Welcome to part two of our In Conversation between the former head of the Australian Competition and Consumer Commission, Graeme Samuel and Monash’s Professor Stephen King, also a former competition regulator.
The interview picks up from yesterday’s first instalment, to discuss:
Petrol pricing. “Price signalling is really all about petrol and it raised its head in the ACCC’s Petrol Inquiry, and subsequently in the Caltex-Mobil retail sites acquisition issue. It was really all about petrol and it hasn’t been addressed. I think if you were to speak to the Petrol Commissioner, unless he’s changed his mind since I last spoke to him, he would say to you he’s still got a problem with price signalling in the petrol industry and that’s what it has been all about.”
Supermarket power and the 2008 Grocery Inquiry, which involved both men. Says Samuel: “The scare campaign out there (now) – I’m taking home brand products as one of the examples – is that Coles and Woolworths are going to crowd their shelves with home brand products and they’ll sell nothing else.”
The NBN. “If Catherine Livingstone as chairman and David Thodey as CEO had been in charge of Telstra during those days of 2004 through to 2008, or even 2009, when the tender was put in for a fibre-to-the-node network, I suspect we would have a completely different telecommunications regime today.”
Stephen King: In your former role as chairman of the Australian Competition and Consumer Commission, you were in a very similar situation to Glenn Stevens. Yet during your time there you saw a massive increase in bank bashing leading to the bank price signalling legislation, you saw grocery bashing go through the roof with the Birdsville Amendment.
You saw issues about petrol and one of our former colleagues who is now petrol commissioner (Joe Dimasi), God help him if the Australian dollar wasn’t as strong as it is now, because we’d be up to two dollars a litre - I bet the Petrol Commissioner would be wishing he had chosen a different vocation.
Graeme Samuel:[laughs] He still wishes he’d chosen a different vocation…
Stephen King: [laughs] To what degree, should bodies like the Australian Competition and Consumer Commission, and the chairman of the ACCC, be involved in educating the public in the way that you’ve just said that Glenn Stevens does very well?
Is that occurring to the degree that it should be? Should those sort of agencies be basically putting more pressure back on the politicians, and saying, well, look, you just don’t have the evidence - for God’s sake, just shut up.
Graeme Samuel: You must understand that the ACCC did just that. But there is a limit to what they can do because they’re regulatory and enforcement agencies. And they are not traditionally permitted, or expected, to get involved in the political debate or in the policy debate. So, the public response when asked our view on policy matters was, “that is a matter of policy and we don’t get involved in that discussion.”
That’s not to say that we didn’t get involved. Because we did very much so behind the scenes, trying to provide rigorous analysis to Treasury and to the relevant ministers to deal with some of the issues they were raising.
You mentioned three issues there and let me try to explain how each of them was dealt with, very much at the insistence of the ACCC.
Price signalling, as has been publicly stated and was stated in a Senate Inquiry, had little to do with the banks at all. It was picked up by government as a matter that ought to be focused on the banks. The ACCC said in the Senate Inquiry, that price signalling was not a matter that really was concerned with the banks - except in a particular, very unusual instance. A particular bank CEO made some comments that went close to crossing over the line in terms of signalling what he would do with interest rates if his competitors followed a particular course. But leave that one aside, that was very unusual.
Price signalling is really all about petrol and it raised its head in the ACCC’s Petrol Inquiry, and subsequently in the Caltex-Mobil retail sites acquisition issue. It was really all about petrol and it hasn’t been addressed. I think if you were to speak to the Petrol Commissioner, unless he’s changed his mind since I last spoke to him, he would say to you he’s still got a problem with price signalling in the petrol industry and that’s what it has been all about.
The ACCC believed back then, that the law was deficient in relation to dealing with what were effectively collusive arrangements between competitors, otherwise known as cartels. Here were collusive arrangements between competitors that were not caught by the law, but that the ACCC believed ought to be caught by the law in the same way that they are in the United States and in Europe.
