KGB INTERROGATION: Graeme Samuel
ACCC chairman Graeme Samuel gives Business Spectator the low-down on Richard Pratt, cartels, the country's competition laws and the commission's inquiry into grocery prices.
ACCC chairman Graeme Samuel gives Business Spectator the low-down on Richard Pratt, cartels, the country's competition laws and the commission's inquiry into grocery prices.
Alan Kohler: Can we just start with the Pratt matter. Isn't the problem there that you actually did a deal last October and it looked like the deal was all done and now you're coming back and you're prosecuting and it looks like you're welching on the deal?
Graeme Samuel: As you'll appreciate, I can't comment upon that matter at all. It's now before the courts and as I said in the statement I made for the National Press Club on Wednesday, it is our strict policy not to comment on matters that are before the courts. That's the only way that we at the ACCC can protect the integrity of the judicial system. That makes us fair game, I'm afraid, because what it does do is leave us open to attack, to criticism, but that's one of the things that we just have to bear. We can't respond. We won't respond − no matter how irresponsible and ill-conceived we believe that any such criticism might be.
AK: So you believe that is irresponsible, ill-conceived do you?
GS: Sorry, I won't respond. I won't comment at all.
AK: What about the suggestion that it's a personal vendetta?
GS: in the National Press Club yesterday, there's been too much comment over recent months of "Graeme Samuel's ACCC” or of decisions that have been made by the commission, based on personal motives on my part. Some of those have been directed towards wanting to curry favour with the current government or to shore up my reappointment prospects and the like.
As I pointed out on Wednesday, there are a whole range of factors. I think that we need to take a reality check and the first is, of course, that every decision that's made at the ACCC is made by seven commissioners and during the five years that I've been in office I'd have to say I think almost every decision has been unanimous. I don't recall that we've ever taken a vote on a decision at all. Our decisions are made on the advice of staff which beforehand must conduct a rigorous and detailed analysis of the issues and submit material to us on all relevant issues. Often, if it's a legal matter they'll seek legal advice from our legal advisers including where it's appropriate eminent legal counsel. Then we are subject to review. This is an important element. Our decisions, that's the ACCC's decisions, are always subject to review by the Federal Court. By the Tribunals. And by the Parliamentary Committee process.
In relation to criminal prosecutions, we must refer information relating to criminal prosecutions to the Commonwealth Director of Public Prosecutions, who under the law has got the full carriage of all criminal prosecutions. It's the CDPP who determines whether or not a criminal prosecution proceeds or doesn't proceed and to suggest that all those parties that I've just described are complicit in some form of conspiracy to provide or to conduct some personal vendetta I think, just beggars belief.
Stephen Bartholomeusz: Accepting all that, you would have known and had dealings with Pratt for decades. Is there anything in that, the history between the two of you that would support the kind of inference that his lawyers are making?
GS: Look, I'm not aware of anything at in my dealings with Mr Pratt in the past that would support that, but again I just don't want to enter into any discussion or debate on the Richard Pratt matter. These are before the courts and I don't think it's appropriate to be drawn into that debate at all. I think the facts speak for themselves in terms of the way in which the ACCC conducts itself – the processes that we have to follow. The scrutiny to which our processes are subject and it is… it beggars belief to suggest that a single individual within the Commission can make decisions on any matter of any importance relating to the ACCC's activity without going through those various processes. As I said somewhat wryly at the National Press Club, I'm not sure who should be most offended – me because my integrity is being impugned or my six fellow commissioners who are being categorised as absolutely irrelevant and missing in action. I suspect they're the ones that probably feel more offended by all this process.
AK: You are, are you not, undergoing not only a reform of the law which you described in your press club speech, but also some reforms at the ACCC itself. Can you tell us bit about how the whole competition framework is going to look in six months time?
GS: Well we're going through what I've described as the third wave of reform in competition policy. The first wave was the introduction of the Trade Practices Act in 1974 and that in itself was a singularly brave step and it underwent not only vigorous debate at the time in the business community and in parliament, but I do recall back in 1975 and thereafter when we had a new government there were even suggestions that the Trade Practices Act 1974 might itself be repealed. We then went through the second wave of reform with the Hilmer reforms in the 1990s which culminated in the COAG (Council of Australian Governments) agreement.
Now, this is the third wave of reform and this is dealing with a whole range of areas including the misuse of market power provisions and just today the government has introduced into parliament the legislation to, at long last – and I say at long last because we believe it's long overdue – to amend Section 46 of the Act dealing with misuse of market power to make that section into a workable section, one that is capable of being properly enforced but at the same time preserving the fundamental philosophy of the Trade Practices Act, which is that we are there to protect competition not to protect competitors or sectors of the economy from the rigours of competition.
AK: There's another way of characterising the waves that you talk about. That Australia's competition laws have never been tough enough up to now.
