EXEMPTIONS AND EXCEPTIONS TO AUSTRALIA's

COMPETITION LAWS AND POLICIES

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BY NICOLE MASTERS

THE TREASURY, AUSTRALIA

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1. Australia's general competition laws are contained within the Commonwealth's Trade Practices Act 1974 (The Act). The Act prohibits a wide variety of anti-competitive conduct including misuse of substantial market power, exclusive dealing, resale price maintenance and mergers or acquisitions that are likely to have the effect of substantially lessening competition. The Australian Competition and Consumer Commission (ACCC) is the single independent agency charged with the responsibility for administering and enforcing the Act.

2. Australia believes that competition laws should apply generally to all business activities (regardless of ownership) and to all sectors of the economy. Broadly speaking, the Trade Practices Act does apply to all business activities and sectors of the economy. However, there are, of course, a limited number of specific situations in which the general competition laws should not apply or should be limited in application. For example, situations where application of competition law is not in the public interest or interferes with administration of government. Therefore, in Australia, there is provision for exemptions for particular type of activities. It is true to say, however, that these exemptions are very much the exception rather than the rule.

3. There are four main categories of exemptions (or exceptions) to Australia's competition laws:

• government activities of a "non-business" nature;
• conduct required or "mandated" by law;
• conduct specifically authorised (or permitted) by legislation or regulation;
• conduct authorised by the ACCC or notified to the ACCC under the TPAct.

4. Three of the four categories are determined by parliamentary processes �� the fourth is determined by the ACCC. I will outline the nature of these exemptions later, but first it may be useful to provide some background to the Australian law.

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5. In 1993 the Report by the Independent Committee of Inquiry on National Competition Policy (the Hilmer Report) recommended that Australia's competition laws should apply universally to all business activities in the Australian economy. As Australia is a federation and the Commonwealth Government has limited powers under the Constitution, implementation of the Hilmer Report recommendations required the cooperation and agreement of the State and Territory Governments. As a result, the Commonwealth, State and Territories signed three competition policy agreements in 1995.
   
   
6. The Conduct Code Agreement led to the national application of the competition laws with each State and Territory passing its own legislation virtually identical to the Commonwealth's competition legislation. This extended the application of Australia's competition laws to all types of businesses regardless of ownership or incorporation (including professional bodies such as doctors and lawyers). Hence, now Australia's competition laws apply universally across all businesses irrespective of their business structure.
   
   
7. The Competition Principles Agreement stated (amongst other things) that all levels of government should implement the policy objective of "competitive neutrality". Competitive neutrality requires that significant government business activities should not enjoy any net competitive advantage over other businesses simply by virtue of government ownership. In order words, government owned business activities and privately owned businesses should (as far as possible) compete on a level playing field (for example, they pay all applicable taxes and are subject to the same planning and environmental laws as privately owned firms). Consistent with the competitive neutrality principle, the Act was amended to extend the competition laws to State and Territory Governments in so far as they "carry on a business". (The Commonwealth Government's business activities have been bound by the competition laws since 1977.)
   
   
8. The third agreement, the Agreement to Implement the National Competition Policy and Related Reforms provides significant financial incentives (from the Commonwealth) for the State and Territory Governments to meet their obligations for implementing the national competition policy initiatives.

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Legislation Review

9. The Competition Principles Agreement also requires the Commonwealth, States and Territories to review, and if appropriate, reform legislation (including Acts or regulation) which restricts competition, by the year 2000. This includes legislation that provides an exemption from the Trade Practices Act. Under the Agreement, the guiding principle for legislation is that it should not restrict competition unless it can be demonstrated that:

• the benefits of the restriction to the community as a whole outweigh the costs; and
• the objectives of the legislation can only be achieved by restricting competition.

10. For example, the Government should not legislate to require that all legal practitioners must have a four year law degree unless it can show that the benefits of such a law outweigh the inherent costs and that the only way to achieve the objective of the Government (which may be to protect consumers of legal services) is to do so by restricting competition in the profession to people with a degree.
    
    
11. The States, Territories and Commonwealth are all responsible for conducting their own legislative review processes. However, the National Competition Council (NCC) is responsible for overseeing these legislative reviews and publishes an annual report on the progress made by the separate governments.
    
