Grocery Industry Competition Bill

Members, we come now to Part 2. This is the debate on clauses 8 to 16, which is the grocery supply code. The question is that Part 2 stand part.

Thank you, Madam Chair. Obviously this part contains quite important elements. I suppose the first thing, when you read through the different elements, particularly clause 10, and then you go into the grocery supply code, it always requires the Minister to have final sign-off. And I suppose the question is: why did the Government go down the route of politicising the operation of this bill, or this Act as it will be, by involving the Minister extensively in some of the decision making, particularly, for instance, when you come to things like determining whether or not a company should be designated a regulated grocery retailer? Why was it felt necessary that that type of decision should come to a Minister as opposed to leaving it to the Commerce Commission, who are not only experts in the sense of monitoring and overseeing that but obviously are used to making those types of decisions? And it’s sort of a fundamental call because there’s a lot of ministerial oversight and involvement in this bill, and I just want to understand why the Government thought that was the best approach.

Thank you, Madam Chair. I will quickly answer that. Look, there is a role for parliamentary oversight in such matters. Designation is a significant step. It’s drawing a supermarket into the regulatory net or a grocery retailer into the regulatory net. And obviously the position of the Commerce Commission is of the utmost importance in that as the expert. And a Minister who chose not to follow that advice would have to have very good reasons for doing so and be prepared to defend that in a public forum such as this House. However, it is, effectively, an extension of the legislation, and I think ministerial responsibility for such an extension is constitutionally appropriate.

Thank you, Minister. I think that sort of partially answered the question, but I suppose my nuance is that there are times when ministerial oversight should be involved in these types of decisions, and there are also other times when it shouldn’t be. For instance, the Overseas Investment Office decision-making around investment coming into New Zealand has been a vexed issue in terms of whether, in fact, it’s best undertaken by politicians—Ministers—or whether, in fact, it should lie with officials. So I suppose my question is more that there will be times when it should come to Ministers, but, in this case, this particular bill requires a lot of ministerial oversight and approval, and that was the question that I was aiming at.

The second thing I just wanted to move on to is this definition in clause 11(3) about when a business should be designated a regulated grocery retailer. Clearly, there’s one test, which is the turnover test—an absolute test—which says that if in a financial period the turnover of that business is more than $750 million, then automatically a grocery operator would become regulated. But then there are these other ones, in clause 11(3)(b)(ii): “the designation of A as a regulated grocery retailer would be likely to promote competitive neutrality”. So I’d quite like to hear what the Minister understands “promote competitive neutrality” to be. It does use the term “a level playing field” in the bill, but what does that mean? Does that mean, actually, now that you have a level playing field by the mere threat of, for instance, Costco coming in? Would it promote competitive neutrality? It doesn’t actually achieve it yet and it may not, but what is that term and when is competitive neutrality achieved—at what point does that occur? It goes on to say “otherwise promote competition”, but I’ll let the Minister just deal with that one, and then I’ve got a couple more on that same point. But what do you mean by that, Minister?

Thank you, Madam Chair. Obviously, it’s important, and I imagine that the brightline of $750 million in turnover would be far and away the most likely way in which a grocery retailer would be designated. However, there is a scenario in which someone is operating in a way which is undermining competition, even though they might not hit that threshold, and whilst we may not immediately be able to imagine what that is, the possibility is there.

The idea of competitive neutrality, as I understand it, is simply that if you try to avoid the kind of pure economics of perfect competition—because we know that that’s an impossibility in a real market—competitive neutrality is where we approach that in the real world and where there’s no particular intervention which will improve competition. So where we have equal players, players of roughly equal force, competing equally, we’re going to have a competitively neutral—it’s not an anti-competitive market; it’s neutrally competitive. Any step—and this is the whole thesis of this bill—is to move towards a situation where we have a market where no one has particular market power over another party.