GS: Certainly, in respect of both misuse of market power and in relation to the criminalisation of cartels which is also on the political agenda to be dealt with in the next few months. That's clearly been our view. It's clearly been our view that the misuse of market power provisions have been ineffective. That's been the result of inconsistent determinations by the courts and particularly culminating in the determination of the High Court in the now well known Boral case which we effectively believed neutered entirely the misuse of market power provision to make them unworkable. I have to say that I think we've had about one or two successes only in 35 years with those misuse of market power provisions, which essentially I would have thought points to a clear indicator that those provisions have been ineffective and have not dealt with the issues that they should have dealt with.
AK: And in relation to cartels, you're investigating 21 at the moment. How many of those cartels do you think actually began since the trade practices law was introduced?
GS: Oh, all of them. All of the cartels began since the trade practices's law of 1974 was introduced. Some of them are much more recent of course, keeping in mind that under civil prosecutions we have a statutory time limit of six years and then in dealing with cartels we look at two issues. One is the formation of a cartel and then the second is giving effect to the cartel. I have to say that in most investigations we're currently looking at, we are looking at both the entering into the cartel and giving effect, both having happened within at least the previous six years.
SB: So among the cartel investigations, of those 21, are there any among them which have the potential to have the economic effect of the Visy and Amcor price fixing?
GS: I can't comment on that, because it would start to betray some of the issues that we might be examining under these cartel investigations. I think we need to remember this: the Visy/Amcor cartel had a very significant effect in two respects. First, it was very high profile. You were dealing with a very significant public company. You were dealing with a very significant private company owned by the family of a high profile Australian business person.
The other one, of course, was it did, as Justice Peter Heerey said in the Federal Court decision on the Visy matter, affect every man woman and child that had bought something that had been packed in a cardboard box. Now, I venture to suggest there's hardly a man, woman or at least mature child in the country that's not bought something from a supermarket that would have at some stage been packed in a cardboard box. So there's a flow on effect right through to the Australian economy. The extent of that flow on effect at the moment? We don't know. There are third party damages claims out against the parties concerned. That is against Visy and Amcor in Australia for I think upwards of in excess of $800 million, but whether they'll ever come to fruition to that extent or in those amounts time will only tell. That's a matter before the courts. In addition, there is a prosecution proceeding in New Zealand by the New Zealand Commerce Commission and that also has to be dealt with in the context of the impact that the cartel may have had at the New Zealand end of trade and commerce.
It is, for example, well-known because it's been publicly stated by the parties and in various court actions, that we are currently dealing with an alleged cartel in relation to freight surcharges, involving a number of the major airlines in the world. The extent of the impact of that cartel worldwide has yet to be identified, and the extent of its impact in Australia is yet to be identified, but they are big matters.
I think what's been important though is that the average Australian punter has at long last realised what cartels are and it's something that I guess I've been saying with as much vigour as I can for the past five years, and that is: cartels are just straight out theft, usually by well-dressed thieves.
AK: Rather than take cases through the courts and achieve prosecutions, would you do deals?
GS: Well, yes, because we treat every court case, every investigation we have, as a separate matter and when you do deals, what we do is we look at the matter and we say, 'what is the likely outcome if this matter were to proceed to court?' We ask what is the likely outcome that's currently being offered to us and that is able to be negotiated. If we believe that we can achieve at least as good an outcome, if not better, by negotiating a settlement, albeit a settlement that has to be approved by the court, then clearly we would proceed along that basis. I doubt that there's any judge in this land that would object to that.
In many respects the judges are asking on so many occasions these days whether it is possible for you to resolve this matter without having to go through a lengthy court process. The resolution of matters such as Visy by means of negotiated settlements does three things. It results in a very quick outcome, which we believe is at least as good as would have been achieved through the court process. Secondly, it provides a certainty of outcome and the certainty of outcome is something that you can never guarantee in a court case. But the third thing is that in sheer public interest terms, it is potentially much more cost effective.
The Boral matter took eight years from beginning to end. Now whether that's a useful application of the resources of the ACCC or the resources of our judicial system I'll let others judge, but I think if you were to ask, as I say, any judge in this land, they'd probably say to you that the outcome that was achieved through the Visy matter went through the proper processes.
SB: Graeme, before we leave cartels, cartel behaviour, almost by definition, involves large companies behaving badly. If you're looking at 21 cases, that says there's something truly rotten about the state of competition in Australia.
GS: No, because first of all, your first proposition's not entirely correct. There are a number of cartels before us that involve quite small operators. More recently, for example, the abalone fishermen one, which Justice Weinberg adjudicated upon, was a group of small abalone fishermen that got some rotten legal advice. They got a $50,000 fine as a result.
