A faster track to supermarkets

Minister Willis announced measures opening retail grocery to greater competition. 

She announced a fast-track process in which retail grocery that would pass a 'does this improve competition' test could get consents that override existing district plans, access to a single building approvals authority for sites across the country, easy ability to replicate builds in multiple places, and an easier path through the overseas investment office.

Back in May, Benno at our shop put up our proposal for achieving the same outcome. Ours differed a bit. It tweaked existing fast-track processes so that a plan change would be effected that could override parts of plans with which it were otherwise inconsistent. The path would only be open to new entrants or to minor current players looking to substantial expansion. And sites would be mixed-use by default so entrants could stick apartment towers above their stores. After 5 years, the pathway would open to current incumbents. The intention here was to give new entrants a head start and a good reason to move early. And, if no entry happened, to let the incumbents go more strongly head-to-head in spots where they previously haven't. 

I think the Minister's proposed process is decent. It seems obvious that Costco will use it for speeding up its own expansion. Whether anyone else will use it is anyone's guess. The point of lowering barriers isn't to guarantee some number of entrants. It's to discover whether new entry is warranted. Maybe there just aren't super-profits here worth chasing. It's hard to tell when entry is de facto illegal. Removing the barriers lets you find out.

There's always ways this could still go wrong. But I'm optimistic. 

A few previous bits.

• BusinessDesk / Spinoff , July 2021
• Submission on market study draft report, August 2021
• Cross-submission to ComCom, November 2021
• RNZ nights, December 2021
• Newsroom March 2022
• Herald Oct 2022
• Post November 2022
• Platform, Oct 2023
• Herald April 2025
• Benno's note
• Taxpayer Talk
• Hosking, May 2025
• Post, June 2025
• Post, June 2025
• Newsroom, July 2025

For a de minimus threshold for mergers

I've spent the last couple of days at the Competition Law and Policy Institute's annual workshop.

Webb-Henderson's Lucy Wright made a good case for a de minimus threshold for merger controls. Small mergers could have a safe harbour, or mergers in markets of insufficient NZ importance.

If we need to set a monetary threshold for a market of insufficient NZ importance, there's an obvious benchmark.

Same day as that session at the CLPINZ workshop, Terry Allen, former Chair of Serrato, had a piece in the Post. You'll remember Serrato. I've sometimes pointed to it as example of how the NZ Commerce Commission destroys value by chasing nth order issues when first-order issues are left by the wayside. 

Allen writes of their NZ startup:

In fact, Pioneer liked Serato software so much that when the company ran a sales process, it was the preferred bidder. Its offer not only valued the company at around $175 million, it also promised to establish a global music laboratory in Aotearoa and to grow the headcount of the chirpy little music company.

It was all going swimmingly until the Commerce Commission pulled the plug mid-2024.

The commission’s concern was that Pioneer’s parent company, AlphaTheta Corporation, already held a significant share of the global DJ hardware market.

Serato was a major player in the DJ software market. In the commission’s view, combining the two could “substantially lessen competition” in the DJ software and related hardware market — even though the New Zealand market for such products is tiny, accounting for well under 1% of Serato’s sales.

The merger review took a year and cost the commission more than $500,000 to investigate, according to the National Business Review. Legal and advisory bills for both Serato and Pioneer were well north of $1m.

The decision meant the reported $175m-plus deal was dead in the water, Serato remained independent, and the promised music lab never left the drawing board.

The Commerce Commission decision did four things. First, it cost the commission over half a million dollars and both Pioneer and Serato over a million in professional fees.

Second, it took the commission a full 12 months to make a call — effectively hitting the pause button mid-track for a year. Tacked onto pre-marketing and then running the process a second time the all-up time was more like three years. An eternity in a fast-moving tech environment.

Third, it made it jolly challenging to run the company on a daily basis while its future ownership was debated and delayed. We were lucky to have a top-flight management team keeping the home fires (and DJ decks) burning.

And fourth, it forced the company to run a whole new sales process but limit the participants to financial buyers rather than trade buyers — effectively narrowing the field to private equity.

I've heard reasonable-sounding arguments that NZ ComCom stuffed this one up in part by defining the market improperly. While Serrato's software is great for hip-hop artists, it's not as popular for artists that don't use scratch. Define a market narrowly enough and weird things happen. 

Allen points to the more fundamental issue:

In today’s world, an increasing number of Kiwi companies build and sell digital services, and are global from day one.

While the commission understood that Serato’s New Zealand revenue was a wafer-thin slice of the whole, the mere existence of any local sales meant it had to run the merger through its standard domestic-competition lens.

The second is that under-resourcing of the commission means even straightforward matters can take a year to determine. In the world of global M&A, that’s an eternity — enough time for opportunities, buyers and market conditions to change completely.

Both of these things need to change if we want New Zealand to continue to grow globally significant tech companies and realise top-dollar sales when their founders exit.

Otherwise, we risk sending an unhelpful message to the world: if you want to buy a Kiwi tech success story, prepare for a year in regulatory limbo, big legal bills, and the real chance the deal won’t happen at all.

Meanwhile, a message to local founders is base your company overseas and only sell your services to foreigners.

That’s not the kind of remix New Zealand should be famous for.

Set a de minimus standard such that if the NZ market is trivially small, it isn't worth the Commission's time. 

So that venture capital won't be scared of backing NZ startups for fear that NZ ComCom will block their reasonable exit if the play pans out and a large international company wants to buy their startup. 

How to define the threshold for the de minimus standard for a market of insufficient NZ importance? A number bigger than the market for hip-hop DJ software in NZ seems like a reasonable starter. 

Please legalise new supermarkets

Jaw-dropping bit from the Grocery Regulator, in interview at Interest.co.nz:

“What we've been told by these players is when they come and they want to open up a large store in New Zealand, the cost to get a spade in the ground is double that of Australia,” he says in a new episode of the Of Interest podcast. 

“Now that is significant. And when they look at 'do we open up a store in Wagga Wagga or Tamworth or wherever in Australia' versus coming to open up in Auckland where there is massive demand or any of the other centres, really, the cost is double that of Australia. And the timeframe often is more than double as well. So when they do their business cases, they look at that and say, 'well, we're going to be better off by going elsewhere rather than here.' Now the government is saying that they're going to change things to make New Zealand more competitive for international players. And that's really what we're looking at.”