Thank you, Minister. I’m not quite persuaded by what you’ve just said there. I look at the three subparagraphs of clause 11(3)(b)—at one end of the spectrum, you’ve got an absolute test that says, if you hit $750 million, you’re automatically in the regulator conditions. The third subparagraph of that subclause (3)(b) says that if you are acting in a way that has “the purpose, effect, or likely effect of unduly hindering or obstructing suppliers from participating”, that is obviously a way to bring them into regulation. I understand why you might want to do that, because we don’t want people who are acting adversely and affecting the market and leading to higher prices potentially. So that’s why you’d want to capture the two ends of the spectrum. One is size; one is bad behaviour.

But the middle bit—subparagraph (ii)—is about promoting competitive neutrality. I saw it the other way, actually. It’s interesting how the Minister spoke of it in a negative sense. I saw it as: if they were promoting and achieving or were likely to achieve competitive neutrality, then, under this subparagraph (ii), that was a potential for that entity to be regulated. So I just want to get clarity around that. What side of the coin is that subparagraph (ii)? And I’d just say to the Minister that it’s not necessarily that a business may disrupt the market because of size. For instance, there is a company currently operating an online platform, right? And disruptive market forces have a major impact, and can have a major impact. If that were to occur, would you see this as, under subparagraph (ii), being a reason why they might be regulated? If they were a major disruptive cause to the market, even if it brought beneficial benefits to consumers, would that subclause mean that they potentially could be regulated?

Hopefully I’m not throwing the Minister out of sequence in the way that he actually has to think about answers, but I wanted to go to clause 14A, “Grocery supply code may extend to related parties of regulated grocery retailers”. My thinking is that, often, grocery retailers—whether it’s actually Countdown or New World—have suppliers who supply them goods, and they have specific, let’s say, vegetable growers who have a particular contract with one particular supplier. They may not wish for their produce to be shared with other grocery retailers—and I can’t remember if we dealt with that specifically in the select committee. If that actually occurs, are they in fact going to be pinged according to this? That is something that has been playing in my head. And I think, when growers and retailers actually have an agreement to sell their produce at, you know, whatever, are we actually imposing on the contract they already have with the grower, in order to achieve the outcome of this bill? That’s the question that I have for the Minister.

Thank you, Madam Chair. The concept of related party is set out in the Act, and in clause 14A(4) there you’ll see it’s an associated person, which is in turn defined in subclause (2) of the interpretation clause and wouldn’t capture your supplier. Then you’ve got paragraph (b) in subclause (4) there: “a person over whose business the regulated grocery retailer has material influence.” Obviously, that’s not a brightline rule, but I’d be very surprised if you would say that the regulated grocery retailer has material influence over a supplier in the way intended there.

In terms of Mr Bayly’s sort of second crack at competitive neutrality—and he talked of a disrupter—I’d be very surprised whether a disrupter was subject to designation when its behaviour was in fact improving the competitiveness. I guess one of the level playing field points is that it could conceivably be the situation where you have a company with a turnover in groceries of less than $750 million but they are in fact making profits which are super-profits because they’re not subject to designation, and so their perhaps larger competitors might almost justifiably complain that the smaller entrant to the market has in fact got a benefit by falling just outside of the regulatory regime. That would in fact be anti-competitive, because that party, because of their non-designation, could be doing things differently from someone just a little bit bigger than them. So it gives that ability to look not only at this brightline threshold but also at the market in real time as it is being conducted and saying, “Well, if we’re going to make it competitive, we need to draw that particular player in to make sure all participants are being treated equally and fairly.”

Thank you very much, Madam Chair. I’d like to move to clause 16, “Commission must review and report on grocery supply code”, I think there is broad acknowledgment—including submissions to the Economic Development, Science and Innovation Committee—of the support for the role of the Commerce Commission. This specific clause refers to the reviews that the commission must undertake in order to provide back to the Minister.

My questions for the Minister are as follows: clause 16(1)(a) refers to a period of two years. So the first review that the commissioner undertakes is after a two-year period, and I’d like the Minister to provide some context around how that specific period was determined, taking into account the fact that this is quite a significant change to the nature of change and the speed of change of this industry, and whether two years is potentially too long in the context of being able to get some initial feedback in order for potential remediation from that.