In the context of the totality of the Australian economy, 21 cartels, I don't know whether it's high or low relative to, for example, what we see in the United States or elsewhere. I'd have to say that we are probably, and this is not something that we're terribly proud of I'd have to say, but we're probably up there amongst the leaders in terms of the number of cartel investigations. Whether that signifies that we're good investigators or whether it signifies that we've actually got some problems in the economy is something that I really couldn't express an opinion on. You will find that where you've got a more concentrated economy you've got fewer players, in any particular market, then it is easier for a form of cartel or collusion to exist and I think that may well be a factor that's contributing to the number of cartels in Australia.
The criminal penalty legislation is, in my view, the most important reform that the government can and should have undertaken many years ago. It moves us into a totally different league in terms of cartel enforcement, in terms of our relationship with our fellow regulators in the United States, in Canada, in the UK, even in the EU. While we are ranked amongst the top five competition regulators and enforcers in the world, we are still, because of the civil penalties in relation to cartels, put at a second tier in relation to cartel enforcement, and frankly, cartel conspirators sit there and they say, "Hey we'll deal with the US first, we'll deal with the UK, we'll deal with the EU, we'll deal with Canada. Australia, you can wait because frankly you're not as important. We can settle you with a cheque. These other guys can put us in jail and that's far more important to us at the present time.”
SB: Do you see those reforms in Section 46 and the criminalisation of cartel behaviour as enforcement enhancements or is it really about deterrents?
GS: It's both. The deterrent effect of potentially going to jail cannot be overstated. I think I observed in my National Press Club speech that the US Department of Justice was interviewing some executives in relation to a 2006 cartel and asked why they stopped at the US border, even though they carried on trading in the US, and they said that because outside the US all they faced was financial penalties. In the US they faced jail and weren't prepared to take the risks, so the deterrent effect is significant indeed, but equally this goes down to the jurisprudential sort of philosophy of whether penalties are there to act as a deterrent or as to act as retribution.
I've forgotten my jurisprudence since I was back in law all those years ago, decades ago, but undoubtedly it has a deterrent effect and I'd have to say that in terms of equity it is only appropriate that if we can put someone in jail for stealing from the taxpayer through the tax department or for stealing from social services, then why shouldn't we put someone in gaol for stealing from Australian consumers through cartels?
AK: Just on the subject of supermarkets, you've just been through a number of hearings and so on where you've examined everybody involved in supermarkets. Have you come to the conclusion, what might be called a preliminary conclusion, that there's some sort of non-collusive price fixing going on in supermarkets?
GS: I think that over-states it, Alan. What I've indicated in one or two of the public hearings is that the evidence put before us by the three major operators, Coles, Woolworths and the Metcash-supplied IGA Group, seems to show that they don't compete as aggressively in pricing as you would like to see in a very vigorously competitive marketplace.
AK: Do you mean they match their prices?
GS: Yeah they tend to match. They don't tend to undercut and the instructions given to store managers is match but don't undercut. You can imagine why that occurs where you've got a small number of players in a market, because the players, let's say there's three players as we fundamentally have here, they need to be saying to themselves, "Why would I enter into a price war with my two competitors, because all they'll do is attempt to punish me by retaliating? It's far better if I just sort of sit a bit comfortably and agree…what we'll do is we'll match, but we won't go any lower. That way I avoid the punishment. I avoid the retaliation and it's much more comfortable existence.” Now you only need three of them to agree that independently, tacitly if you like, and you've got a tacit coordination.
AK: But how do you do anything about that as a regulator?
GS: I think you'll have to wait and see in the context of the grocery report. I don't want to pre-empt the findings there, but all I'm indicating is that the figures given to us to date suggest that there is a reasonable degree of alignment between the major retailers in the grocery market that suggests that there is that comfortable tacit coordination. There's not as aggressive pricing differentials between them as you would hope to achieve in a fully rigorously competitive market.
SB: This is uncompetitive behaviour as opposed to anti-competitive?
GS: Let's call it 'less than rigorously competitive behaviour'. I just want to be careful of the words we use.
SB: Yeah, I can understand that. Is there a structural response? Is the answer to try and lower the barriers to entry? Access to sites?
GS: I'd have to say that where you have got less than rigorous competitive dynamics operating in a market, one of the first things you look to is to the entry of new competition and what barriers to entry there would be and it wouldn't surprise you at all that we're looking at those barriers to entry.
AK: And is part of the answer possibly something along the lines of Fuel Watch or Grocery Watch?
GS: I think the government's already announced that it's intending to introduce some form of advice to consumers on grocery prices. I won't go into the detail of that, because that's yet to have been finalised with government, but they're hoping to introduce at least some form of advice that will help consumers be able to identify which are the cheaper outlets in regions and which are perhaps the more expensive outlets in regions. There's a lot of development work going on with that and we'll see some more detail on that over the next few weeks or so.