Therefore the ACCC said, following its Petrol Inquiry in 2007, and had been saying ever since, that something needed to be amended in the law. There was a lot of debate about it by academics, by practitioners, by the ACCC and by government. Ultimately, the government took it up, but took it up in the context of the banks and interest rates and that was perhaps a bit unfortunate.
Because it diverted attention away from what it was all really about and how it started, which was the Petrol Inquiry and the price signalling processes that the ACCC believed were occurring in relation to petrol prices, that have contributed to the price cycles that have caused a constant angst for both those who are buying petrol and for Joe Dimasi.
Stephen King: Can I take from that, that you would be happy with the bank price signalling legislation if they just crossed out the word “bank” and changed it perhaps to “business”?
Graeme Samuel: Yes and no, it should not be sector specific. There is no question in my mind that making it sector specific created a precedent that was unfortunate and it ought to be removed…and that’s one aspect. Unfortunately though in the course of the passage of the legislation through parliament, there were provisions that were inserted that effectively emasculated the price signalling provisions so that they actually are meaningless.
And so it wouldn’t matter if you took the word “bank” out. The amendments are ineffective in dealing with the issues raised by the ACCC. So we wind back to the problem that existed in 2007 when the ACCC conducted the Petrol Inquiry.
Now you talk about trying to educate the public about petrol pricing… the Petrol Inquiry was an interesting one in that the ACCC asked the then Treasurer Peter Costello, if it could conduct the inquiry. The treasurer was understandably reluctant because he couldn’t see that it would achieve anything.
I was particularly keen to have the inquiry in an effort to bring out the facts and the relevant information concerning petrol pricing and petrol retailing in this country.
I have to say to you that Mr Costello, was probably right – the Inquiry had no effect. Primarily because the prejudices were there and those prejudices weren’t going to be put aside by a detailed analytical report spanning some 600 pages that explained what was happening in the petrol industry.
Since then, the ACCC has had the responsibility of conducting a petrol monitoring process each year and publishing a petrol monitoring report. That report for anyone who reads it, - and I venture to suggest that there are not too many who do - they will find that it is highly informative and educative about the structure of petrol wholesaling and retailing in this country… how the refining sector is working, how the wholesaling and retailing sector is working. But no one reads it.
Yet I feel for Joe Dimasi because he has done an extraordinary job in trying to inform the public about what petrol pricing is all about. But in the end I think he’s found that the best recipe is actually to say nothing.
Stephen King: Okay, the third one…
Graeme Samuel: Groceries has been really interesting because the ACCC conducted a Grocery Inquiry in 2008. You were part of it. It was a very thorough inquiry. It formed two parts, the first of which was to look at competition in the retail sector and the other was to look at the supply chain from the grower, the farmer right through the wholesaling process, through to retail and what was happening.
It was a very rigorous examination of the grocery sector, but again, it didn’t disabuse the commentators who had and continue to have a preconceived view about what’s going on in groceries and are going to keep on promoting that view, whether it’s on talkback radio, particularly in Sydney, or elsewhere.
There is a preconceived notion that the two major grocery chains, Coles and Woolworths, have got too large a share of the market place, that they’ve got a duopoly, that they’ve got a share of 75% to 80%, that they control prices and everything else.
The bemusing element of the debate is this: back in 2008, contrary to all the statistics, it was being said that the two major grocery chains, Coles and Woolworths, were leading increases in the prices of groceries beyond the rate of inflation, and beyond the rates of increases in grocery prices in other major OECD nations.
That wasn’t borne out by the statistics, but it didn’t matter, it was what was being put out. Then the Grocery Inquiry Report came out and it said there were two or three issues involved.
First, there was workable competition between Coles and Woolworths - one of the fundamental problems at the time was that Coles was just about to start a management restructure that was potentially going to lead to a more aggressive and competitive environment.
Second, while the home brand seller Aldi was imposing some really interesting price competition, the Metcash IGA group was imposing no price competition at all, but had some convenience elements to its stores. They were the fundamental tenets of the 2008 report.