    
12. The Hilmer reforms effectively lead to a reduction in the number of exemptions, thereby achieving greater consistency of application of the Act. The reforms also make it more difficult for Governments to implement new exemptions.
    
    
13. Turning to the four types of exemptions mentioned earlier, it is worth noting that the term "exemption" is used in a broad sense �� to encompass both "conduct" that falls completely outside the scope of the Act and conduct of a kind that is prohibited by the Act but for some particular reason falls into a category that is or can be exempted from the competition laws.
    
    

Exemption 1 �� Government Activities of a "non-business" nature

14. The Act expressly provides that the Commonwealth, State and Territory governments are only bound by the competition laws in so far as they "carry on a business" either directly or indirectly through a government authority (ss 2A and 2B). Therefore, government activities that are "non-business" in nature do not fall within the bounds of (or are automatically exempt from) Australia's competition laws. For example, the government would not be prevented by competition law from imposing a vertical restraint, such as providing employment services only on the basis that the unemployed people must attend training sessions provided by a nominated provider.
    
    
15. As mentioned earlier, before 1995, all State Government activities (including government business activities) were automatically exempt from the Act. However, consistent with the principles of "competitive neutrality" all government business activities are now covered by the competition laws.
    
    
16. The rationale for having an exemption for non-business activities conducted by government is principally based on public policy grounds. That is, extension of competition laws into 'non-commercial' aspects of government activity may unduly interfere with the executive government's power to govern and government agencies' ability to implement government policy.
    
    

Exemption 2 �� Conduct required or mandated by law (mandated conduct exemption)

17. Generally speaking, conduct that is required or mandated by an existing law is exempt from the Act. This "mandated conduct exemption" can arise in two types of cases. First, there may be situations where the particular legislative requirement ensures that there is no relevant "conduct" for the purposes of the Act. For instance, a law may require businesses to sell a product at a fixed price (eg. milk at $1.30 per litre). The Act prohibits competitors from agreeing to fix prices but in this case, there is no agreement between the competitors to fix the price - the fixed price (or anti-competitive outcome) is merely a result of legislative requirements.
    
    
18. The second type of "mandated conduct" arises where an existing law requires a person or business to engage in conduct that may breach the Act. For instance, a law may require certain parties to agree to establish a fixed price for particular services (eg doctors may be required to set a standard fee for "home visits"). In this situation there would be an "agreement" between competitors and this conduct would appear to breach the Act even through the parties were required by law to make the agreement. Conflict of laws issues (between the Trade Practices Act and the other law) then arise, which need to be resolved by statutory interpretation. In Australia, the general rule is that a later Act overrides an earlier Act.
    
    
19. As mentioned earlier, the legislation review process which requires governments to assess and, if appropriate, reform anticompetitive laws is an ongoing process which is reducing the number of laws that mandate conduct and have an anticompetitive effect.
    
    

Exemption 3 �� Conduct specifically authorised or permitted by legislation or regulation

20. The Act provides a mechanism that State, Territory and the Commonwealth Governments can use to exempt specific conduct. Section 51(1) of the Act provides that conduct specified in and specifically authorised by an Act or government regulations are exempt from the competition laws provided the Act or regulation refers to the Act. However, regulations relying on s. 51(1) of the Act are only effective for 2 years.
    
    
21. The requirements of s. 51(1) are consistent with the Conduct Code Agreement (mentioned previously) in which the governments agreed to establish a national competition code that applied universally to all business activities. It was envisaged that exemptions from the competition code should be clearly expressed in legislation and preferably be in Acts rather than regulations (hence, the two year sunset clause on regulations relying on s. 51(1)).
    
    
22. Further limits have been placed on State and Territory exemptions. The States and Territories are unable to pass their own legislation relying on the section 51(1) exemption process to exempt conduct that would breach the merger provision of the Act (section 50 prohibits mergers or acquisitions that substantially lessen competition). Also, the Commonwealth may override any State or Territory legislative exemptions under s. 51(1) of the Act. However, this Commonwealth power is only likely to be exercised if the State or Territory legislative exemption cannot be justified on public interest grounds.
    
    
23. In this category of exemption the relevant legislation or regulation merely authorises or permits a party to engage in anti-competitive conduct but does not "force" them to do so. This is distinct from conduct required or mandated by law (where the party has no discretion to engage in anti-competitive conduct) mentioned earlier.