The Commerce Commission released its first annual grocery report on Wednesday which revealed ComCom’s efforts to boost grocery competition over the past year hasn’t had much impact. 

Later in the podcast, he says that Costco would already have expanded to more places in NZ if expanding in NZ weren't so freaking hard. 

It shouldn't be surprising that the grocery regulator hasn't chalked any wins as yet. The real problem is largely out of the regulator's hands: RMA, Overseas Investment Act, Council processes. 

On council processes, just look at this clusterfxxk. This is what an incumbent who has been here forever has to deal with: a company that knows the system. If even they can't get through it, what hope for someone who's new to NZ?

Woolworths has backed out of its fight to install a new entrance and signage to its FreshChoice store in Greytown.

It’s left heritage campaigners and business owners, who have spent almost a decade fighting the plans, breathing a collective sigh of relief.

The supermarket giant appealed to the Environment Court after an independent commissioner for South Wairarapa District Council declined it’s proposal to create a new access to the store from Main St in December last year.

The plan included the demolition of the existing house at 134 Main St, the installation of a 8.3 metre-wide new vehicle crossing and an internally illuminated 3.6m high, freestanding sign.

Matthew Grainger, Woolworth’s director of property in New Zealand, said it hadn’t been able to find “a solution that would work for everyone”.

“We simply haven’t been able to reach an outcome that would be satisfactory for the community and viable for Woolworths which is why we’re withdrawing our appeal."

It marked the end of a “diabolical” process that had dragged on for nearly a decade, Gina Jones from the Greytown Heritage Trust said.

Minister Bishop's move to set mixed use by default in places subject to intensification under the National Policy Statement on Urban Development is a great start in opening things up.

But I'd love it if retail grocery had access to the fast-track consenting regime. If an entrant could put dozens of sites up and down the country up for simultaneous approval through that regime, rather than waiting for consents to dribble through over the next decade...

 

Interchange fees

A few years ago, MBIE ran an inquiry into credit card interchange fees.

Most of the analysis seemed predicated on an assumption that retailers could neither impose surcharges for card transactions nor avoid accepting cards.

So I started taking pictures of EFTPOS terminals with tape over the credit card button or with obvious signs noting credit card surcharges to accompany my submission on it. The MBIE paper seemed to take "Well, anything's possible in two-sided markets so we should regulate" approach. 

Now it's ComCom that's proposing to regulate credit card interchange fees. 

But they did commission a couple papers. 

And this seems a key bit:

Moreover, it is theoretically argued that if the no-surcharge rule is lifted, interchange fee regulation is harmful for total welfare. Regulatory attention should in this case shift to merchants, rather than focusing on card networks. If surcharging is to be allowed, the optimal cap is equal to the merchant fee minus the merchant’s convenience benefit from card payments. In other words, the merchant should not surcharge more than his own incurred “transaction” cost of a card payment. This result is perfectly in line with the proposed “merchant indifference test” or “tourist test” to optimally cap merchants fees keeping the merchant indifferent between a cash payment vis-à-vis a card payment. Yet, recent cost-based surcharge regulations seem too lenient, as they allow surcharges up to the merchant fee – or even higher (Gomes and Tirole, 2018).

And remember that NZ retailers can set surcharges if they want. All of us see them all the time. Maybe John Small doesn't. 

It then goes on to note evidence from other countries about smallish proportions of transactions attracting surcharges.

But think about it for a minute. 

High volume retailers have some power in those relationships. You might expect that surcharges imposed on transactions at the grocery stores would be lower than the surcharges in other places. And it wouldn't just be about the supermarkets being big enough to have some heft. It would also be about the cost of providing the ancillary services that credit cards provide. You're going to be a lot less likely to see chargebacks for undelivered or unsatisfactory goods on a weekly grocery shop than you might for a mail order shipment that's gone wrong or, say, payment for your kid's trip out to space camp. Credit cards provide insurance; EFTPOS doesn't. That insurance is valuable, but more valuable in some cases than others. Those differences matter and I'd expect affect the charging structure that the card companies set. Nobody's doing a credit card chargeback if there's a broken egg in the darned carton when you get home. 

Another key bit, if you remember that NZ retailers very regularly set surcharges for credit cards.

Moreover, many payment networks have frequently imposed restrictive – and potentially “regressive” rules – on the merchant side, such as no-surcharge rules or honor-all-cards rules.31 Effectively, this implies that payment cards that are more expensive for merchants to accept, such as credit cards, will be cross-subsidized by cheaper means of payments such as debit and cash. As high-income consumers are the ones most likely to hold and use cards with higher reward schemes that are more expensive for merchants to accept, the cross-subsidies between the payment methods are regressive transfers from low-income consumers to high-income consumers (Felt et al., 2021; Wang, 2023).

I remember MBIE relying on this kind of argument in making its case, seemingly unaware that NZ retailers can and do set those surcharges. Hence my photography while out grabbing lunch. 

If ComCom tightly restricts credit card fees, expect a whole pile of services currently bundled with card transactions to disappear.  

It's annoying when there's a world of real problems that need to be dealt with and agencies like ComCom go off on these kinds of tilts. 

Fun antitrust application

David Harvey reports that AI scraping could wind up being part of the revised NZ Fair Digital News Bargaining Bill. 

Having defined what an AI system and an AI service is the Bill goes on goes on to link an AI system to news content for the purpose of training the AI system.

The focus is upon the way in which news content may be used to train a digital platform or AI system.

The first element is that an AI system must be trained using news content. This links to the definition of news content in the Bill. The training must generate outputs which happens if the AI system enables or facilitates the generation of outputs.

He continues through with technical elements on whether the definitions work and whatnot.

The better underlying question seemed to be why anyone thinks there's a problem here to be solved.

It's simple for a website to restrict against scraping. It would similarly be simple for a news site to licence its content for AI training, if anyone wanted to pay them enough to allow it. There is no obvious reason government needs to be involved in any of this. 

But there's a fun potential antitrust angle, and then conflicting priorities. It looks like Google has licensed Reddit content for AI training, and that part of the deal might mean that Google is now the only search engine that works on Reddit.

Reddit wouldn't have set an exclusivity deal unless the exclusivity deal gave it more money than licensing its content to multiple agents. 