Now, interestingly, on January 26 last year - Australia Day - Coles announced the commencement of the price war in some of the staples, milk and ultimately, bread.
Suddenly the supermarkets were charging too little and so it’s no longer a question of them pushing the prices up. It’s a question of them pushing the prices down too low. And we get another group that comes out which is the suppliers and the farmers in the supply chain who are saying it is going to impact on them significantly. To the best of my knowledge actually, to date, that hasn’t happened.
And in fact if you look at the farm gate price for milk, it’s actually gone up a bit since January 26, 2011. But, it doesn’t matter; Coles and Woolworths are conducting a price war that according to some interests is bad for the economy and it’s bad for everyone that’s associated with it.
The linked issue is home brands. Coles and Woolworths are now selling home brands across a range of products. And if you watch some of the current affairs shows on our commercial television of an evening, they seem to be indicating that some of the home brand products are as good if not better than some of the branded products. There is a battle of some quite powerful vested interests that’s going on here and it’s a fascinating tussle for the consumer dollar.
On the one hand, (there’s) farmer groups and on the other hand, major supermarket chains like Coles and Woolworths and the Metcash IGA group.
But also sitting in the centre are some very powerful suppliers and processors of milk and bread and the like, who are feeling the squeeze.
The one group that seems to have been forgotten is the group that the ACCC has the fundamental responsibility to look after. They are potentially the most powerful group in this country – the Australian consumer – 22 million of them.
They’re the ones that the ACCC is vested with the responsibility to act as the agent to empower, so they can have choice. But there are too many individuals who seek to remove that choice from the consumer and say, if we give the consumer that choice, if we empower the consumer, then it is going to impact upon certain people we want to protect from that impact.
We went through this debate through the national competition policy instituted by Paul Keating back in the mid-1990s, and then carried through by John Howard and Peter Costello.
A couple of us on the Commission had some responsibility with the National Competition Council and we used to hear this all the time. Why should the consumer be empowered if that was going to act to the detriment of certain vested interests? I’ll never forget giving speeches in Adelaide and in Western Australia about retail trading hours and I said “business is there to serve the needs of consumers, consumers are not there to serve the needs of business.”
Stephen King: I must confess, I weep about the low prices as I pour my home brand milk onto my muesli every morning, I’m just shocked by the fact that I don’t pay more… [Laughs]
Graeme Samuel: [Laughs] I should say to you that I did provide the solution, I was called by a journalist from a financial newspaper when I was back with the ACCC, and asked, “What are you going to do about these low grocery prices?”
I responded that we had developed two possible solutions. The journalist was very interested in this. I said well, this is on-the-record, here are the two solutions which we have put to government. The first requires a legislative enactment, and he said “what’s that?” And I said it is to empower the ACCC to mandate the supermarkets to double the price of milk.
And he said “Oh, that’s ridiculous.” And I said no, it’s not, that’s what is being proposed by a number of our politicians.
But I went on to say that there is another solution which we proposed to Treasury and to Finance which doesn’t involve a legislative change. The journalist said “Oh, well what’s that?” and I said, that’s easy, we have asked for an extra vote of funds which we will then use to engage several major security firms around the country to stand outside the major supermarket entry doors with guard dogs and prevent people going inside. That will stop all this crazy nonsense of people buying cheap products!
The journalist didn’t report any of those comments and I can’t understand why.
Stephen King: [laughs] Can I bring you back to the original issue though – the level of debate in Australia. So we’ve now run through government, business, the agencies and you’ve left a depressing story here. I mean, in a sense, government isn’t going to do it – minority government – business doesn’t seem to be doing it, except in the vested interest area, could be a role there but it’s hard for them to get out of their own space.