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Subsections 51(2) and (3) of the Act

24. The Act also provides for a very small number of ongoing exemptions. Subsections 51(2) and (3) of the Act provide specific exemptions from the competition laws for exemptions such as agreements between employees relating to conditions of employment, contractual provisions relating to the dissolution of partnerships, and exemptions for contractual provisions relating to the licensing and assignment of various intellectual property rights (patents, designs, copyrights, trademarks etc). These exemptions are in the process of being reviewed under the legislation review process referred to earlier.
    
    
    

Exemption 4 �� Authorisations and Notifications

25. The fourth and final type of exemption is provided by the ACCC and is known as an authorisation or notification. The ACCC has the power (upon application) to authorise conduct or agreements between competitors which would otherwise be prohibited under the Act. Authorisation may only be granted where the ACCC is satisfied that the relevant conduct or arrangement results in a benefit to the public that outweights any anti-competitive effect.
    
    
26. Authorisations are specific to the particular parties engaging in identified conduct - and are determined on a case by case basis. The ACCC cannot compel parties to apply for authorisation but is under a statutory obligation to make a decision regarding every application it receives. The ACCC frequently discusses authorisation matters with the applicants and may decide to grant an authorisation subject to certain terms and conditions. The Act requires the ACCC to follow a transparent process which enables interested parties to express their views and requires the ACCC to issue a draft determination before it issues a final determination.
    
    
27. Authorisations granted by the ACCC are usually expressed to be in force for a specifiec period, after which the parties must reapply for authorisation. The ACCC may also revoke an authorisation if it is satisfied that the basis on which the authorisation was originally granted was false or misleading, or if there has been a material change in circumstances. The ACCC also has the power to grant minor variations to existing authorisations where required.
    
    

Notifications

28. Any decision by the ACCC to grant, refuse, revoke or vary an authorisation can be appealed to the Australian Competition Tribunal.
    
    
29. Parties may also notify the ACCC that they propose to engage in conduct known as "exclusive dealing". Exclusive dealing describes various vertical restraints prohibited by the Act, such as "refusal to supply", "refusal to deal" or "third line forcing". Any exclusive dealing described in the notice is deemed to be immune (or exempt) from the Act unless the ACCC overturns it. The ACCC can only overturn a notification if it believes the detriment arising from the relevant conduct outweights any public benefit.
    
    
30. The ACCC maintains a register of material relating to notifications and authorisations, which is available to the public (subject to commercial confidentiality constraints).
    
    
31. A more detailed outline of the authorisation and notification provisions and procedures, prepared by the ACCC, is provided in Annexure A.
    
    

Summary

32. Broadly speaking, Australia has a general competition law that applies across all industries and is administered by a single agency, the ACCC. Exemptions are the exception rather than the rule. Nonetheless, there are four broad categories of exemptions �� three of which are parliamentary in nature (non-business activities of government, conduct required by law and conduct specifically authorised or permitted by legislation). The fourth category is a mechanism set out in the Act, which gives the ACCC power to authories specific anti-competive conduct but only after an objective and transparent assessment that the public benefits of the conduct outweigh the detriments.
    
    
33. The ACCC authorisation and notification processes rely heavily on balancing the public benefits and detriments, and public benefit analysis is central to legislative review of laws that have anti-competitive effects and to creation of new laws with possible anti-competitive effect. Exemption processes are transparent and, following the Hilmer reforms, exemptions are occuring less frequently. As a guide, the Commonwealth has one or two section 51(1) exemptions and is reviewing or has reviewed approximately 96 pieces of legislation that have an anti-competitive effect. Similarly, the States and Territories have relatively few numbers of section 51(1) exemptions and are also engaged in legislation review processes that will reduce even further the number of exemptions from the Act.

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The aim of this paper is to provide an overview on how Australia has balanced the issue of having an effective competition law regime with the need to allow anti competitive conduct in certain cases because of the public benefits that are raised.

Competition generally promotes efficient allocation of resources and ultimately economic growth which benefits all participants in the economic process. Competition, however, does not always produce the most beneficial results and permitting anti-competitive conduct in certain cases may be more beneficial.