We also need to remember that where you've got a tacit coordination, if that's what we do have in groceries, you can price match two ways. 'A' and 'B' can reduce their prices to 'C', or 'B' and 'C' can increase their prices to 'A'. Tacit coordination can operate both ways and sometimes it can operate to the disadvantage of consumers by pushing prices up.
SB: Before leaving grocery retailing, this week the commission announced it was going to oppose a proposal by Woolworths to buy a supermarket in Queanbeyan. Does that represent any kind of change in policy towards the big grocery retailers?
GS: No it doesn't. I think what it represents is two things. The first is the rather special circumstances here. Forager was the owner of the site and had a license from Superbarn to provide a Superbarn supermarket on the site, but it was a fairly small one. Superbarn said it would acquire the site and expand the site significantly to a substantial Superbarn operation.
The fact that you had that, and then Woolworths came and said it would pay more and buy the site said to us that if we look at the 'with and without' test, that is, the counter factual, Superbarn would have been there as an aggressive competitor, offering a different choice to consumers. So that was the counter factual that we used and that's a bit unusual. That doesn't often occur.
But I'd also have to say to you that I think we are adopting a more rigorous attitude to some of these acquisitions, particularly in light of some of the information that we're starting to pick up as part of our grocery enquiry, but I wouldn't want to over-state the case. I wouldn't like to say that this is going to mark the beginning of a line in the sand and a banning of all future acquisitions of supermarkets by Woolworths or Coles. We need to remember that in terms of those so called 'creeping acquisitions', they're a very, very small part of ultimate growth. The substantial part of growth of these major supermarket chains has been through new sites, either greenfields or shopping centres.
AK: Just on the subject of the broadband network, an almost frenzied debate has broken out in recent weeks over structural separation of Telstra, whether to or not. What's your position on that? If you were making a decision about the broadband network and the only bid you had was from an integrated Telstra, would you accept it or not?
GS: Unfortunately, I'm bound by the probity rules relating to the National Broadband Network not to provide too much detail of our thinking in this area, because I think that could prejudice our ability to provide rigorous independent advice to the NBN expert panel.
AK: Nobody else seems to be bound by it.
GS: Well, yes, but we happen to be in a slightly different position. We're there as an agency asked to provide advice to government and I think you'll find that neither the minister nor the department or the ACCC, nor any member of that expert panel has expressed a view on this particular subject. We have been asked in recent Senate Estimates hearings what our view was on the current operational separation regime that's been in place since 2005. We don't think the current operational separation network is being very effective at all. As to what happens after that, it is ultimately a matter for government and government policy and what might or might not be the outcome of this NBN process. I see the NBN process is to be referred off to a Senate committee now, so we may see some more examination of these issues as part of that Senate committee process.
SB: How influential will the commission's views on issues like separation be in this process? Are you having enough input?
GS: I don't know. Suffice to say that the minister has publicly said that he regards the ACCC's involvement as being an integral part of the process. As the process currently stands, we will be required to provide a report on the various proposals that will be put to government to the expert panel. I would guess that we will cover all elements in our report, but as to where we go from there, I don't think it's appropriate to comment at this point of time.
AK: What do you think of the verbal warfare that has broken out between Telstra and its competitors?
GS: I don't think we can respond to any of that. Verbal dialogue, warfare, call it what you like. It is probably part of the process you'd expect between competitors in this area. Whether it has any impact upon any of the parties involved in ultimately adjudicating upon these tenders, well I'd be very surprised indeed, but you know, that's up to the players themselves. Certainly, I can say to you that people wonder about the personal barbs that are levelled against both the ACCC and against me personally by representatives of Telstra. I say it's like water off a duck's back. It has no influence at all upon our processes or upon our adjudications and frankly there's no effect at all on my personal relationship with some of those that are firing the arrows.
SB: Those personal barbs seem to have been fewer and less spiky since the election. Has your relationship with Telstra changed at all since then or can you explain if it has?
GS: I don't think so. I think the barbs actually probably haven't softened that much. I can't remember whether my being categorised as a car bomber was before or after the election. I note that Phil Burgess, who actually happens to be quite a good mate, but I note that Phil says time and again that the ACCC is stifling investment, that we're doing all sorts of things, but you know, that's all part of the game. If that's the worst that we get from people with whom we're having to deal, well so be it. That's just part of the process. As long as people can judge us on a very transparent and accountable basis as having been fair, impartial in carrying out our responsibilities under the law, I don't really care what people say about us.
SB: One of the interpretations of that 'quieting', if you like, of the Telstra attacks on you is that they don't want to do anything that strengthen's your chances of being reaffirmed for a second term as chairman of the ACCC. Do you want to be chairman for a second term?
GS: Nice try, but as I've said to you and many others, I won't respond to any of these questions about appointments to the commission. These are matters that have to be dealt with by Government and any communications I have with government I'll do with government, rather than through the media.