Government-types have claimed to be deeply worried about news sites not being able to adequately monetise content, with consequences then for the public good aspects of journalism. And they've tried to punt the bill over to tech platforms rather than just fund a public good out of public funds.

Here we have a news content site that has made a voluntary deal with a platform for content access for AI scraping - the very thing that NZ's Parliament seems to want to legislate to force - and folks are worried that the exclusivity arrangements that mean more money for the news sites also give the platform too much power. 

Today in Antitrust: when we force (or even allow!) AI companies to sign deals w/ content producers for old content or API access, there is obvious way to "raise rivals' costs" and lock in market power, dynamically making things worse for content producers. https://t.co/5wvRIoE0mU

— Kevin A. Bryan (@Afinetheorem) July 24, 2024

I'm not saying there aren't potential competition issues here. But there are trade-offs. Ban exclusivity arrangements and you'll reduce the amount of money going to news content providers, and then you'll have other parts of government looking for convoluted ways to force additional payments. 

Afternoon roundup

The closing of the browser tabs:

• The Commerce Commission blocks NZ DJ software company Serato from selling out to Japanese DJ product company AlphaTheta. One lesson: don't do tech startups in NZ if your exist strategy is selling out to a larger company.


• New Zealand's bureaucrats have apparently been considering a harmonised set of plain packaging rules on infant formula with Australia, which would force an important part of dairy processing overseas. Hopefully the government stops this one while issuing a pretty hard "please explain" to the officials involved. 


• Aaron Smale's reporting on the Inquiry into Abuse in Care has been superb throughout, and is great again this morning at Newsroom. He asks the right questions about state accountability. I expect that those who helped cover up the state's abuses are more likely to earn knighthoods than to face charges. 


• Gas shortages have Huntly importing more coal. 


• The Department of Conservation has more opportunity than any other part of govt I can think of to realistically improve its own finances through user charges and concession auction. Newsroom reports this morning that they're facing "huge financial pressure". There is an obvious solution here.

Afternoon roundup

A closing of the browser tabs:

• New Zealand's space industry keeps growing. Here's BusinessDesk on Dawn Aerospace. So neat. 
• America's economists are very sceptical about the latest round of tariffs on imports from China.
• Ancient bugs hiding in NZ amber.
• Statistics New Zealand is shifting out of central Auckland because of increasing levels of 'intimidating behaviour' in the neighbourhood. Police victimisation stats had a surge in crime in Auckland Central West in 2023 that's since abated, but the number of victimisations there remains far higher than in the Lambton area around the SNZ Wellington office. 
• Easy to find claims that public ownership is better than private because private operators are too short-term oriented. Meanwhile, half the board of Christchurch City holdings has resigned. Why? "...the decisions council has subsequently taken over 2024 to maximise short-term dividends at the expense of paying down group debts and investing in the future of its companies has caused us to lose confidence in council's ability to responsibly own core strategic infrastructure."
• Satya Marar at Mercatus on America's populist turn in antitrust policy. 
• Modern desalination is pretty cheap. The energy required for desalinating a household's water is roughly on par with the power needed for its refrigerator.
• Whenever you're depressed by NZ problems like deteriorating council infrastructure, messes in government IT systems, and crises in public media funding, always worth checking over at Canada's seemingly worse problems in the same areas.
• Concrete is neat.
• There is no good version of a central bank digital currency.
• Eli Dourado wants floating cities.
• Worried about the de-banked - people who can't reasonably access normal banking serives? Fix AML.
• If I were still teaching Public Choice, this would be added to the syllabus. If you want the implicit models behind critiques of the left's shift into identity politics from folks like Chris Trotter, it's a good read.
• Cass Sunstein's 'Economic Constitution of the United States' would also hit the syllabus. I've viewed the Public Finance Act and Reserve Bank Act as being part of New Zealand's economic constitution. Sunstein here makes the case around the rules around regulation and regulatory impact assessment.

Barriers to Banking

I like the new Commerce Commission draft market study into retail banking. Instead of spending a pile of time trying to estimate whether the note on the sidewalk is a $20 or a $50, it looks at what's blocking anybody from picking up any notes that might happen to be there.

And it finds a whole pile of regulatory barriers preventing smaller banks from expanding and new banks from entering. 

The Reserve Bank lets large banks run leaner capitalisation, disadvantaging smaller ones. The large banks had access to the Reserve Bank's Funding for Lending Program; small ones didn't. The overall regulatory burden is huge, but a huge regulatory burden disproportionately hurts small players who can't spread the cost across a larger depositor base. Constantly changing CCCFA rules particularly hurt smaller players. AML rules increase switching costs and help entrench those with already-large depositor bases. 

My column over at Newsroom this week ($ today, ungates tomorrow) goes through some of it. 

A snippet:

None of this should be a surprise. The Reserve Bank’s prudential framework has not considered the effects of its rules on competition. Neither has it been required to give regard to competition. 

The draft report also points to a promising change. The Deposit Takers Act, which introduces deposit insurance, requires the Reserve Bank to take account of “the need to maintain competition within the deposit-taking sector” as one of several objectives. It’s a start. The draft report urges it to go further, recognising that existing levels of competition are not ideal. It warns that the depositor compensation scheme that will back deposit insurance could too easily set levies that have anti-competitive effects.

The Commerce Commission really should be commended for this report. Its draft report on supermarkets spent enormous time and effort trying to estimate supermarkets’ cost of capital and profitability. However, it seemed not to have occurred to the commission, in its draft report on retail grocery, that high profits should encourage new entrants wanting a slice of high profits. The final report turned to those barriers to entry.

This time, its draft report spent less time agonising over precisely how profitable the banks may be and more time on the barriers that may stop existing or new rivals from competing those profits away while benefiting consumers.

The sharper focus meant the commission could come to practical recommendations around regulatory barriers that the Government could ease to reduce large incumbents’ advantages over others.

As the coalition agreement between National and Act requires the commission’s future market studies to maintain this focus, the draft report into banking is also a promising sign for studies yet to come.

Rather than try to guess whether there are $20 or $50 notes on the sidewalk, it is far better to check whether policy and regulation have made it impossible for anyone to pick them up.

Afternoon roundup

Eight browser windows each full of tabs. Something's gotta give.