Authorisation's provisions enable the Government or relevant regulator to permit conduct which may be desirable to the nation but which may otherwise be in breach of the countries competition laws. Authorisations are, however, in the Australian context intended to be granted only where benefits to the public result from the conduct and the detriment's resulting from the conduct, including the lessening of competition, are outweighed by those benefits.

In a period of significant economic turmoil this process is potentially valuable in that it enables a country to pass effective competition laws whilst allowing the Government to exempt certain arrangements or conduct which raise a public benefit. We therefore believe the Australian authorisations experience may provide some valuable guidance to those APEC countries that are in the process of implementing their own competition laws.

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The Authorisations Framework

The legislation which provides for authorisations in Australia is the Trade Practices Act 1974 Cth (the "Act") and the relevant administrative body which has the power to authorise conduct or agreements between competitors which would otherwise be prohibited under the Act is the Australian Competition and Consumer ACCC ("ACCC").

Authorisation is granted on the grounds of a public benefit. Depending on the arrangement or conduct in question, the ACCC must be satisfied that the arrangement results in a benefit to the public that outweights any anti-competitive effect; or that the conduct results in such a net benefit to the public that the conduct should be allowed to occur.

The ACCC cannot compel parties to apply for authorisation. It does, however, have a statutory responsibility to rule on the applications it receives.

Interestingly the ACCC has both an enforcement and an adjudicatory role

Decisions made by the ACCC in relation to authorisations can be appealed to the Australian Competition Tribunal ("Tribunal"). The appeal provisions are very broad as an appeal will be allowed where the person was either a party to the original application or notice or any other person who the Tribunal is satisfied has a sufficient interest in the matter. Furthermore, the Tribunal may, upon such conditions as it thinks fit, permit a person to intervene in proceedings before it.

A review by the Tribunal takes the form of a re-hearing of the matter. The Tribunal makes its decisions independent of the nature of the ACCC's determination or the basis of it issuing the notice.

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History

The Australian Act was largely modelled on American anti-trust legislation. Despite substantial similarity between Australian Competition law and American anti-trust law the authorisation provisions under the Australian legislation is one key area of difference.

American anti-trust law does not provide the regulator with an option of authorising conduct which would otherwise be prohibited under the legislation. In this respect the Australian legislation is closer to the European Union's ("EU") legislation in that the legislature has recognised that there may be cases where it would be beneficial to allow conduct which would otherwise be in breach of the legislation because of the public benefits raised.

Authorisation provisions were essential when the Act was originally passed due to the nature of competition within the Australian marketplace which existed at that time. Australian industry used to be protected by high tariff barriers and anti-competitive practices were rife in most industries. It was therefore necessary to provide for a transition period during which industry could reform, become competitive and be in compliance with the Act.

The initial authorisation provisions which remained in force until 1977 were different to the current provisions. The legislation established an authorisation and clearance procedure aimed at people who would be affected by the new Act. Under the clearance provisions a person could approach the Trade Practices Commission (the "TPC" �� forerunner to the ACCC) and seek a declaration from the TPC that the conduct did not contravene the Act. The authorisation provisions were available then, as now, for more serious cases.

In the early stages of the legislation the TPC grouped applications and granted authorisations on an industry-wide basis. An alternative which was also used was to grant interim authorisations until the TPC had time to deal with the industry properly.

The industries selected for public hearings were chosen:

• firstly because of their importance to the consumer, their economic importance and their competitive characteristics;
• secondly, because in the circumstances of the particular industries the ACCC was of the view that the decision and public acceptance of it would be assisted by the process of public hearing and testing of evidence, with its concomitant opportunity for other interested parties such as consumer groups to seek to participate; and
• thirdly, because of their significance as test cases for the hundreds, and sometimes thousands, of other similar applications on the public register relating to the same industries.

The need for industry wide authorisations is evident when the number of applications for clearance and authorisations are considered. During the TPC's first year of operation 21,835 applications were made. The number of applications dropped to 3,539 in the following year but the simple fact of having received 25,374 applications during the first two years of the TPC's existence necessitated a high degree of streamlining of procedures.

The TPC had to spend a considerable proportion of its resources on clearing these applications but by the early 1980s the majority of them had been processed. It should also be noted that the ACCC denied authorisation in the vast majority of cases. The reason for the refusal in most cases was because the benefits were private rather than public.