* It has been reported that the federal cabinet supports the reappointment of Graeme Samuel as chairman of the ACCC, although in doing so it is believed to have recommended a shortened term. It is now up to the state governments to approve or reject the endorsement, before Samuel's nomination can be finalised.
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Alan Kohler: Can we just start with the Pratt matter. Isn't the problem there that you actually did a deal last October and it looked like the deal was all done and now you're coming back and you're prosecuting and it looks like you're welching on the deal?
Graeme Samuel: As you'll appreciate, I can't comment upon that matter at all. It's now before the courts and as I said in the statement I made for the National Press Club on Wednesday, it is our strict policy not to comment on matters that are before the courts. That's the only way that we at the ACCC can protect the integrity of the judicial system. That makes us fair game, I'm afraid, because what it does do is leave us open to attack, to criticism, but that's one of the things that we just have to bear. We can't respond. We won't respond − no matter how irresponsible and ill-conceived we believe that any such criticism might be.
AK: So you believe that is irresponsible, ill-conceived do you?
GS: Sorry, I won't respond. I won't comment at all.
AK: What about the suggestion that it's a personal vendetta?
GS: in the National Press Club yesterday, there's been too much comment over recent months of "Graeme Samuel's ACCC” or of decisions that have been made by the commission, based on personal motives on my part. Some of those have been directed towards wanting to curry favour with the current government or to shore up my reappointment prospects and the like.
As I pointed out on Wednesday, there are a whole range of factors. I think that we need to take a reality check and the first is, of course, that every decision that's made at the ACCC is made by seven commissioners and during the five years that I've been in office I'd have to say I think almost every decision has been unanimous. I don't recall that we've ever taken a vote on a decision at all. Our decisions are made on the advice of staff which beforehand must conduct a rigorous and detailed analysis of the issues and submit material to us on all relevant issues. Often, if it's a legal matter they'll seek legal advice from our legal advisers including where it's appropriate eminent legal counsel. Then we are subject to review. This is an important element. Our decisions, that's the ACCC's decisions, are always subject to review by the Federal Court. By the Tribunals. And by the Parliamentary Committee process.
In relation to criminal prosecutions, we must refer information relating to criminal prosecutions to the Commonwealth Director of Public Prosecutions, who under the law has got the full carriage of all criminal prosecutions. It's the CDPP who determines whether or not a criminal prosecution proceeds or doesn't proceed and to suggest that all those parties that I've just described are complicit in some form of conspiracy to provide or to conduct some personal vendetta I think, just beggars belief.
Stephen Bartholomeusz: Accepting all that, you would have known and had dealings with Pratt for decades. Is there anything in that, the history between the two of you that would support the kind of inference that his lawyers are making?
GS: Look, I'm not aware of anything at in my dealings with Mr Pratt in the past that would support that, but again I just don't want to enter into any discussion or debate on the Richard Pratt matter. These are before the courts and I don't think it's appropriate to be drawn into that debate at all. I think the facts speak for themselves in terms of the way in which the ACCC conducts itself – the processes that we have to follow. The scrutiny to which our processes are subject and it is… it beggars belief to suggest that a single individual within the Commission can make decisions on any matter of any importance relating to the ACCC's activity without going through those various processes. As I said somewhat wryly at the National Press Club, I'm not sure who should be most offended – me because my integrity is being impugned or my six fellow commissioners who are being categorised as absolutely irrelevant and missing in action. I suspect they're the ones that probably feel more offended by all this process.
AK: You are, are you not, undergoing not only a reform of the law which you described in your press club speech, but also some reforms at the ACCC itself. Can you tell us bit about how the whole competition framework is going to look in six months time?
GS: Well we're going through what I've described as the third wave of reform in competition policy. The first wave was the introduction of the Trade Practices Act in 1974 and that in itself was a singularly brave step and it underwent not only vigorous debate at the time in the business community and in parliament, but I do recall back in 1975 and thereafter when we had a new government there were even suggestions that the Trade Practices Act 1974 might itself be repealed. We then went through the second wave of reform with the Hilmer reforms in the 1990s which culminated in the COAG (Council of Australian Governments) agreement.
Now, this is the third wave of reform and this is dealing with a whole range of areas including the misuse of market power provisions and just today the government has introduced into parliament the legislation to, at long last – and I say at long last because we believe it's long overdue – to amend Section 46 of the Act dealing with misuse of market power to make that section into a workable section, one that is capable of being properly enforced but at the same time preserving the fundamental philosophy of the Trade Practices Act, which is that we are there to protect competition not to protect competitors or sectors of the economy from the rigours of competition.
AK: There's another way of characterising the waves that you talk about. That Australia's competition laws have never been tough enough up to now.