• Excellent quips from our Treasury Secretary in response to RBNZ pleading for even more money.
• All the BS speech restrictions that apply on election day. 
• I don't get how Brian Albrecht doesn't yet have a syndicated national column in the US. Gold!
• Bits from me and a few others on whether National or Labour is 'better for business'
• My column at Newsroom this week expanded on last week's post on the NIMBY problem. 
• British Columbia's Supreme Court backs the Squamish Nation's push to build a pile of needed apartment towers on Squamish land in Vancouver, batting back NIMBYs. 
• A Commerce Commission that were on its game would be checking into just how the existing cartels have managed to block a new nurses' training school from training new nurses. 
• Excellent piece by Bill Watson on competition policy versus actual competition.
• Interesting ideas from Andrew Body and Simon Jensen on improving prudential bank regulation in NZ. But there's still the bigger question of whether we ought to split monetary from prudential.
• Noah Smith thinks a three-state solution is needed. I can't see how that works while Hamas runs Gaza, but maybe somebody will figure it out.
• "The region's pipes are ageing at a faster rate than they can be fixed." Wellington is such a mess. But I simply don't buy the claim that "Our councils are pushing their ratepayers to the limit in order to fund [Wellington Water]." Our council is set to spend $350m earthquake strengthening a building that could be bulldozed and just built a convention centre and is spending $100m more than necessary on a central library.  
• Queenstown has the country's worst housing shortage. The Infrastructure Commission points out that Queenstown's new plan will enable about 31-149 houses over ten years. Neither National nor Labour are really serious about housing.
• The final chapter in BusinessDesk's excellent series on the state of the NZ public service and the legacy of Peter Hughes. I still think an incoming government should fire Hughes pretty much on day 1 rather than let him see things through to February. 
• Years back we'd been arguing for a variant on city deals. They're in fashion now, with some risk of monkey-paw problems. 

Morning roundup

The morning's worthies:

• iPredict's PredictIt gets another stay of execution
• Kainga Ora has been making great progress in streamlining builds. So long as they don't get burned down. Perhaps it would help if nearby owners could reasonably expect Kainga Ora's tenants to be better neighbours. It's the rare prominent cases that create reputations.
• Jason Sorens says that bad zoning leads to dysfunctional housing markets and high prices, leading to bad ideas about how to fix the problem. A variant on Caplan's Idea Trap.
• Problems that wouldn't exist under proper road pricing and if debt for new roads could be backed by road-user revenues.
• I wish for a world in which Andrew Leigh were a Labour MP rather than a Labor MP. 
• Resale price maintenance. It is still fun to think through the conditions under which it's efficiency-enhancing substitute for vertical integration or otherwise efficient rather than potential indication of cartel-type mechanisms. The typical presumption is the latter, but it isn't necessarily the case. 
• ComCom price regulation of the proposed 3-waters entities will follow standard drill utility regulation. EnergyNews rightly points out that prohibitions on water suppliers earning a profit (remember that standard state-owned enterprises and council-owned enterprises can!) will "limit the extent to which profit can reward and incentivise efficiency and innovation". 
• NZ mayors pushing for city deals. Seems antithetical to Labour's current centralising DNA. Maybe some future better government will dust off the report we'd written back in 2015.

Evening roundup

The accumulated worthies:

• Dave Heatley on the publicly-provided goods that should, and should not, draw user charges - and how to tell the difference. Public transport should be charged. I'd add that, when congestion charging is finally in place, the case for subsidising public transit really goes away. Or at least the economic case for it. 
• If you think that NZ hosting FIFA matches is worth at least $11 per capita in fun and festivities, then that's fine. But there might be better uses of the money. And if you think the spending buys us anything other than a festival, you're deluding yourself. A few bits from me in this piece. 
• New Zealand's holiday pay rules are so complicated that the Ministry of Health has spent $50 million on consultants trying to deal with it. They now estimate that they owe backpay of $1.8 billion due to incorrect holiday pay calculations. 
• Otago's public health people prefer prohibitionist approaches to vaping, with restrictions ramping up as smoking rates decline. 
• Westpac argues for vertical separation of the supermarkets to encourage competition. Their report ignores regulatory restrictions against new large-scale entry, other than nodding at removal of covenants. Bizarre from a sector that's likely to be hitting its own market study soon, and ought to prefer that interventions have sound logic. 
• New Zealand has a new policy in the event that boatloads of refugees arrive: detention. UNHCR has some reasonable concerns. 
• Concentration in graduate economics education.
• Scott Sumner on Noah Smith's pessimistic vision.
• Water flows downhill and restrictions on housing supply drive housing price growth. Nathaniel Baum-Snow in the Journal of Economic Perspectives. 
• Want affordable housing? Make sure there's ample excess zoned capacity. 
• Council-owned wastewater treatment plans are often a mess. Regional councils seem to feel constrained against properly enforcing their regulatory duties. 
• An oldie but a goodie: Alex Tabarrok on The Happy Meal Fallacy
• Some cautions about the "Gas stoves cause asthma" hypothesis. A lot of the underlying research isn't that sound. 
• Remember how SCTV came up with Bob & Doug McKenzie in response to a demand for 2 minutes more Canadian-content per episode? Think about that when considering CanCon rules for pornography in Canada....
• The Spinoff has a pre-budget roundup. Six months ago I'd have put very high odds on some form of a carbon dividend showing up. Now, with some problems in the last auction, it's harder to say. Still some odds of it though. A few bits from me in this piece. 
• Peter Griffin on Rocket Lab's successes. This really was one where NZ's regulators stepped up to quickly set an enabling regulatory framework. 

Richard Meade on banking and competition

Prudential regulation requires banks to hold more capital than they would otherwise like to, so that there's less risk of default and less risk that the bank imposes bailout risk. 

New Zealand does not have deposit insurance, but some are of the view that there's an implicit guarantee of at least some sort - that the government would not let depositors be too badly hurt. The open-banking resolution mechanism would impose haircuts on depositors if there were still a shortfall after unsecured creditors and equity were burned through, and I don't think anybody really knows how big a haircut might prove politically intolerable. In that view, deposit insurance then just winds up requiring up-front payment for the insurance they're probably already getting for free. 