The number of authorisation applications has greatly decreased over the years and the ACCC received only 34 applications in the 1996-97 financial year. Out of these 34 applications 15 were new applications related to the National Electricity Code and Stage 1 of the National Electricity Market.

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Conduct which can be authorised

Authorisation and notification do not provide a blanket exemption from the requirement to comply with all provisions of the Act. The Act allows the ACCC, on application to grant authorisation in relation to:

• making or giving effect to a contract or arrangement or arriving at or giving effect to an understanding where a provision of the contract, arrangement or understanding substantially lessens competition;
• covenants affecting competition;
• primary boycotts;
• secondary boycotts;
• anti-competitive exclusive dealing;
• exclusive dealing involving third line forcing;
• resale price maintenance; and
• mergers leading to or likely to lead to substantial lessening of competition.

Notification is available in respect of exclusive dealing. Exclusive dealing conduct occurs where:

• one person trading with another imposes restrictions on the other's freedom to choose with whom, or in what it deals; or
• one person supplies goods or services to other on condition that the other party acquires goods or services from a particular third party or refuses to supply goods or services because the purchaser will not agree to that condition. This conduct is called third line forcing.

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The Procedure For Granting an Authorisation

The consideration of applications for authorisation is a transparent and public process but does not involve formal public hearings prior to the issuing of a draft determination.

Before consideration of the application on its merits the ACCC will immediately compile a list of parties who may have an interest in that application. Such lists are compiled on a case by case basis and include all identified stockholders and others who may be able to provide relevant comment, including; competitors; customers; suppliers; regulators and other relevant government bodies; and industry and consumer groups.

Each interested party is provided with a copy, summary or extract of the application for authorisation and invited to make submissions in response to it. The ACCC may, by way of public advertisements in newspapers and trade publications, advise the community of an application for authorisation and seek submissions in relation to it. In some instances comment may be invited, generally or from selected interested parties, in relation to specific aspects of an application. In addition to seeking submissions the ACCC will usually conduct market and other inquiries, including interviews.

The applicant is provided with copies of letters to interested parties, advertisements and each submission which appears on the public register. The applicant may make submissions in response to submissions from other parties. Interested parties may also respond to all submissions by the applicant and other interested parties.

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The Authorisation Tests

In assessing applications for authorisation the ACCC is required to apply public benefit and public detriment tests.

There are three variations in the authorisation test:

1. The general test (ss 99(6), (7)) is that the ACCC be satisfied that in all the circumstances that the conduct would be likely to, result in a benefit to the public and that the benefit would outweigh the detriment to the public constituted by any lessening of competition resulting from the conduct. This applies to:

• Conduct which restricts dealings or affects competition other than those involving primary and secondary boycotts; and
• Exclusive dealing conduct other than third line forcing.

2. The second test (s. 90(8)) is that the ACCC be satisfied that in all the circumstances there is such a benefit to the public that the conduct should be allowed. This test applies to primary and secondary boycotts and third line forcing.
   
   
3. The third test (ss 90(9), (9A)) is for mergers. In addition to meeting the second test it also requires the ACCC to have regard to the following in determining what amounts to public benefits:

• A significant increase in the real value of exports; and
• A significant substitution of domestic products for imported goods.

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Relevant market

Market definition is a significant element in considering applications for authorisation. Section 4E of the Act defines "market" in these terms:

�地 market in Australia and, when used in relation to any goods or services, includes a market for those goods or services and other goods or services that are substitutable for, or otherwise competitive with, the first-mentioned goods or services.

In Queensland Cooperative Milling Association the Tribunal commented on markets by stating that:

We have taken the concept of a market to be basically a very simple idea. A market is the area of close competition between firms, putting it a little differently, the field of rivalry between them�� Within the bounds of a market there is substitution �� substitution between one product and another, and between one source of supply and another, in response to changing prices. So a market is the field of actual and potential transactions between buyers and sellers amongst whom there can be strong substitution, at least in the long run, if given a sufficient price incentive.

The Tribunal and the Courts have both held that demand and supply side substitution must by taken into account in determining the relevant market. Substitution possibilities must be considered in three dimensions:

• product;
• geographic; and
• functional.

