When in doubt – regulate

Following on from the "bullying" theme established earlier in this edition of Boardroom, it is perhaps timely to have a think about the ways in which the law looks to moderate the conduct of business bullies.

The two key devices in the Commerce Act for this purpose are: the section 36 prohibition on the taking advantage of market power; and the powers under Part 4 relating to the imposition of price control. A certain equilibrium exists under this regime whereby even the largest businesses remain able to exercise a degree of commercial freedom within the parameters set down. The regime operates not so as to micro-manage large businesses, but to leave them be, provided that there will be severe consequences in the event that they abuse their position.

However, this model is being gradually undermined as the Government’s controlling instincts have come to the fore. Increasingly detailed and unwieldy sets of industry specific regulation to manage the perceived excesses of major players in particular infrastructure industries, namely telecommunications and electricity distribution, have been promulgated to supplement the devices already available.

This trend seems to have arisen due to gaps perceived to exist in the existing regime. Section 36, for example, has been considered somewhat toothless since the "incumbent-friendly" outcomes of the Telecom v Clear wars of the 1990s. The relative infrequency of successful section 36 prosecutions has lent some credence to this view. The Commerce Commission’s most recent section 36 conquest was stamping on a particular practice of the Hermitage Hotel at Mt Cook. The Hermitage was "bundling" a meal at its restaurant with a night’s accommodation to the detriment of others in the local market – presumably the local fish and chip shop? Whatever, it was hardly the bust of the century. Others have surely done worse and got away with it. Similarly, the Government seems to consider that threshold for invoking Part 4 is too high. Ports and airports have already escaped. In those cases, no matter how hard the Government tried, it could not justify intervening.

Frustrated at its inability to interfere, the MED, in its Discussion Document relating to the review of Parts 4 and 4A of the Commerce Act, is now proposing that New Zealand business be subjected to a whole new range of brand new regulatory toys – each of them inevitably expensive and imperfect, and ready to be deployed in the context of a whole range of different industries where it is not clear there is a problem that requires solving. The new "negotiate/arbitrate" concept – a variation of which was deployed with little success in the telecommunications sphere – is being pitched as part of the Government’s attempt to work with businesses to enhance investment incentives with "better quality regulation". In reality, slightly less heavy-handed devices such as these are more likely to enhance the quantity – but not necessarily the quality – of regulation. This initiative has been mooted despite the fact that regulated companies are becoming increasingly frustrated with the vast costs involved in complying with their regimes. Any talk of dampening investment incentives in a country with creaking infrastructure is seemingly glossed over by officials, regulators and politicians as some kind of self-serving hyperbole from the business community.

What a shame that this issue is so glibly brushed aside. In pursuing its interventionist agenda, the MED has simply assumed its way past the most crucial issue – that is, establishing that New Zealand businesses somehow deserve this level of regulatory supervision. The working logic seems to be that if we didn’t get to regulate them, there must be something wrong with the system! This attitude is perplexing. MED must address the question of whether a country and economy as small as ours can afford to lower the thresholds at which regulatory intervention is justified, dragging more and more industries into the tundra that is economic regulation. The dangers of importing "regulatory best practice" from economies many times our size are self-evident. A pervasive regulatory regime overlaying a modest commercial prize will turn the private sector right off – quite opposite in effect then to the supposed pro-investment agenda underpinning the proposed reforms.

So, in making their views know to the MED, businesses need to look past the pro-investment rhetoric of its Discussion Document and focus on the wider anti-investment implications. Unfortunately, as they were in the mid-80s, New Zealand businesses today are becoming increasingly accustomed to and accepting of the intrusiveness and cost of regulation. And MED seems set to take advantage. Businesses harbouring concerns about the direction proposed in MED’s Discussion Document should stand up and be counted. They can of course make their views known through the submissions process.

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Related topics: Competition, regulatory & antitrust; Commerce Commission; Corporate & commercial; Directors

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