In any case, high capital requirements mean that banks have to hold a lot of capital; they have to compete for that capital against other potential uses of it. So you'll wind up with high nominal reported profits. And politicians will then point to high profit levels as reason for windfall taxes and the like, while ignoring return on equity. 

Those big numbers generate political demand to do things. And so it seems near-certain that the Minister of Commerce is going to ask ComCom to run a market study on the banks.

Over at The Conversation, Richard Meade raises a few points that need to be kept in mind:

• The OCR sets a coordination point for pricing that could be considered price-fixing in other sectors; 
• RBNZ's cheap wholesale funding during the worst part of Covid reduced the risk of meltdowns while preserving bank profitability;
• RBNZ restrictions on entry, aimed at ensuring financial stability, also prevent competition.

He concludes with a few questions:

First, are growing bank profits due to banks acting anti-competitively, the Reserve Bank fighting inflation and preserving financial stability, or both?

Second, if bank profits are indeed excessive and due to anti-competitive behaviour, are there measures the commission could recommend and practically implement that would improve outcomes?

Finally, if bank profits are excessive, and at least partly due to the Reserve Bank doing its job, would interventions by the commission to improve competition worsen financial stability or frustrate the fight against inflation?

Answering these questions will need both the commission and the Reserve Bank to have serious conversations about how competition policy and banking regulation can be made to work together to achieve better outcomes for both bank customers and the wider economy. Little would be gained by improving bank competition if that reduces financial stability or worsens inflation.

I still think that a market study focused on barriers to entry, including account portability, could do some good. 

And I still think that that will not be what the Minister of Commerce asks for. I expect instead that the Minister wants show-trials of bank executives during the election campaign, during which they can be harangued just as the supermarket CEs were during that market study, with any report coming after the election. That kind of market study would focus on interest rate margins, mortgage interest rates and the like. 

The point would be to make it easier for the government to blame the banks, rather than bad government policy, for poor outcomes during the election - while trusting that ComCom wouldn't issue any final report until after the election. 

And the risk would be a whipping up of appetites for very bad policy and rash promises during an election campaign. The draft supermarkets report was poorly done, and created an anchor point for populist expectations - and for legislation.

If I'm right, I hope that ComCom is able to push back on any weak terms of reference and propose something that could add value rather than do harm. 

And for a bit more on New Zealand's monetary policy mess, Bryce Wilkinson's report, out today, is a must-read. 

Tilting at bank profits

RBNZ Chief Economist Paul Conway wants a ComCom market study into banking. He's worried about 'profiteering'.

But this is the first time the Reserve Bank, which is statutorily tasked with regulating banks, has stepped in so explicitly. It's been warning of "profiteering" in some sectors during the cost of living crisis and in the aftermath of Cyclone Gabrielle, and singled out the widening gap between mortgage and term deposit rates.

"It's a very legitimate thing for the central bank to be concerned about and to be keeping an eye on," Conway says. "It's a general warning across the New Zealand economy that now is not the time for profiteering. Now is actually the time to start paying the price, for climate change and, in this instance, for the cyclone."

Commerce Minister Dr Duncan Webb says no decisions have yet been made about the focus of the next market study. "However, I am focused on using the tool to ensure markets operate fairly for consumers," he tells Newsroom. "I am particularly interested in improving markets where the greatest long term gains can be made for ordinary New Zealanders."

I've also thought a market study into banking, and insurance, could be well warranted - but with a very different focus.

I've worried that barriers to entry look awfully high and that we may be missing out on innovations happening overseas as consequence. 

Last year I'd urged that ComCom change how it does market studies. Rather than a giant draft study that tries, and inevitably fails, to estimate weighted cost of capital and potential excess returns, start with a desk-based analysis of barriers to entry. 

Because whatever you wind up doing will depend on barriers to entry anyway.

Suppose that you really strongly believe that there are high excess profits in whatever sector. If you're right, what's stopping anyone from coming in and eating away at those profits? Remember that profits are a signal that tells other to enter. If they aren't entering, is it because you're wrong about your guess on excess profits? Or is it because there are regulatory, legislative, or other barriers preventing entry? 

When ComCom thought there were excess profits in supermarkets, and I was yelling about barriers to entry, some folks argued for KiwiGrocer as cartel-busting parallel to KiwiBank. But now we're talking about banks, and KiwiBank's already there as KiwiBank. And for whatever reason, it seems far less profitable than other banks. Surely that should give some pause.

Now banks wouldn't be the first place I'd be aiming a market study: medical services really should be first in line. But barriers to entry in banking and insurance are obvious things to look at. 

But man it's a worry if the RBNZ is wanting the thing aimed at 'profiteering'. If that's the kind of advice the Minister's getting, then expect a request for a very different market study. Instead of looking at barriers to entry, it'll be more like the Supermarkets draft study - where they raked the CEs over the coals for weeks and tied up supermarket exec teams for months in inquiries. 

If that's the request that ComCom winds up getting, then it's a test of ComCom. 

Do they indulge the Minister's preference for a highly politicised and populist bash on the banks in an election year? Or do they do the work that actually needs doing: checking whether barriers to entry, including the nonsense that RBNZ layers on top of the industry, and CCCFA regs, make for less competition than would be desirable?

Heck, RBNZ is undertaking an investigation into whether it should make it even harder for foreign banks to operate here. And Paul Conway's pointing fingers at banks for profiteering.

Jonathan has a few bits from me in his piece. It'll ungate tomorrow if you pull the /pro from the URL. But the bit including my quotes is here:

Dr Eric Crampton, chief economist at the NZ Initiative think tank, says the appropriate use of a market study would be to ascertain what barriers there are to new entrants to this country's banking market. 

New Zealand has been a slow follower on structural changes like open banking, and such easy wins as account number portability. When phone number portability was introduced in this country's cellphone market, it played a critical role in breaking apart the Telecom-Clear duopoly.

It's expected bank account portability would make it easier for bank customers to move their money (or their debt) to more a competitive bank.

What all this means is it can be difficult for a new player to get a toehold in banking here, Crampton says. "In groceries, the Commerce Commission found zoning and consenting proved substantial barriers preventing entry. In building materials, the commission’s draft study pointed to substantial barriers to using foreign-sourced building materials. In both cases, easing barriers to entry would improve competition," Crampton says.