GS: Certainly, in respect of both misuse of market power and in relation to the criminalisation of cartels which is also on the political agenda to be dealt with in the next few months. That's clearly been our view. It's clearly been our view that the misuse of market power provisions have been ineffective. That's been the result of inconsistent determinations by the courts and particularly culminating in the determination of the High Court in the now well known Boral case which we effectively believed neutered entirely the misuse of market power provision to make them unworkable. I have to say that I think we've had about one or two successes only in 35 years with those misuse of market power provisions, which essentially I would have thought points to a clear indicator that those provisions have been ineffective and have not dealt with the issues that they should have dealt with.
AK: And in relation to cartels, you're investigating 21 at the moment. How many of those cartels do you think actually began since the trade practices law was introduced?
GS: Oh, all of them. All of the cartels began since the trade practices's law of 1974 was introduced. Some of them are much more recent of course, keeping in mind that under civil prosecutions we have a statutory time limit of six years and then in dealing with cartels we look at two issues. One is the formation of a cartel and then the second is giving effect to the cartel. I have to say that in most investigations we're currently looking at, we are looking at both the entering into the cartel and giving effect, both having happened within at least the previous six years.
SB: So among the cartel investigations, of those 21, are there any among them which have the potential to have the economic effect of the Visy and Amcor price fixing?
GS: I can't comment on that, because it would start to betray some of the issues that we might be examining under these cartel investigations. I think we need to remember this: the Visy/Amcor cartel had a very significant effect in two respects. First, it was very high profile. You were dealing with a very significant public company. You were dealing with a very significant private company owned by the family of a high profile Australian business person.
The other one, of course, was it did, as Justice Peter Heerey said in the Federal Court decision on the Visy matter, affect every man woman and child that had bought something that had been packed in a cardboard box. Now, I venture to suggest there's hardly a man, woman or at least mature child in the country that's not bought something from a supermarket that would have at some stage been packed in a cardboard box. So there's a flow on effect right through to the Australian economy. The extent of that flow on effect at the moment? We don't know. There are third party damages claims out against the parties concerned. That is against Visy and Amcor in Australia for I think upwards of in excess of $800 million, but whether they'll ever come to fruition to that extent or in those amounts time will only tell. That's a matter before the courts. In addition, there is a prosecution proceeding in New Zealand by the New Zealand Commerce Commission and that also has to be dealt with in the context of the impact that the cartel may have had at the New Zealand end of trade and commerce.
It is, for example, well-known because it's been publicly stated by the parties and in various court actions, that we are currently dealing with an alleged cartel in relation to freight surcharges, involving a number of the major airlines in the world. The extent of the impact of that cartel worldwide has yet to be identified, and the extent of its impact in Australia is yet to be identified, but they are big matters.
I think what's been important though is that the average Australian punter has at long last realised what cartels are and it's something that I guess I've been saying with as much vigour as I can for the past five years, and that is: cartels are just straight out theft, usually by well-dressed thieves.
AK: Rather than take cases through the courts and achieve prosecutions, would you do deals?
GS: Well, yes, because we treat every court case, every investigation we have, as a separate matter and when you do deals, what we do is we look at the matter and we say, 'what is the likely outcome if this matter were to proceed to court?' We ask what is the likely outcome that's currently being offered to us and that is able to be negotiated. If we believe that we can achieve at least as good an outcome, if not better, by negotiating a settlement, albeit a settlement that has to be approved by the court, then clearly we would proceed along that basis. I doubt that there's any judge in this land that would object to that.
In many respects the judges are asking on so many occasions these days whether it is possible for you to resolve this matter without having to go through a lengthy court process. The resolution of matters such as Visy by means of negotiated settlements does three things. It results in a very quick outcome, which we believe is at least as good as would have been achieved through the court process. Secondly, it provides a certainty of outcome and the certainty of outcome is something that you can never guarantee in a court case. But the third thing is that in sheer public interest terms, it is potentially much more cost effective.
The Boral matter took eight years from beginning to end. Now whether that's a useful application of the resources of the ACCC or the resources of our judicial system I'll let others judge, but I think if you were to ask, as I say, any judge in this land, they'd probably say to you that the outcome that was achieved through the Visy matter went through the proper processes.
SB: Graeme, before we leave cartels, cartel behaviour, almost by definition, involves large companies behaving badly. If you're looking at 21 cases, that says there's something truly rotten about the state of competition in Australia.
GS: No, because first of all, your first proposition's not entirely correct. There are a number of cartels before us that involve quite small operators. More recently, for example, the abalone fishermen one, which Justice Weinberg adjudicated upon, was a group of small abalone fishermen that got some rotten legal advice. They got a $50,000 fine as a result.
In the context of the totality of the Australian economy, 21 cartels, I don't know whether it's high or low relative to, for example, what we see in the United States or elsewhere. I'd have to say that we are probably, and this is not something that we're terribly proud of I'd have to say, but we're probably up there amongst the leaders in terms of the number of cartel investigations. Whether that signifies that we're good investigators or whether it signifies that we've actually got some problems in the economy is something that I really couldn't express an opinion on. You will find that where you've got a more concentrated economy you've got fewer players, in any particular market, then it is easier for a form of cartel or collusion to exist and I think that may well be a factor that's contributing to the number of cartels in Australia.
