Business

Jane Clifton: Government move to tackle anti-competitive business just got massive boost

OPINION:

The Government has wanted to bring anti-competitive sectors of the market to heel for some time. Now it has all the excuses it needs.

It wasn’t quite up there with the Vatican demanding the ordination of women or Donald Trump conceding the US election, but a pretty big thunderbolt went off here last month.

The Institute of Directors (IoD) formally asked the Government to consider whether public companies should be forced to give equal weight to public-interest issues such as the needs of customers and the environment, alongside the imperative of optimising returns to shareholders.

This should have caused a sensation. It’s as though the Vampires’ Collective demanded Dracula be made to go vegan several days a week.

As the directors more sedately characterised it, the shareholders-first tradition is outdated and irresponsible. Their submission made it clear directors had grown increasingly uneasy about balancing profit-maximising decisions, and social and other factors.

This disquiet was behind so many companies repaying their Covid support money, despite the obligations being a grey area.

More topically, a number of electricity company directors will be mortified their profit-optimisation governance imperative caught the sector with its pants around its ankles last week, causing rolling power cuts.

Most New Zealanders were agape to see the slew of excuses for generation capacity being so perilously run down during winter – from weed cloggage to scheduled-maintenance shutdowns and “unexpected” weather conditions.

Understandably, the Government worried aloud that the industry might be more interested in protecting its returns than providing a decent safety margin in its active generation to ensure security of supply.

The directors’ official plea therefore comes at a cracking good time for the Government. It has, in the space of a few months, been presented with a raft of reform decisions to make, all of which will result in businesses, investors and shareholders having the value of their holdings somewhat diminished.

In the case of electricity, the supermarket duopoly and petrol retailers, the IoD’s representations are a valuable counter to the howls of pain that will result. The Government already has social licence to put a bit of stick about in those markets. Now it also has some permission from within the heart of the business beast itself.

Put on notice

Generally, the last thing a Government wants to do – or should do – is attack the value of blameless people’s assets or the viability of their businesses, especially without very long notice or, in some cases, compensation.

In some industries’ cases, however, there’s solid evidence that companies have long been extracting way more money from customers than was fair or justified in terms of actual cost, simply because they’ve had unfair market dominance.

That so many rich listers are supermarket franchise-holders suggests groceries are this country’s equivalent of a licence to print money. Regulation will simply redistribute some wealth away from these hitherto-lucky proprietors.

The question of notice is a bit trickier. The supermarkets were stunned at the Commerce Commission’s suggestion that one option might be the forced divestment of stores and/or a state-sponsored new competitor, and understandably so.

Their dominance had gone expressly politically unmolested since the Labour Party in 2014 declined to back its then MP Shane Jones’ crusade to do something about the very obvious ill-treatment of both consumers and suppliers in the sector.

Jones made a compelling case, but if not even the Labour Party cared enough to intervene, even from the safe vantage point of Opposition rhetoric, the supermarkets were entitled to assume their realm was secure. Obviously the “we never interfere with business” National Party wouldn’t trouble them, so their hard-nosed business practices continued apace.

However, our super-grocers should have been on notice when the commission was last year empowered to demand the financial information to analyse their overall returns. At its estimate of a roughly 20 per cent “return on average capital employed”, this sector is an investor’s fantasy land – or as economist Cameron Bagrie put it, a target with an almighty bullseye on its backside.

Still, neither forced divestment nor a from-scratch state KiwiMart is an elegant solution. The other option, a code of conduct, has not always stopped covert price gouging in Australia (with respect to suppliers’ margins more than retail mark-ups). Any regulation would need rigorous monitoring, enforcement and penalties. And to be fair to the supermarkets, when there are only two big players in an industry, it’s understandable they might be tempted to charge and pay whatever the market seems able to bear.

Now the electricity sector, too, has made the Government’s intervention path clear. Voters still rightly think of electricity as a vital public utility. If private operators won’t run what used to be a public utility in a prudential fashion, electors will undoubtedly support their being forced to.

Petrol retailers are going first in the dog-box parade, newly compelled to sell at pre-disclosed rates, even to their competitors, among other new behavioural curbs. Banks, the building-products sector and the motor industry’s parts dealers will not be stringing up the bunting either when their turn to be ComCom-ed arrives.

Such shake-ups stand to be populist, but with the worrisome cost of business apprehension and investor hesitancy. Together with the likely forced confiscation of water management from local bodies to form a centralised authority, a troubling Big Government narrative is forming.

The “public good” criterion can be alarmingly elastic. “Nationalisation” is as big a political horror word as “privatisation”. National and Act will have plenty of fear and loathing to mine.

Port in a storm

Meanwhile, how timely that the ports companies have just been caught out in a competence outage, which makes a perfect pair with the electricity barons.

Last month, they insisted they couldn’t possibly have all their workers and contractors vaccinated quickly because it would cause intolerable disruption.

Naively, the Government accepted this and didn’t force them, allowing them another couple of months to get it done. When the Rio de la Plata container ship hove to the other day, bringing scores of Tauranga workers in contact with the Delta strain of Covid, guess what? There was intolerable disruption. And nearly something even less tolerable than power cuts in the snow: a new community Covid outbreak and another lockdown.

The port companies are no less in the Government’s sights for forced redistribution of their businesses and assets than the electricity companies, and no less militantly defensive. It’s uncanny that both have provided such vivid tableaux of private-sector flaws to illustrate the IoD’s submission.

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