"If the Commerce Minister told the commission to look at barriers to entry in banking, or in insurance, that could be worthwhile. The combination of barriers to entry and regulatory measures like the Credit Contracts and Consumer Finance Act may have had substantial detrimental effects on competition.

"If so, it would be great to document the barriers, their effects, and how those barriers could be eased. Is New Zealand seeing the same innovations in FinTech and InsuranceTech as are being seen overseas? Could a foreign online financial service provider easily enter the New Zealand market, or would it be impossibly hard given our scale? What are the effects on consumers?

"But I would greatly worry that, in an election year, a minister could be tempted to send the commission off on more populist tilts against the banks," he says. "Sending the commission off to interrogate the banks about interest rates and mortgage rates would be politically tempting and help divert attention from the prior government failures that led to rising rates. I would also hope that the commission would push back against proposed studies that would shed a lot more political heat than provide actual light."

It would be exceptionally disappointing if ComCom got put to populist electoral purpose this year.  

ComCom's punt on building materials

The Commerce Commission's final report on building materials supply recommends some patches that would make a bad situation less bad, but fails to strike on important root of the problem.

Councils under joint-and-several liability stand very high odds of being last-man-standing if anything goes wrong with a building. Work by Sapere, commissioned by MBIE not too long ago, found that councils wind up 100% liable in 48% of cases in which damages are assessed. 

That drives councils to avoid risks. They bear zero upside for allowing anything new and innovative and have about even odds of being 100% responsible if anything goes wrong.

And a pile of pathologies flow on from there.

Because councils are reluctant to sign off on anything new, architects and engineers specify plans with materials and methods that council officers are comfortable with. That's a huge advantage for incumbents, and especially where councils won't easily sign off on equivalent substitutions by the builder because council can wind up liable for that too. 

Getting councils out from under joint and several liability would start fixing the problem. Lots of ways of doing it. They could be carved out and held only proportionately liable, but that requires that you trust that the courts wouldn't decide that the council's proportion is 100% if there's nobody else with pockets deep enough to compensate someone who didn't get insurance. Capping councils' proportion could be less risky. Or taking them out entirely and setting a compulsory builders' warranty or insurance programme that would shift liability over to insurers. 

I covered the mess in this week's column for the Sunday Star Times. 

The Commerce Commission’s own findings suggested that liability is a far bigger issue than MBIE has claimed.

But the commission presumably saw the area as politically futile, saying: “Given the previous consideration of these matters, the position statement, the ongoing work of the reform programme, and the lack of any clearly better alternatives, we have not focused in this study on the nature of liability faced by BCAs or its impact on competition.”

But there is a rather obvious alternative – like the plug for the leaky boat.

Exempting councils from joint and several liability would encourage sharper diligence when purchasing and commissioning homes. If that kind of bare caveat emptor regime were too harsh on its own, the Government could add the kinds of building insurance or warranty requirements that are common internationally.

Liability would shift from councils to insurers or warranty guarantors who would have stronger reasons to weigh both the costs and the benefits of new materials, making them easier to use. A warranty or insurance scheme would add to the cost of a house but could pay for itself through lower building material costs and better buildings.

The commission’s recommendations will help. But the boat will still be leaking. A closer look at the most obvious plug for that hole would have been warranted.

Regulating entry

This week's column in the Sunday Star Times picks up on last week's post on grocery entry and the new grocery regulator.

It concludes

The surest protection consumers have in any market is vigorous competition among suppliers and potential suppliers for their trade. Economists know that even the threat of potential entry can provide substantial and real competitive discipline.

Hasty legislative drafting from a Government trying to get too many things done simultaneously is more likely to blame than a deliberate effort to prevent new grocers from entering. It could yet be fixed by select committees.

But legislative urgency makes it more likely that bad ideas and drafting errors turn into policy failures.

And any sufficiently advanced incompetence does become indistinguishable from malice.

I have to submit my SST columns on Thursdays. I didn't then know about the entrenchment games in the Three Waters legislation - the kinds of mess that happens under urgency. That one looks a lot more like malice. Good that they're retreating from it. But if there'd been no furore, they'd have kept it.  

Discouraging grocery entry

The main potential problem in retail grocery competition, in New Zealand, is the near-impossibility of at-scale entry. 

Now we have another one. New entrants could be forced to supply their competitors with products at regulated prices after having been here for five years - so why would they ever want to enter?

We'll save that bit to the end. 

First a refresher on the existing problem. 

A foreign entrant would face uncertain lags and outcomes through the Overseas Investment Office. Not many sites are zoned for grocery retail. The supermarkets have been voiding restrictive covenants that have tied up some zoned properties against use in grocery retail, but assembling a network of sites where large-footprint grocery retail is permitted will be a challenge. Then there are long and variable lags in council consenting processes. And the background suspicion that at least some towns, like Ashburton, are owned by cartels of existing town-centre property owners who'll block competitors no matter what the zoning is. 

Basically a pile of legislation, regulation, and standing practice caused by the regulatory thicket makes entry impossible. 

After the Commerce Commission's market study, the government moved to legislate in support of something the supermarkets were already doing - getting rid of those restrictive covenants.

But the Commerce Commission also had recommendations on zoning. It suggested that District Plans and Regional Spatial Strategies should be required to include sufficient land for choice of sites in development of grocery retail, that there should be minimum proportions of urban land zoned for retail grocery, and that positive outcomes of trade competition should be able to be considered in planning instruments. See 9.35 at page 386.

None of that's turned up in the draft legislation. Worse, the NBEB seems to forbid consideration of effects on trade competition full-stop. In parts it's ruling out rent-seeking uses of consenting to block a competitor's opening or expansion. And that's fine. 

But in other parts Commissioners, Independent Hearings Panels, and planning committee are instructed to disregard effects on trade competition full-stop. 

Some examples.

• The IHP, in formulating its recommendations, must disregard trade competition and the effects of trade competition. Schedule 7 126(1)(e).
• When formulating recommendations, commissioners must disregard trade competition and the effects of trade competition. Schedule 7 60(d).
• A person who could gain an advantage in trade competition through a submission may make the submission only if directly affected by an effect that (a) adversely affects the environment; and, (b) does not relate to trade competition or the effects of trade competition. Schedule 7 20 (4)(b)
• Note that this one blocks rent-seekers, but would also block Aldi from putting in a submission saying "Hey! You're zoning for only one supermarket! Make room for us too!"
• When considering a requirement and any submissions received, a regional planning committee must not have regard to trade competition or the effects of trade competition 512 (1)(d)

Just go to the bill, hit Control-F, type in "trade competition". Some restrictions against rent-seeking, some bans on considering trade competition full-stop. And ComCom said that they needed to make room to consider the positive effects of competition. 

