition in the market. Implement the Commerce (Cartels and Other Matters) Amendment Bill Parliament passed the Commerce (Cartels and Other Matters) Amendment Bill on 10 August. This Bill makes a number of changes to the Commerce Act intended to support a more competitive business environment. It clarifies the extra-territorial jurisdiction of the Act and redefines the cartels regime while allowing greater innovation through collaborative activities. Part of Building Innovation Measure and monitor competition in New Zealand In 2016 released a research paper presenting a relatively new measure of competition for New Zealand (profit elasticity). is working with the research community across government to develop an ongoing competition research agenda to systematically measure competition and identify areas requiring greater analysis., Treasury, Productivity Commission Improve consumer participation in the regulatory processes under Part 4 of the Commerce Act Part 4 of the Commerce Act provides for the regulation of the price and quality of goods or services in markets where there is little or no competition and little or no likelihood of a substantial increase in competition. Poor consumer participation in Part 4 regulatory processes may reduce the extent to which regulation reflects consumer preferences. Support to help businesses and consumers transact with confidence Budget 2016 provided an extra $15.2 million of operating funding over the next four years for the Commerce Commission to better protect consumers and promote competition including supporting timely investigation of competition matters such as merger clearances, so that businesses can operate with greater certainty. Treasury, Commerce Commission Identify barriers to competition and opportunities to promote competition in specific sectors and across the economy Examine retail payment systems is working with industry on ways to address concerns about New Zealand s retail payment systems. Review occupational regulation is developing best-practice guidance on regulatory design and implementation issues for occupational regulation, to ensure that encouraging competition is considered alongside other objectives such as protecting consumers. Part of Building Innovation Consider search and switching costs Examine whether search and switching costs are limiting or distorting competition in particular sectors. This was a recommendation from the Productivity Commission s Services Sector inquiry. Consistently build competition analysis into core public policy across government Include consideration of competition as an objective when undertaking reviews of existing regulations. Part of Building Innovation, Treasury and the Commerce Commission 9

10 Project Description Status Who s involved Actively seek open trade and investment policies which can mitigate the disadvantages of small size and distance Analyse the impact that importing has on our economy Conduct research into the impact that importing has on our economy, to test the extent to which the disciplines imposed by import competition contribute to competition outcomes in New Zealand s domestic market. Implement an ambitious free trade strategy Free Trade Agreements open up our markets to import competition and encourage our businesses to experience export competition. This introduces competitive disciplines on our firms and encourages increased productivity. Actions in relation to our free trade strategy are being taken forward in the Export Markets workstream of the. Part of Building Export Markets MFAT lead Realise competition benefits from the digital economy We need to make the most of enhancements to competition that can flow from New Zealand s evolving digital economy, including cross-border e-commerce opportunities. This is being taken forward in the Digital Economy workstream of the. General outcome from Digital Economy lead 10

11

12 ISBN Online CROWN COPYRIGHT 2017 This work is licensed under the Creative Commons Attribution 3.0 New Zealand licence. In essence, you are free to copy, distribute and adapt the work, as long as you attribute the work to the Crown and abide by the other licence terms. To view a copy of this licence, visit Please note that no departmental or governmental emblem, logo or Coat of Arms may be used in any way which infringes any provision of the Flags, Emblems, and Names Protection Act Attribution to the Crown should be in written form and not by reproduction of any such emblem, logo or Coat of Arms. 12