The criminal penalty legislation is, in my view, the most important reform that the government can and should have undertaken many years ago. It moves us into a totally different league in terms of cartel enforcement, in terms of our relationship with our fellow regulators in the United States, in Canada, in the UK, even in the EU. While we are ranked amongst the top five competition regulators and enforcers in the world, we are still, because of the civil penalties in relation to cartels, put at a second tier in relation to cartel enforcement, and frankly, cartel conspirators sit there and they say, "Hey we'll deal with the US first, we'll deal with the UK, we'll deal with the EU, we'll deal with Canada. Australia, you can wait because frankly you're not as important. We can settle you with a cheque. These other guys can put us in jail and that's far more important to us at the present time.”
SB: Do you see those reforms in Section 46 and the criminalisation of cartel behaviour as enforcement enhancements or is it really about deterrents?
GS: It's both. The deterrent effect of potentially going to jail cannot be overstated. I think I observed in my National Press Club speech that the US Department of Justice was interviewing some executives in relation to a 2006 cartel and asked why they stopped at the US border, even though they carried on trading in the US, and they said that because outside the US all they faced was financial penalties. In the US they faced jail and weren't prepared to take the risks, so the deterrent effect is significant indeed, but equally this goes down to the jurisprudential sort of philosophy of whether penalties are there to act as a deterrent or as to act as retribution.
I've forgotten my jurisprudence since I was back in law all those years ago, decades ago, but undoubtedly it has a deterrent effect and I'd have to say that in terms of equity it is only appropriate that if we can put someone in jail for stealing from the taxpayer through the tax department or for stealing from social services, then why shouldn't we put someone in gaol for stealing from Australian consumers through cartels?
AK: Just on the subject of supermarkets, you've just been through a number of hearings and so on where you've examined everybody involved in supermarkets. Have you come to the conclusion, what might be called a preliminary conclusion, that there's some sort of non-collusive price fixing going on in supermarkets?
GS: I think that over-states it, Alan. What I've indicated in one or two of the public hearings is that the evidence put before us by the three major operators, Coles, Woolworths and the Metcash-supplied IGA Group, seems to show that they don't compete as aggressively in pricing as you would like to see in a very vigorously competitive marketplace.
AK: Do you mean they match their prices?
GS: Yeah they tend to match. They don't tend to undercut and the instructions given to store managers is match but don't undercut. You can imagine why that occurs where you've got a small number of players in a market, because the players, let's say there's three players as we fundamentally have here, they need to be saying to themselves, "Why would I enter into a price war with my two competitors, because all they'll do is attempt to punish me by retaliating? It's far better if I just sort of sit a bit comfortably and agree…what we'll do is we'll match, but we won't go any lower. That way I avoid the punishment. I avoid the retaliation and it's much more comfortable existence.” Now you only need three of them to agree that independently, tacitly if you like, and you've got a tacit coordination.
AK: But how do you do anything about that as a regulator?
GS: I think you'll have to wait and see in the context of the grocery report. I don't want to pre-empt the findings there, but all I'm indicating is that the figures given to us to date suggest that there is a reasonable degree of alignment between the major retailers in the grocery market that suggests that there is that comfortable tacit coordination. There's not as aggressive pricing differentials between them as you would hope to achieve in a fully rigorously competitive market.
SB: This is uncompetitive behaviour as opposed to anti-competitive?
GS: Let's call it 'less than rigorously competitive behaviour'. I just want to be careful of the words we use.
SB: Yeah, I can understand that. Is there a structural response? Is the answer to try and lower the barriers to entry? Access to sites?
GS: I'd have to say that where you have got less than rigorous competitive dynamics operating in a market, one of the first things you look to is to the entry of new competition and what barriers to entry there would be and it wouldn't surprise you at all that we're looking at those barriers to entry.
AK: And is part of the answer possibly something along the lines of Fuel Watch or Grocery Watch?
GS: I think the government's already announced that it's intending to introduce some form of advice to consumers on grocery prices. I won't go into the detail of that, because that's yet to have been finalised with government, but they're hoping to introduce at least some form of advice that will help consumers be able to identify which are the cheaper outlets in regions and which are perhaps the more expensive outlets in regions. There's a lot of development work going on with that and we'll see some more detail on that over the next few weeks or so.
We also need to remember that where you've got a tacit coordination, if that's what we do have in groceries, you can price match two ways. 'A' and 'B' can reduce their prices to 'C', or 'B' and 'C' can increase their prices to 'A'. Tacit coordination can operate both ways and sometimes it can operate to the disadvantage of consumers by pushing prices up.