Either it's poor drafting or they want to block pro-competitive effects from being considered. 

In any case, they're not easing the barriers to entry. And they haven't instructed the Overseas Investment Office to make darned sure it's simple for new entrants to come in.

Instead, they're doing something else. 

They're putting in a big new regulatory regime for existing groceries that will have a backstop of mandated wholesale access. Legislation being introduced under urgency, but with some time for submissions.

The regulation proposed is a mess. 

Leave to one side for now all the problems in regimes mandating that an integrated grocery operator supply competitors at regulated prices for heterogenous and perishable goods. 

Sections 22 through 25 say that additional retailers can be made subject to the wholesale supply requirements after having been operating here for 5 years. How does that work?

A grocer can be designated as having wholesale supply obligations under section 23, on the Minister's recommendation in Section 24. 

24

24 Minister’s recommendation for designation under this Part

(1)

The Minister may recommend that a person (A) be designated as a regulated grocery retailer under this Part only if—

(a)

the Commission has given the Minister a recommendation about whether A should be designated; and

(b)

the Minister has had regard to the Commission’s recommendation; and

(c)

A has been carrying on business as a grocery retailer in the whole or any part of New Zealand for 5 years or more.

(2)

In deciding whether to make a recommendation, the Minister may do any of the following:

(a)

accept the Commission’s recommendation that A be designated if the Minister is satisfied that the criteria set out in section 25(2)(b) are met:

(b)

reject the Commission’s recommendation:

(c)

request that the Commission reconsider any matter (such as an error, an oversight, or competing policy interests):

(d)

make any other decision that the Minister considers is in the public interest.

(3)

For the purposes of subsection (1)(c), A must be treated as carrying on a business referred to in that paragraph if—

(a)

A is a member of a group of interconnected bodies corporate, and that group (or any part of it) has been carrying on business as a grocery retailer in the whole or any part of New Zealand for 5 years or more; or

(b)

A acquires (directly or indirectly) the whole or any part of the business of a regulated grocery retailer.

Ok. So suppose the Minister receives a recommendation from the Commission not to designate a retailer as being subject to the wholesale supply requirements. 

That satisfies 24(1)(a). The Minister has received a recommendation. Doesn't say anything about the direction of the recommendation now does it? 

The Minister can then have regard to it in (1)(b), reject it (2)(b), and make any other decision that the Minister considers is in the public interest (2)(d).

In short, if the Minister considers it as being in the public interest to force Costco, or Aldi, or any other new entrant to provide rent-seeking New Zealand competitors with access to its products at regulated prices, the Minister can go ahead and do that. 

Unless the legislation is changed. Like maybe they just assumed that the Minister would only proceed if the Commission had recommended that a grocery retailer fall under the designation. But nothing in the legislation specifies that. The Minister need only have been given a recommendation about whether the retailer should be designated. 

Anyone with kids is smart enough to see the problem here. If you tell the kids they can do something only if they ask their mother, without having said that their mother has to say they can do the thing, you're just asking for trouble. "You can if your mother also confirms it is okay with her" is safer. 

Now. Suppose you're an international grocer who's spent decades building supply chains. And New Zealand's started looking potentially more open for business. Maybe zoning and consenting does get fixed, and maybe the Overseas Investment Office eventually gets told to approve new grocery retail.

If you figure that five years after you're considered to be operating as a grocery retailer in New Zealand, you'll be forced to open up access to every rent-seeking New Zealand competitor at regulated prices at the whim of the Minister, why would you ever want to open up shop here?

I guess one bottom line is that the Commission should refuse to provide any recommendation unless they actually want the Minister to make the designation - unless the legislation gets changed to require a positive recommendation. 

But more substantively, government needs to be assuring potential entrants that they won't just be expropriated after having been here for five years if you want them to open here, rather than spelling out an obvious mechanism for existing and potentially preferred incumbents to get access to new entrants' supplies.

Everything is stupid and broken and getting stupider and more broken. 

Spicy competition

I got to have a lot of fun in a panel session at the Competition Law and Policy Institute of New Zealand annual conference in Auckland last weekend. 

Donal Curtin summarises the whole conference. On our session:

Saturday morning, and we started off with 'Market studies, looking back and looking forward'. It was to have been chaired by Will Taylor of NERA, but at the last moment he came down with the dreaded lurgy, and the ubiquitous Ben Hamlin stepped in to preside over Eric Crampton from The New Zealand Initiative and Lucy Cooper from Chapman Tripp. Two big points from Eric: if you're concerned that competition isn't working in a market, the best first question to ask is, what are the barriers to entry? Why aren't new entrants able to come into a market and eat the incumbents' supernormally tasty lunch? And secondly, when you do that, you're liable to discover that there are "impenetrable thickets" of overlapping blockages which are the real issue: he mentioned the cumulative effects, for example, of regulation (including occupational licensing), statutory protections, zoning and consenting in the planning process, and the Overseas Investment Act. Both Eric and Lucy wondered about the selection process: so far the topics chosen (while good ones) have all been government priorities, and there could well be traction from ComCom being given its head to look at where it thinks there may be issues. Lucy raised something I hadn't thought of: she said that ComCom's strength is in analysis and findings, and perhaps there's scope for the policy recommendation piece to be shared with, or done by, others, given that policy development is an art form of its own. I can see the point, and Lucy (who's been through the supermarkets and petrol bunfights) knows more about process than I do, but FWIW, what you might gain in policy development you might lose in urgency (think s36, and others), unless the policy developers' feet were held to the fire in the same way that ComCom is forced to move right along with its market studies.

The most fun for me came in form of a question from the back of the room. 

I'd noted pharmacy ownership rules as a place where a ComCom market study could look at the restraints on competition caused by regulation. Pharmacies must be at least 50% owned by registered pharmacists. It looks, sounds, feels, smells and tastes like a cartel measure to prevent competitive entry. I note that the only real entry has been by virtue of complex capital structures developed to route around a different set of Australian regs. And while ComCom can put in submissions on this stuff, they get ignored. A market study draws an answer from the Minister. 