The agencies, as you say, they’ve got a fine line, particularly a regulatory agency or an enforcement agency like the ACCC. It doesn’t leave anyone! I mean, are we just doomed to have this ongoing debate revisiting issues about protectionism, about fixing exchange rates, about food security in a country that is a massive food exporter? Are we doomed to have this silly debate and the damage that debate causes when it becomes part of legislation?
Graeme Samuel: Yes but you’ve left out an incredibly vocal group, which is those that write for The Conversation, or those that contribute to Business Spectator, or contribute to Global Mail, or contribute to the daily newspapers in the opinion pages. In other words, individuals who have credibility, have some knowledge, and are prepared to put pen to paper and to create the debate, create the information.
The issue we have at the present time is that their views are (considered) not quite as interesting.
You know, I was reading an interesting story the other day in a daily broadsheet, I think it was The Australian. It followed on from some anecdotes that had been told about a particular business that put off 100 workers because it was finding the going tough on the Australian dollar, you know, and Fair Work Act, and all these sorts of issues.
There were a whole range, a litany of issues, none of which seemed to have anything to do with the management of the business at all, but we’ll leave that aside.
But then what did come out at long last was a report, in The Australian from several small businesses that said, for example, “I was a very small business three years ago, I had seven people, I’ve now got 170 people that I’m employing because I’m actually producing home brand products for the major supermarket chains. I thank them, for it.”
During our Grocery Inquiry, we had manufacturers saying they welcomed the orders for home brand products, because what they are actually doing is using up the unused production capacity which would otherwise sit idle. They employ more workers to produce these products.
The scare campaign out there – I’m taking home brand products as one of the examples – is that Coles and Woolworths are going to crowd their shelves with home brand products and they’ll sell nothing else.
Well, forgive me, but that can’t possibly happen if consumers are exercising a choice. Because there are a vast number of consumers that simply say they’re not prepared to buy the home brand milk, they’re not prepared to buy the home brand bread, or they’re not prepared to buy the home brand baked beans, or toothpaste, or whatever.
Experience overseas and elsewhere has shown there are some consumers who are very price conscious who will buy the home brand product. And there is a group of other consumers who, for a range of reasons, are less price conscious and won’t buy the home brand product. I first recall reading six or seven years ago about how Coles and Woolworths were going to increase the percentage of home brand products on their shelves by 35%, over a period of two years.
But you know, if I walk up and down those aisles today in either of the major supermarket chains, I’ve actually got to look to the bottom shelves to see the home brand products.
So clearly, Coles and Woolworths don’t believe that their home brands merit eye-level positioning on shelves and there is a massive amount - tens of thousands - of products that are there that are not home brand. So we keep on seeing these prognoses that the home brands are going to take over and there will be no branded products left on the shelves. If that was the case, no one would shop anywhere but Aldi, but that hasn’t happened, it’s just not the way it works.
Stephen King: Before we finish off, I want to take us off on a slightly different tack. I mean, so, the media, in particular the “new” media, are going to save us. That’s good, particularly given that this is on The Conversation.
The government is involved in very large expenditure on a particular technology of getting the new media, the internet and digital technology into our homes, which is called the National Broadband Network, or the NBN. It’s going to create a government monopoly.
We’ve had a recent decision by the ACCC on Foxtel and Austar which seems to be embedding some market power over content in the hands of one of our favourite telecommunications carriers, Telstra.
Where do you think Australia is actually going in terms of digital convergence, the NBN and content? And are we going the right way or are we simply throwing 40 or so billion dollars into an infrastructure facility that will be redundant before it is even built?
Graeme Samuel: Right, let me put aside very quickly, the Foxtel/Austar decision because I, as you know, made a firm resolution when I left the ACCC that I wouldn’t comment upon matters that I’d been involved in.
Stephen King: It was worth a try.
Graeme Samuel: [laughs] No I won’t comment on it so let’s put that aside. Let’s deal with the NBN. The NBN, I think, to my dismay, has been subjected to a politicisation which is really unfortunate and it’s a pity we can’t lift it out of the political debate in to a very serious financial, commercial, economic and analytical debate.