The product market relates to goods or services in Australia.

The geographic market is the geographical area(s) in which sellers of the particular goods or services operate and to which purchasers can practicably turn for such goods or services. The market will include firms which may currently supply close substitutes for the relevant firm's product(s) and which can easily switch production to supply the relevant product within the accessible geographic area of the firm's customers.

In industries where functional levels are clearly distinct, the levels on which the parties operate are considered when determining the relevant market. For instance, the breadth of the market at a wholesale level may be different to that of the market at the retail level.

In conceptual terms the relevant market can be identified by determining the smallest area over which a profit maximising monopolist would impose a small but significant and non-transitory increase in prices, or equivalent exercise of market power.

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Public Benefit

The public benefit of the conduct is assessed within the context of the market. The Act requires that the ACCC have regard to all the circumstances that relate to public benefit.

The term public benefit is not defined in the Act and its meaning has been left to the Tribunal and to the Courts to decide. There has been some criticism over this lack of definition but it is submitted that this ambiguity provides the ACCC and Tribunal with a greater degree of flexibility to recognise changes taking place in the marketplace and react accordingly.

The Tribunal held in Re Queensland Co-operative Milling Association and Defiance Holdings Ltd (QCMA) in 1976 that a public benefit should be given:

the widest possible conception�� This we see as anything of value to the community generally, any contribution to the aims pursued by the society including as one of its principal elements�� the achievement of the economic goals of efficiency and progress.

It should, however, be noted that this "widest possible conception" refers to a community benefit. Both the ACCC and the Tribunal have distinguished between private and public benefits. However, the exact division between a private and a public benefit remains fluid. In Southern Cross Beverages the Tribunal stated:

Before a benefit can properly be regarded as a benefit to the public for the purposes of s 102(4) of the Act, it must be seen as a benefit to the community generally. This does not mean that private benefit is necessarily irrelevant. The encouragement or enabling of an individual to pursue legitimate ends or to attain legitimate goals or to obtain legitimate rewards may well be beneficial to the community generally. When a benefit to a particular individual or segment of the community is pressed as a relevant benefit to the public for the purposes of s. 102(4), the Tribunal must assess whether the benefit to the individual or group can properly be so categorised. That assessment will involve consideration of whether the community generally has an interest in the individual or group being so benefited and of whether the benefit involves detriment to other individuals or groups.

A good example of the flexibility and potential breadth of the public benefit provisions was highlighted in the Wattyl (Australia) Pty Ltd, Courtalds (Australia) Pty Ltd & Ors where the ACCC stated:

The ACCC recognises that Australian ownership may be a social benefit if Australians place a value on Australian ownership of assets located in Australia. In this case, domestic acquisitions of a foreign owned asset must, other thing being equal, be a public benefit. The ACCC considers that it is likely that Australians do place a value on Australian ownership of assets. However, no evidence as to the significance of this joint was put before the ACCC. Accordingly, the extent of such a benefit is difficult to quantify.

It must, however, be noted that the issue of Australian ownership only formed on component of the ACCC's considerations in that case. In its final determination the ACC concluded:

The economic arguments as to the benefits of foreign ownership are at best equivocal and �� the parties have not demonstrated any substantial public benefit in this regard sufficient to outweigh the ACCC's concerns about the adverse effects on consumers of higher prices.

The ACCC, therefore, rejected the application.

The ACCC and the Tribunal have recognised the following issues as constituting a public benefit:

• fostering business efficiency, especially when this results in improved international competitiveness;
• industry rationalisation resulting in more efficient allocation of resources and in lower or contained unit production costs;
• expansion of employment or prevention of unemployment in efficient industries or employment growth in particular regions;
• promotion of industry cost savings resulting in contained or lower prices at all levels in the supply chain;
• promotion of competition in industry;
• growth in export markets;
• development of import replacements;
• economic development, for example of natural resources through encouraging exploration, research and capital investment;
• industrial harmony;
• improvement in the quality and safety of goods and services and expansion of consumer choice; and
• arrangements which facilitate the smooth transition to deregulation.

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The Rural Sector

The last mentioned public benefit has been used considerably in the context of deregulating many rural industries. The removal of statutory protection measures and statutory marketing authorities has meant that many primary producers have suddenly gone from concentrating on producing grains, eggs and dairy products to becoming marketeers overnight.