Anyway, question from the back of the room (more of a statement) was to the effect of whether I was aware that the only way that pharmacy grads can recoup the cost of their study is by being a pharmacy owner rather than a pharmacist employee. I let that sit there for a minute as the implications of the question worked their way through. Then I thanked the questioner for having made the case for strenuous anti-cartel investigation of those regulations; I think I noted that the pharmacy schools should be included in the study. 

I'd had a column in the Herald in August on related matters that I think I forgot to post here. Will do so now. I think it's why Ben Hamlin introduced me at the CLIPNZ session as the Sardaukar shock trooper of market liberalism. Had always considered myself more Atreides/Fremen-aligned; the Sardaukar support the Emperor, and the Emperor helps enforce (or, is allowed to serve at behest of) a pretty bad cartel. I don't like Empire-supported cartels. 

In Frank Hebert's classic Dune series, the Bene Gesserit sisterhood's supernatural abilities extended only so far. There was a place where their powers could not see – a place that repelled and terrified them.

Over thousands of years of careful influence over royal marriages, the Bene Gesserit sought the birth of the Kwisatz Haderach – the one able to look where they could not and shorten the way.

The Commerce Commission's relatively new market studies powers may not quite make them the Kwisatz Haderach.

Nevertheless, there are parallels.

The Commerce Commission has long been able to pursue anti-competitive activity. Cartels are illegal. Some cartel conduct can draw criminal penalties.

Anti-competitive activity running short of cartels is also prohibited.

But there has been a place the commission has not been able to look.

Section 43 of the Commerce Act exempts activities authorised by government. If a law or Order in Council authorises an activity, that activity is allowed even if it appears to be anti-competitive.

There is some sense to the Section 43 exemption if you think that government generally works well. Parliament and the ministries, at least in theory, will have weighed the public interest and considered any effects on restraint of trade when setting laws and regulations.

A statutory regime may have anti-competitive effects but still be desirable on balance.

In an ideal world, ministries overseeing these regulatory regimes would be running rolling reviews to ensure the regimes continue to be beneficial.

But successive governments have done an abysmal job in ensuring that regulatory and statutory regimes remain fit for purpose.

Reviews of regulatory regimes, when undertaken, tend to have a narrow focus. They do not look at how a regime intertwines with other agencies' regulations and practices and its effects on competition.

Statutory regimes have been the place where the Commerce Commission has been unable to look.

Commerce Act amendments in 2018 allowed the Commerce Commission to undertake market studies.

A market study lets the commission take a broad approach in examining conditions of competition in a sector, including the cumulative effects of different regulatory regimes, land use planning, and consenting practices. The commission then issues a report on its findings, to which the minister must respond.

The two most recent market studies show that rot has festered in places where the commission had previously been unable to look.

Earlier this year, the commission released its final report on competition in grocery retail. The findings should not have surprised anyone passingly familiar with regulatory barriers to entry in the sector.

Councils have not considered competition as a benefit when setting plans. If a single grocery retailer could plausibly serve a new subdivision, council will zone for only one. Any potential new entrant would need to find the small number of available sites zoned for use in grocery retail not already encumbered by covenants prohibiting their use in grocery retail. The Overseas Investment Act adds additional delays and uncertainty for any potential entrant with more than trivial levels of foreign ownership.

The combination of zoning restrictions, consenting practices, and Overseas Investment Act constraints have made it impossible to open any new large-footprint grocery retail chain.

The market study assembled the evidence. If you want more competition in grocery retail, opening a new supermarket chain shouldn't be effectively illegal. It should not have taken a market study to reach that conclusion.

Last week, the commission released the draft report of its study on building materials. Again, the findings should not surprise anyone passingly familiar with the sector. Again, a complex and toxic stew of regulatory barriers makes it far too hard for builders to use materials from overseas. Legislation, regulation, consenting practices, and liability regimes facing councils combine to make a strongly anti-competitive environment providing a heavy advantage for incumbent suppliers.

Suppose you want a more competitive building materials sector to scale up to meet changing demand. In that case, you need to unwind the regulatory morass that makes it far too difficult to use building materials from trustworthy places.

In both its review of grocery retail and building materials, the commission turned its gaze to the place it had not previously been able to look: statutory regimes exempted by Section 43 that combine to thwart real competition. And it found things in serious need of remedy.

Like Dune's Kwisatz Haderach, the commission's market studies authority is powerful and just a bit dangerous.

The commission's very detailed work documenting what had been well understood by sector observers at a high level was not without cost.

Supermarket executive teams would have been tied up for months responding to requests for information while also trying to run supermarkets during a pandemic.

Some future ill-intentioned minister could direct the commission to undertake market studies on areas he wishes to punish. The study process itself imposes a substantial cost, regardless of its findings.

The commission would do well to provide its minister with a list of areas most in need of future investigation. And top of that list should be the places where it previously has been barred from action by Section 43.

Conditions of competition in the provision of medical services would make for a superb market study.

Earlier this year, it was reported that some 150 foreign-trained doctors living in New Zealand have been unable to practice because the rules require them to take up a supervised training position first.

Those positions do not exist for foreign-trained doctors.

The simplest explanation for regulations setting impossible conditions is that the medical professionals who help to set the standards wish to prevent competitors from entering the market.

If we are to have a Kwisatz Haderach, best it be directed in beneficial ways. Let the spice of competition flow.

I'd also chatted with Bryan Crump at RNZ Nights on related matters this week. 

Update. A loyal reader notes, via email:

Pharmacy is an interesting one because they had less regulation when the school was in Wellington. When it relocated to Auckland uni the duration was increased to that of Otago, a full degree. Many would dispute the need for a full degree for a community pharmacy, which is partly why they are largely staffed by pharmacy technicians rather than pharmacists. These sorts of discussions become heated quickly.

A similar issue exists in nursing where the push to turn this large professional group into a university program and remove enrolled nurse pathways, has driven up costs and therefore the need to recover costs. Similar arguments are used in medicine and the same problem exists where under the Cth generalist system we effectively overtrain medical practitioners at great cost.

Pharmacy would be a good one to start with.