The Competition and Consumer Act 2010 (Cth) is the national legislation that governs the interaction between businesses in markets. Other regulatory laws can also have a considerable impact on competition, either for better or worse. In doing so, these laws have a significant effect on businesses and the economy.
The issue of regulation and competition was considered in detail by the final report of the Competition Policy Review (Harper Review), published in early 2015. The impact of the review process is ongoing – for example, the Governments introduced reforms to section 46 of the Competition and Consumer Act in December 2016. These reforms flowed from recommendations made in the final report. This article focuses on two other areas of regulation affecting competition that the Harper Review considered: liquor laws and zoning and planning regulations.
In most cases, regulatory laws don’t inherently affect competition. These types of laws serve a broader public interest or need. For example, state liquor laws determine (among other things) who can obtain a liquor licence and who can serve alcohol. An essential purpose of this regulation is to ensure that alcohol is supplied, sold and consumed in a manner consistent with the needs and expectations of the wider community.
Nonetheless, regulatory laws can have a profound effect on competition. They can affect a consumer’s ability to exercise choice in the marketplace and a business’ ability to respond to its customers. They also materially affect who participates in the marketplace and determine what businesses can produce or supply products or services, as well as the standards their products or services must meet. This influence can be positive or negative. For example, the review notes that the recent reforms of planning laws in Victoria constitute a leading practice for the way in which regulatory laws can help competition.
If regulatory laws impose too many restrictions or too onerous a burden on market participants, they can stifle competition and economic activity. For example, a popular bar may wish to extend its premises in response to increased demand. However, local planning and zoning might prevent it from doing so. The relevant council could either refuse the business permission to increase in size outright or deter the business from ever applying because the process of receiving development approval is too complex, overly expensive and excessively lengthy.
The final report of the Harper Review observed that, while reforms undertaken by all Australian governments as part of the National Competition Policy have assisted in substantially reducing anti-competitive regulation, the process of reform requires reinvigoration.
Importantly, the review did not advocate complete deregulation. Nor did it work from the premise that regulation itself is necessarily negative, noting that regulation serves important public interests. Rather, the report advocated better regulation. This means regulatory laws that do not restrict competition except to the extent required to meet overriding policy objectives.
To this end, it recommended that all Australian governments should undertake a review of regulatory laws to ensure they are as favourable as possible to competition. It also recommended that regulatory laws continue to be subject to a public interest test. This would ensure that regulations only restricted competition when proponents of the laws could demonstrate that the public benefit of the restrictions outweighed any costs to competition. Further, proponents of the laws would need to show that it was only possible to achieve the objectives of the regulation through the proposed restriction. The factors relevant to determining the ‘public interest’ may vary between each particular regulation under consideration. For its part, the Federal Government indicated that it supports these recommendations and would expand its Regulatory Reform Agenda to include a competition regulation review.
The final report of the Harper Review noted that liquor retailing and gambling are heavily regulated sectors of the national economy. The report recognised the overwhelming social utility of such regulations to minimise the risk of harm to the public and families from problem drinking and compulsive gambling. Nonetheless, the review panel was of the opinion that liquor laws should be included in the proposed review of regulations to ensure that they continue to meet their objectives without unduly restricting competition. Further, any review of liquor laws should rely on evidence and seek to compare outcomes regarding competition and harm reduction resulting from the different regulatory regimes operating in the various Australian jurisdictions.
The report particularly highlighted the disproportionate effect that certain liquor laws were having on the ability of small businesses to compete in the market, noting that some restrictions on the sale of alcohol favoured certain classes of competitors. For example, under the liquor licensing regime in Queensland, only premises with a hotel licence can operate detached bottle shops. Under this system, smaller retailers are less able to compete with the supermarket chains. The supermarkets can run licenced bottle shops attached to their hotel licences within shopping centres. This regulation could mean that the retail liquor market in the State is unequal and weighted towards large retailers. Even the Foundation for Alcohol Research and Education (FARE) drew attention to these problems. FARE noted that Coles and Woolworths now own approximately half of the detached bottle shops in the State.