SB: Before leaving grocery retailing, this week the commission announced it was going to oppose a proposal by Woolworths to buy a supermarket in Queanbeyan. Does that represent any kind of change in policy towards the big grocery retailers?
GS: No it doesn't. I think what it represents is two things. The first is the rather special circumstances here. Forager was the owner of the site and had a license from Superbarn to provide a Superbarn supermarket on the site, but it was a fairly small one. Superbarn said it would acquire the site and expand the site significantly to a substantial Superbarn operation.
The fact that you had that, and then Woolworths came and said it would pay more and buy the site said to us that if we look at the 'with and without' test, that is, the counter factual, Superbarn would have been there as an aggressive competitor, offering a different choice to consumers. So that was the counter factual that we used and that's a bit unusual. That doesn't often occur.
But I'd also have to say to you that I think we are adopting a more rigorous attitude to some of these acquisitions, particularly in light of some of the information that we're starting to pick up as part of our grocery enquiry, but I wouldn't want to over-state the case. I wouldn't like to say that this is going to mark the beginning of a line in the sand and a banning of all future acquisitions of supermarkets by Woolworths or Coles. We need to remember that in terms of those so called 'creeping acquisitions', they're a very, very small part of ultimate growth. The substantial part of growth of these major supermarket chains has been through new sites, either greenfields or shopping centres.
AK: Just on the subject of the broadband network, an almost frenzied debate has broken out in recent weeks over structural separation of Telstra, whether to or not. What's your position on that? If you were making a decision about the broadband network and the only bid you had was from an integrated Telstra, would you accept it or not?
GS: Unfortunately, I'm bound by the probity rules relating to the National Broadband Network not to provide too much detail of our thinking in this area, because I think that could prejudice our ability to provide rigorous independent advice to the NBN expert panel.
AK: Nobody else seems to be bound by it.
GS: Well, yes, but we happen to be in a slightly different position. We're there as an agency asked to provide advice to government and I think you'll find that neither the minister nor the department or the ACCC, nor any member of that expert panel has expressed a view on this particular subject. We have been asked in recent Senate Estimates hearings what our view was on the current operational separation regime that's been in place since 2005. We don't think the current operational separation network is being very effective at all. As to what happens after that, it is ultimately a matter for government and government policy and what might or might not be the outcome of this NBN process. I see the NBN process is to be referred off to a Senate committee now, so we may see some more examination of these issues as part of that Senate committee process.
SB: How influential will the commission's views on issues like separation be in this process? Are you having enough input?
GS: I don't know. Suffice to say that the minister has publicly said that he regards the ACCC's involvement as being an integral part of the process. As the process currently stands, we will be required to provide a report on the various proposals that will be put to government to the expert panel. I would guess that we will cover all elements in our report, but as to where we go from there, I don't think it's appropriate to comment at this point of time.
AK: What do you think of the verbal warfare that has broken out between Telstra and its competitors?
GS: I don't think we can respond to any of that. Verbal dialogue, warfare, call it what you like. It is probably part of the process you'd expect between competitors in this area. Whether it has any impact upon any of the parties involved in ultimately adjudicating upon these tenders, well I'd be very surprised indeed, but you know, that's up to the players themselves. Certainly, I can say to you that people wonder about the personal barbs that are levelled against both the ACCC and against me personally by representatives of Telstra. I say it's like water off a duck's back. It has no influence at all upon our processes or upon our adjudications and frankly there's no effect at all on my personal relationship with some of those that are firing the arrows.
SB: Those personal barbs seem to have been fewer and less spiky since the election. Has your relationship with Telstra changed at all since then or can you explain if it has?
GS: I don't think so. I think the barbs actually probably haven't softened that much. I can't remember whether my being categorised as a car bomber was before or after the election. I note that Phil Burgess, who actually happens to be quite a good mate, but I note that Phil says time and again that the ACCC is stifling investment, that we're doing all sorts of things, but you know, that's all part of the game. If that's the worst that we get from people with whom we're having to deal, well so be it. That's just part of the process. As long as people can judge us on a very transparent and accountable basis as having been fair, impartial in carrying out our responsibilities under the law, I don't really care what people say about us.
SB: One of the interpretations of that 'quieting', if you like, of the Telstra attacks on you is that they don't want to do anything that strengthen's your chances of being reaffirmed for a second term as chairman of the ACCC. Do you want to be chairman for a second term?
GS: Nice try, but as I've said to you and many others, I won't respond to any of these questions about appointments to the commission. These are matters that have to be dealt with by Government and any communications I have with government I'll do with government, rather than through the media.
* It has been reported that the federal cabinet supports the reappointment of Graeme Samuel as chairman of the ACCC, although in doing so it is believed to have recommended a shortened term. It is now up to the state governments to approve or reject the endorsement, before Samuel's nomination can be finalised.
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