January 31st 2004

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Articles from this issue:

COVER STORY: More surprises likely in Queensland poll

EDITORIAL: The dark side of the Internet

TRANSPORT: Waterfall crash report indicts NSW State Rail Authority

CANBERRA OBSERVED : Vultures circle wounded Democrats

STRAWS IN THE WIND: Paper children / The peripatetics / The serious people we are losing

SOUTH AUSTRALIA: Mixed outcome on same-sex bill

ECONOMY: Amend Trade Practices Act to protect small business

Super rethink needed (letter)

Population: quality, not quantity (letter)

Upgrade our rail system (letter)

FAMILY: Fatherhood and marriage - a vital connection

COMMENT: Castro's legacy: the New Left

TAIWAN: March election a key issue in China

TRADE: NAFTA - lessons for Australia

BOOKS: DIGNIFIED AND EFFICIENT: The British Monarchy in the Twentieth Century

BOOKS: A NEW CITY: Photographs of Melbourne's Land Boom, edited by Ian Morrison

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Amend Trade Practices Act to protect small business

by Evan Jones

News Weekly, January 31, 2004
Evan Jones, Associate Professor of Political Economy at the University of Sydney, examines the importance of the current Senate inquiry into the Trade Practices Act.

The current Senate inquiry into small business and the Trade Practices Act is a reflection of outright failures or marginal successes of past inquiries and reports, the systemic weakness of the regulatory apparatus, and the flawed intellectual culture that underpins the regulatory apparatus.

Behind this hierarchy of failure is a less seemly infrastructure - the power of the big business lobby, the active complicity of the legal fraternity (with some exceptions) in its defence of its key income source, and the bipartisan cowardice of parliamentarians.

Following the 1993 Hilmer report, national competition policy and its comprehensive scope has involved a socially engineered imposition on an unconsulted community. It is vague on its most central of concepts - the nature of competition.

It proceeded to subject all dimensions of economic (and later social) life to competition without explaining what it means. Apart from the ideologically-driven and unaccountable National Competition Council, the nation's economic and social fabric is thus made to depend on the creaky edifice that is the Trade Practices Act.

The generic failure of national competition policy to contemplate the systemic unlevel playing field for small business in the competitive process is embodied in the establishment of the Reid Inquiry in 1996 and in its report, Finding a Balance. The accounts of predation against small business make salutary reading.

Since Reid, there has been substantial advance in only one area - franchising; but this is integrally linked to the expertise and activism of solicitor Robert Gardini and friends.

There has been a modicum of extra resources for the ACCC, but insufficient. Section 51AC of the TPA has been enacted, but with minimum impact. Shopping centre tenancies remain essentially exploitative.

Retail market share has not been addressed. Bank malpractice remains in the too hard basket.

All of which explains why another Inquiry has been established. But what lies behind the lethargy?

Ironically the core of conventional microeconomic theory is a market economy of small businesses ("perfect competition"). This vision implicitly underpins a strong Section 50 merger provision. But because the conceptual structure is abstract and other-worldly, its policy impact is inevitably inhibited.

Some economists manage to transcend the limitations of their training to become useful professionals in negotiating real-world complexities. In Australia, the number of economists with expertise in the trade practices arena has always been small; worse, the coterie is not reproducing itself. Where there should be a vibrant expertise there is increasingly a vacuum.

In this vacuum, two intellectual traditions combine to erect a formidable barrier against regulatory justice for small business.

Academic microeconomics, worshipping analytical elegance, abhors real-world complexities. In key sectors, we have a concentrated core of a handful of corporate giants and a large number of small and medium enterprises (SMEs) - a structured horizontal hierarchy.

We also have a structured vertical hierarchy of a handful of corporate giants, lauding it over SME suppliers and/or customers.

Lacking an analytical framework that centrally incorporates such structural hierarchies, a culture has been absorbed into practices surrounding the Trade Practices Act centred on the homogeneity of players. All players are equal in the great competitive game of economic warfare, and the natural beneficiary is the "consumer".