But these regulations are not the only difficulty when considering the issue of competition, regulation and small business in the context of the liquor industry.
Also of concern is how some powerful market participants use or attempt to use the existing regime to pursue uncompetitive and self-interested ends. In his speech to the Australian Financial Review Retail Summit on 28 September 2016 on the subject of ‘Enhancing Competition in Retail’, the Chairman of the Australian Competition and Consumer Commission (ACCC), Rod Sims, made reference to legal action that the regulator took against Woolworths and Liquorland in 2006. The ACCC alleged contravention of section 45(2) of the then Trade Practices Act 1974 (Cth) (which has now been replaced by the Competition and Consumer Act). The section prohibited corporations from entering an agreement that contains an exclusionary provision. In that instance, Woolworths and Liquorland objected to several applications for unrestricted liquor licences to safeguard their market position. They subsequently entered into a deed with the applicants under which the applicants agreed to withdraw their applications for unrestricted liquor licences and apply instead for restricted licences. In return, Woolworths and Liquorland agreed not to object to the new application. The Court held that the conduct constituted a contravention of the legislation.
Planning and Zoning Laws
In its final report, the Harper Review also noted that zoning and planning laws have a very real capacity to restrict competition by creating unnecessary barriers to entry into a market. However, such regulations equally have the potential to encourage competition and resist limiting entry into the marketplace. The report perceived that some planning laws are placing inflexible restrictions on retailers at present. These include restrictions on land use and expensive approval procedures. These regulations have the effect of hindering potential entrants to the market. It also deters those already in the market from expanding. The report noted that ALDI, the supermarket chain, has made submissions suggesting that its expansion in Australia had been considerably slower than anticipated on account of regulatory constraints.
However, the report acknowledged that some jurisdictions are leading the way by drafting planning laws that encourage competition. In particular, the report characterised planning reforms in Victoria as a leading example. The Victorian government began this process of reform in 2013. An important component of the reforms was the decision to reduce the number of zoning categories from five business zones to two broader commercial zones. Within these two zones, there would be more permissible uses, consequently allowing a more diverse range of activities to take place in business precincts.
The government also introduced VicSmart in 2014. This new development permit process targets low impact development applications under $50,000 and has considerably shorter wait times than the previous regime. The government has also streamlined the appeal process for development applications at the Victorian Civil and Administrative Tribunal. Appeals are now less costly and take less time. Finally, the government drafted ‘Plan Melbourne’, a strategy document to guide the future development of the city. This document was released for public comment in 2013 and adopted as policy the following year. It aims to create an increased number of higher density mixed-use zones and to remove caps on offices and retail floor space in key centres of business activity.
The report acknowledged that reviews of zoning laws were underway nationwide. However, it suggested that these reviews should proceed quicker. Also, the review process should allow regulators to compare different jurisdictions. This comparison would facilitate the creation of ‘best practice’ for planning regulations that could serve as a guide for updating and improving all existing regulations. The review further recommended that these kinds of laws should include a public interest test. The review panel considered that the following would be relevant in the planning context:
- arrangements that favour particular operators are anti-competitive;
- various factors are not, of themselves, relevant considerations for planning decisions (including competition between individual businesses, restrictions on how many retail stores of a particular category there are in the same area, impact on the commercial viability of existing businesses and proximity restrictions);
- business zones should be broad;
- development permit processes should be simple; and
- planning systems should be consistent and transparent to avoid creating opportunities for gaming appeals (using consultation and objection processes to ‘game’ the planning system and prevent competitors entering the local area).
The Federal Government has supported this recommendation. However, it noted that planning and zoning regulations are under the control of state governments.
Regulatory laws serve various public interests other than promoting competition and a strong economy. Nevertheless, these laws can have a significant impact on competition. The recent Competition Policy Review considered this potential tension and made recommendations aimed at ensuring that any restrictions on competition through these kinds of laws be in the public interest and limited only to the extent necessary to serve the public interest.
If you have questions about how regulatory laws affect your business, get in touch with our commercial lawyers on 1300 544 755.