In assessing these applications, the ACCC has accepted that in most cases there would be a public benefit in mechanisms that facilitate the transition from a regulated scheme to a deregulated regime. This position helped to avoid a dislocation in the functioning of a market that would be caused by too sharp a move from regulation to deregulation.

Inghams Enterprises Pty Ltd

Inghams applied for authorisation for its proposal to collectively negotiate a standard five-year growing agreement with its South Australian contract chicken growers.

The growing agreement provides for a standard fee payable to contract growers at the end of the growing cycle. This fee is based on the concept of a "model farm", where the fee each contract grower receives depends on his or her efficiency compared to other contract growers.

Efficiency is measured by the conversion of feed (the most expensive input in the growing process) to chicken meat. Inghams proposes to meet representatives of the contract growers every six months to review the standard fee. Contract growers will have the option of negotiating individually with Inghams if they do not wish to be part of the collective negotiation process.

The growing agreement includes a code of practice which governs issues pertaining to negotiations between Inghams and its contract growers.

Inghams" application was lodged in anticipation of deregulation of the South Australian chicken meat industry. Under regulation, chicken grower contracts, terms and conditions, fees, and associated matters were negotiated on a State-wide industry basis.

The chicken industry is highly vertically integrated, with two large processing companies, Inghams and Steggles, controlling 86 per cent of the South Australian market. Chicken growers are required to make significant capital investment in sheds and equipment that have virtually no alternative use, but never own the chickens or many of the inputs in the chicken growing process.

The ACCC recognised that the new arrangements had a number of anti-competitive features, particularly with regard to prices and market entry. However, their effect was limited by the contract provisions encouraging individual grower efficiency, and by the market pressures exerted by competing processors and chicken retailers.

The ACCC considered it would be unreasonable to expect growers to move from a totally regulated system, in which grower contracts for the whole industry were negotiated by a statutory committee, to one where each grower had to negotiate individually with the processing company, given the significant imbalance between growers and the vertically integrated processor in bargaining power and access to information about growing costs and performance.

The ACCC was, therefore, satisfied that the public benefits of Inghams" proposed arrangements are likely to outweigh the anti-competitive effects. Given the nature of the proposal and the structure and dynamics of the industry, these public benefits include:

• assisting a smooth transition from regulation to deregulation, which will ensure lower adjustment costs for the South Australian chicken meat industry;
• providing chicken growers with countervailing bargaining power; and
• a likely reduction in production costs, as a result of the collective negotiation process, which could lead to lower retail prices.

Authorisation was granted for five years, the ACCC regarding the arrangements as temporary whilst the industry progressed to a deregulated market.

Authorisations for Mergers

Sections 50 and 50A of the Act seek to prevent mergers and acquisitions which have the effect, or are likely to have the effect, of substantially lessening competition in a market. The authorisation provisions can grant immunity, on public benefit grounds, for mergers and acquisitions which would or might otherwise contravene ss 50 or 50A.

Once authorisation is granted in relation to an acquisition, neither the ACCC, the Minister, nor third party can take action under the Act to overturn the acquisition. The immunity only runs, however, once authorisation is granted.

The ACCC has a period of 30 days to consider an application (s. 90(11)(a)). This may be extended to 45 days for complex matters (s. 90(11A)). It may also be extended by ACCC requests for information from the applicant (s. 90(11)(b)) or with the agreement of the applicant (s. 90(12)).

In relation to authorisation's for mergers under s. 50A, s. 90(9A) of the Act provides some guidance as to the issues that need to be taken into account when determining what amounts to a benefit to the public:

1. the ACCC must regard the following as benefits to the public (in addition to any other benefits to the public that may exist apart from this paragraph):

1. a significant increase in the real value of exports;
2. a significant substitution of domestic products for imported goods; and

2. without limiting the matters that may be taken into account, the ACCC must take into account all other relevant matters that relate to the international competitiveness of any Australian industry.

In addition to these issues which are to be taken into account in relation to mergers and acquisitions all other issues which may be public benefits need to be considered in determining whether or not to authorise the transaction.

