Single economic market has risks

This article first appeared in the NZ Herald on January 20 2010.

At this time of year, many of us are forced ruefully to concede - again - that it is possible to have too much of a good thing.

Usually we have in mind parties, food and drink. But perhaps we should also include transTasman regulatory co-ordination.

The transTasman work schedule has revved up significantly in the past few years and will reach a new pitch of intensity in 2010. It has delivered - and will deliver - much that is useful.

There may come a tipping point, however, at which it is no longer axiomatic that, because some harmonisation is good, more is better.

The bilateral relationship has evolved significantly under the aegis created by CER (closer economic relations) and has cross-party support in both countries.

In 2004, the Clark Government and the Howard Government took CER to a new level by agreeing to work towards a single economic market (SEM) based on common regulatory frameworks.

Then, last year, in a move which attracted surprisingly little attention, Prime Ministers Kevin Rudd and John Key took another quantum leap by signing up in the August 20 Statement of Intent to "Principle 7" - the last of seven principles which will guide the SEM programme.

Principle 7 says that initiatives should be evaluated according to whether they deliver "a net transtasman benefit". In other words, each initiative need not benefit each economy or need not benefit each economy equally to proceed.

Documents released under the Official Information Act (OIA) show that Principle 7 was recognised as "a significant new element in explicit transtasman messaging" which would "move beyond each side applying a narrower net national benefit test on an issue by issue basis to embracing a longer-term, more strategic calculation of overall balanced benefits across a broad number of areas of endeavours within the SEM".

We know that the Treasury expressed "some caution" around Principle 7 in a briefing to Finance Minister Bill English.

But we do not know what the nature of the Treasury's reservations were as this material was withheld on the grounds that publication might prejudice New Zealand's international relations.

But, clearly, there are some risks to New Zealand in Principle 7.

Australia's size creates a risk integration could spill into assimilation and the pull of the Australian market creates a potential for a "hollowing out" of New Zealand capacity if the action is perceived to be in Sydney or Melbourne.

And we need to be careful about the quality of the policies we import from Australia. Two identified for possible adoption in 2010 are the criminalisation of cartel offences and the broadening of the misuse of market power test (under section 46 of the Australian Trade Practices Act, section 36 of our Commerce Act).

The Australian amendments to their misuse of market power test were, famously, drafted on a beer coaster in a Birdsville pub by a Queensland senator sympathetic to Australia's influential small business lobby.

While they were given some polish as they wound their way through the legislative process, more than a whiff of the bar smoke remains and Australian lawyers complain that no one really knows what the provisions mean. Yet our Commerce Commission wants us to incorporate them into our own law.

Similarly with the Australian move to criminalise cartels. It was apparently promoted by the former chairman of the Australian Competition and Consumer Commission (ACCC), Professor Allan Fels, as a diversionary tactic against an attempt to clip the ACCC's wings and fell into John Howard's lap just as he needed to distance himself from the billionaire "cardboard cartelist", Richard Pratt.

At no time was the idea's wisdom seriously evaluated.

We also need to heed the lessons of the mutual recognition regime for securities offerings which came into force in June 2008. The regime allows issuers issuing securities in their own country to issue also in the other country using their home jurisdiction offer documents. The facility is delivering significant savings both in compliance costs and in the time to get security issuances to market.

But the traffic is very heavily in Australia's favour. A recent report by the Australian Securities and Investment Commission (ASIC) showed that, since the regime's inception, it had been used only seven times by New Zealand issuers against 253 times by Australians, predominantly for offering managed funds in New Zealand.

The imbalance reflects differences in other policy settings. For example, to distribute a securities offer in Australia generally requires a licence from ASIC, which can be a costly and lengthy business. And for managed funds, tax is a problem because we tax all foreign income of a New Zealand managed fund whereas Australia does not tax non-Australian investors in Australian schemes on income sourced from outside Australia.

This experience underlines the complexity and the layers of detail involved in co-ordinating our two legal systems. It also illustrates how a change in one area can set up the momentum for changes in other areas so that the work programme develops its own internal logic.

It is within this context that Principle 7 gives cause for concern. Nowhere in the papers released under the OIA was there any evidence of any detailed evaluation being done - or even sought - on what Principle 7 might mean in practice and what its implications might be. Before we proceed too much further, we should conduct that analysis.

These are not arguments for abandoning the single economic market. It has a lot to offer New Zealand business. But the objective must be to improve the regulatory settings of both countries, not just to make them the same.

Regulatory difference can offer a source of competitive advantage which we don't want lightly to throw away. The World Bank's latest Doing Business survey, for example, ranks our regulatory framework as superior to Australia's in nine of the 11 criteria.

The Capital Market Development Taskforce has the right idea. Among its sheet of recommendations is one that we "balance any ongoing drive for greater international capital market integration against clear long-term benefits for New Zealand's capital market, such as a better allocation of capital, improved risk management and increased competition".

Let's make that "Principle 8".

Geof Shirtcliffe is a partner at Chapman Tripp specialising in corporate and competition law. The views expressed here are his own rather than those of the firm or its clients.

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Related topics: Corporate & commercial; Capital markets reform; New Zealand productivity; Public law

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