Thus a presumed market structure of undifferentiated players and a vision of contestability means that small business is yesterday's model. The species is justifiably cannon fodder for the fight for the consumer's purse.

Given that economic experts are thin on the ground, legal opinion has taken to depending upon second-hand economic opinion as entrenched in legal precedent. But the law has its own contribution. A contract is an arrangement between rational and non-coerced parties. End of story. The structural hierarchies missing from the economist's lexicon are also missing from the lawyer's brief. The effect of economic and legal intelligence in combination? All players in the commercial world are, by definition, equal.

Misuse of market power, substantial lessening of competition, and unconscionable conduct might be represented literally in the Trade Practices Act. However, if the conceptual apparatuses suffusing the mentality of the "experts" displace these concepts to the outer margins of possibility, what is the likelihood of the relevant sections having force? Effective litigation and enforcement is precluded a priori.

Thus Boral can defy a Section 46 injunction in spite of the prosecution having "smoking gun" evidence of intent, and in spite of the Section referring to competitors and not to competition.

The High Court might have excused Boral for the trying times of the early 1990s, and its less than monopolistic market share, but this is white noise that camouflages the emasculation of Section 46.

The "substantial lessening of competition" provision (Section 50) is currently powerless against creeping acquisitions. An Act and a regulatory overseer that tolerates Coles' and Woolworths' insatiable takeover of key niche players in the liquor industry is an Act that is in urgent need of remediation and an overseer in urgent need of re-education.

Retail monopolies

Moreover, the rampant colonisation by Coles Myer and Woolworths of new terrain facilitates strategic territorial expansion of market share by cross-subsidisation.

Finally, the monopoly rents made by Woolworths and Coles Myer get capitalised in the share price, forcing the two mega-beasts into another round of colonisation to feed the equally insatiable appetite of the market analysts.

There are failings for comparable reasons in the realm of unconscionable conduct. The real world is imbued with persistent and blatant unconscionable conduct, but the experts see only the Social Darwinist process of weeding out the inefficient and the incompetent.

Section 51AC was enacted in 1998 to recognised unconscionable conduct of big against small business. The tardiness with which this section has been legislated into existence is a fundamental reflection of the scandalous weakness of the Act with respect to structural hierarchies.

Parliamentary committee members may find it convenient to take at face value the remonstrations of corporate spokespersons; but if previous governments had built a more robust regulatory bulwark this current inquiry would not have been necessary. Recurrent bank malpractice against its small business clients highlights that the Trade Practices Act is of marginal utility in this domain.

There are still no functioning mechanisms available to aggrieved small business borrowers. The Banking Ombudsman routinely turns away small business complaints.

Mediation has been corrupted by precisely the asymmetry of power between the parties that led to its proposed substitution for litigation in the first place. Assistance from the pro bono wing of the legal profession is unavailable. Letters to the ACCC and to members of parliament are returned noting an incapacity to assist.

The movement of the relevant sections of the Trade Practices Act (relating to financial dealings) into the ASIC Act after the 2001 election was ill-informed. ASIC has neither the interest nor the intelligence to administer the sections removed from the Act.

Given that the intrinsic need for debt capital of small business makes the lender-borrower relationship of fundamental importance, it is of fundamental significance to the small business community that redress for unconscionable conduct and misleading representation in this arena be available.

The facilitation of collective bargaining with powerful market players deserves entrenchment in the Act as a legitimate procedure that is integral to the competitive process itself, rather than having to be specially authorised as an anomaly.

The Howard Government appears likely to support this development (following the Dawson report), but it smells of compensation for passivity elsewhere.

S.46 needs re-working regarding the definition of market power. S.50 needs re-working to accommodate an inhibition to creeping acquisitions. Financial dealings moved to the ASIC Act in 2001 need to be returned to re-incorporation into the Trade Practices Act.

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