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Draft Determinations

Before determining an application for authorisation (other than for applications for authorisation of mergers) the ACCC is required to prepare a draft determination. That draft determination states whether or not the ACCC proposes to grant authorisation to the application and summarises its reasons.

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Final Determinations

Prior to granting a final determination the ACCC will often hold a pre-decision conference which is conducted informally and allows interested parties and the ACCC to meet face to face to discuss the operation and effect of the particular application for authorisation.

Prior to granting a final determination the ACCC will consider issues raised at the conference and any submissions made since the draft determination.

The final determination sets out the ACCC's decision on whether to:

• deny authorisation;
• grant authorisation subject to conditions; or
• grant authorisation unconditionally

and states the reasons for its determination. Depending upon the nature of the conduct in question and its effects on the market, authorisation may be granted for a specific time. When that time expires the immunity ceases. It is open to the applicant to seek a new authorisation.

The ACCC may grant authorisation subject to conditions as a means of ensuring that public benefits outweigh anti-competitive detriments.

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Review and Revocation of Authorisations

The ACCC has the power under the Act to revoke an authorisation. Revocation can take place only after the ACCC has reviewed the authorisation and followed the formal process required by the Act.

To revoke an authorisation the ACCC must be satisfied that:

• the authorisation was granted on the basis of evidence or information that was materially false or misleading;
• a condition of the authorisation has not been complied with; or
• there has been a material change of circumstances since the authorisation was granted.

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Examples of authorisation cases

Retail Confectionery and Mixed Business Association (Victoria)

The Association sought to circulate to members from time to time suggested price lists for soft drinks, ice cream, confectionery, bread, biscuits, cigarettes and tobacco.

The following public benefits were accepted:

1. The existence of these types of outlets trading outside "normal" business hours and

especially at weekends is in itself a public benefit.

2. Their continued existence depends both on the guidance and assistance in pricing

provided by the Association and the counter balancing influence it exerts on manufacturers endeavouring to reduce the retail margins.

3. Approximately 40% of the Association's membership changes each year as a

result of businesses changing hands. These new entrants, in the main, are completely untrained and need guidance on price and other matters in order to survive.

4. The calculation of the suggested retail prices by the Association results in a substantial saving in manpower hours as it frees hundreds of shopkeepers from the task of making similar calculations for a multitude of different lines.

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Australian Institute of Building (A122)

Authorisation was granted to the Institute's terms of engagement and scales of professional charges provided, among other things, that they were published only as guideline terms and fee scales and were open to negotiation.

The ACCC recognised that a public benefit resulted from the preparation and publication of fee guidelines that facilitated negotiations between a builder and his client. It was satisfied that such public benefit outweighed the minimal anti-competitive effect of the revised documents.

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Australian Meat and Livestock Corporation (A90473, A90474)

Authorisation was granted for arrangements relating to the collection of a levy to fund the testing of cattle and calf carcasses for chemical residues.

The ACCC considered there was clear public benefit in any program that helped to prevent marketing and consumption of meat with chemical levels higher than those prescribed and to secure acceptance of Australian meat overseas.

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International Commodities Clearing House Ltd (A30119)

Authorisation was granted for restrictions to regulate futures traders on the Sydney futures market. ICCH proposed that, by agreement with Sydney Futures Exchange Ltd (SFE), it would register only those contracts traded on the SFE in the name of clearing members who were also members of SFE.

The ACCC considered that there was public benefit in SFE supervising futures trading to protect all ethical market participants, the investing public, and traders who used the futures market to hedge their risks. It acknowledged additional public benefit in an arrangement which enhanced SFE's ability to ensure an orderly and fair market for futures trading. However, it also recognised that the public benefit in an efficiently regulated Sydney futures market should be heavily weighted because of the potential for manipulating the market.

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Qantas Airways Ltd (A90427)

Authorisation was granted in respect of agreements reached outside the International Air Transport Association (IATA) on tariffs and related conditions between itself and both IATA and non-IATA carriers.

The ACCC accepted that there was benefit in arrangements which, by enabling the terms of Australia's air services agreements with other countries to be complied with, facilitated international air travel to and from Australia. Provided that any fares determined from these arrangements were list fares only and not made compulsory for the airlines or their agents, the ACCC considered there was sufficient net benefit to secure authorisation.