Let me put it into the simplest of form as I see it, and just see where it takes us. Australia for infrastructure purposes can be divided up into two zones, Zone A and Zone B.
Zone A is that area that is densely populated. We’ve got a massive continent here, and in terms of land area per capita, I think that we probably have the greatest land area per capita of any continent in the world.
So we have Zone A, which is the more densely populated area, and Zone B, which is the less densely populated area, the more sparse areas. We call it rural and regional Australia.
Since Federation, and in fact before that, we took a social view that we were going to provide rural and regional Australia, Zone B, with services like roads, water and electricity and postage. All these services - television services, telecommunications - were all going to provided on the basis that this was the way that Australia’s demographic structure was created and it ought to preserved.
On any analysis, servicing Zone B is far less profitable than servicing Zone A, the densely populated areas. In fact, Zone B is unprofitable. But we’ve still got to do it. That’s the nature of the social contract that we have in Australia between the government and its population.
In a sense, that is the basis of the National Broadband Network. The NBN is covering 100% of Australia, 93% through fixed line technology – fibre optics – and 7% through wireless and satellite. And on all the work that the ACCC did, there is no question that private sector would regard Zone A, encompassing about 75% of the population of Australia, as being profitable, commercial.
Telstra always said as much in terms of what it put to government what it would do, as did Optus with the Fanoc consortium (later called TERRiA).
It’s the remaining 25% that is the issue. And when you have Zone A – 75% – profitable, and Zone B – the remaining 25% – very unprofitable, in fact potentially loss making, when you put them both together, then guess what happens? You average out with a fairly low rate of return.
Now, I should’ve thought that at some point of time, someone is going to actually separate out Zone A and Zone B and say to themselves if we’ve got a profitable Zone A, an unprofitable Zone B, then what we’ll do is separate them out and we’ll be able to create, or have, an entity that will earn a commercial return providing that someone – it’s got to be government – does what is done with every other utilities sector and with the roads and the dams and the water, electricity, gas, telecommunications, postage - subsidise Zone B.
And when we get to the reality of that which may be some years down the track, when I think we’ll actually understand how the NBN is working, but to talk of the NBN earning 7% on its funding and all that sort of thing, I think just ignores the fact that 25% of the NBN is like every other utilities sector that we provide, every other infrastructure that we provide to Zone B - it’s unprofitable.
Stephen King: So shouldn’t the government then have followed a policy where it shouldn’t be involved in the NBN and should be involved in a rural and regional broadband network, funded explicitly out of taxation revenue and then left the city areas, the urban areas of Australia, to run on competition?
Graeme Samuel: It tried that. It tried that for several years in discussions and negotiations with Telstra under its former management of you know, Sol Trujillo, Phil Burgess and then-chairman, Don McGauchie.
And it failed, it couldn’t reach a sensible commercial resolution. The ACCC was intensely involved in the negotiations, but couldn’t reach a sensible commercial position.
In the end the government decided to go a different route and so, if we want to see a fibre optic fixed line network supplemented by a wireless network, both for that 7% in the sparsely populated rural and regional Australia, and also a complementary wireless network covering the rest of the country - then the government would have to sponsor it.
That’s not unusual, we’ve seen that happen, where government will turn around and will say “we will take the front running on this, we’re running into a problem trying to get those in the private sector to do this, for a whole range of reasons, therefore we’ll do it. And ultimately when it’s done we’ll turn around and do what I said before, we will separate them out into their two components. We’ll subsidise the Zone B and that will enable the whole project to earn a commercial rate of return that, in appropriate circumstances could prepare the project for some form of private sector ownership”.
I’ve said over and over again that if Catherine Livingstone as chairman and David Thodey as CEO had been in charge of Telstra during those days of 2004 through to 2009 when the tender was put in for a fibre-to-the-node network, I suspect we would have a completely different telecommunications regime today.
Stephen King: Graeme Samuel, Thank you very much.
Graeme Samuel: Thank you.