And, subsequent to that, if you look at clause 16(2A), the ongoing interval for reviews is then set at five years. I guess, again, the conversation—and while the commissioner is going to have responsibility and obligations in terms of taking actions and remedial actions—and the integration with the viewpoint of the Minister; every five years—and, again, in an industry where, well, you just think about the technology changes that occur over that period. Again, what is the rationale around that period of time? And is the Minister confident that reporting on that level of cycle is going to provide the frequency of review that will enable sensible changes to be reflected back, in regards to that grocery supply code?

I was just giving pause to see whether the Minister was going to respond, but OK.

CHAIRPERSON (Hon Jacqui Dean): You either want the call or you want the call, right?

ANDREW BAYLY: I was just offering the opportunity for the Minister to respond; no doubt, he will.

I suppose the very good comment from my colleague Mr Watts very much related to that: how does he envisage the grocery supply code to operate? Is it a living document? Or does he expect that what the Commerce Commission will present, ultimately, is a document that deals more at a principle level as opposed to trying to deal with specific market practices? If it’s the former, then how does the commission react to changing market practices, such as whether a duty is placed on supply arrangements that a supermarket might impose on a supplier, or how they price their arrangements in the supermarket, whether it’s at the top of the shelf or at the bottom of the shelf, or whether it might be a marketing fee. How does the Minister expect the Commerce Commission to reflect those ongoing changes in market behaviour as they occur? Is that outside the code or is it going to be part of the code? So I’m just going to stop there, and, hopefully, the Minister might take the opportunity to talk.

Thank you, Madam Chair. In respect of Mr Watts’ question, obviously the market study, which precipitated this legislation, itself took some time, and then, of course, it’s taken some time to get to this point. So two years seems to be a reasonable period of time to gather data, analyse it, and provide a review of the grocery supply code. Similarly, five years is a very common legislative cycle. I do note that clause 16 does provide that the commission may review the code at any time. So I think that’s important as well, that if information comes to hand, or markets behave in a particular way which need some kind of addressing, that can be done.

In respect of Mr Bayly and the code, I think it is important to note that it will be the Government that issues the first code, so that will set the tone. However, it’s really important to recognise, I think, that it is a living document—to use your words, Mr Bayly—and that if behaviours emerge, perhaps in response to the regime that’s imposed, that need addressing, they can, essentially, be addressed by the Commerce Commission, who will have custodianship of this code, making determinations through its own process as set out in the legislation. Whether it’s a high-level code or a down-in-the-weeds regulation, my hope is that it starts out as a high-level code, and my hope is that it stays there because it gives the guidance necessary. But I would expect that if that doesn’t work, the Commerce Commission will do the work to make rules of a more detailed nature if needed.

Thank you for that. First of all, I’d just like you to, Minister, let me know specifically where it provides for the code to be updated at an earlier date other than the two and five years specified in clause 14—that would be useful. Sorry, I’m just missing that reference. So that’s the first point.

I suppose the related point is: if the Commerce Commission does decide to update it, because it is a living document, what would be the trigger for the commission to do that? Does it just come to a view and then it makes a recommendation to the Minister that it needs to be updated?

The third point is—and this was an earlier point I made about ministerial oversight—that I find it slightly strange that the Minister has to sign off on a grocery supply code. Most commerce Ministers wouldn’t know much about grocery specifics, and, particularly, a supply code. Again, my point—and this is my earlier point—is that there seems to be a lot of ministerial oversight in that. So those are three points there.

I want to go back to clause 12, “Power to make grocery supply code”. Can the Minister confirm that the Ministry of Business, Innovation and Employment (MBIE) is preparing the first draft code? When he talked about how it is a Government code—I think those were the words he just used—is it MBIE doing the first draft and then the Commerce Commission doing subsequent drafts, or is it the Commerce Commission doing the initial draft? I’ll leave it there—that’s enough—and then I’ll come back. I’ve got some more.

I did hear Mr Bayly say, “That’s enough.”; I tend to agree with him! This is about the code. The last question first: yes; it’s by Order in Council, and that will be done by the responsible Minister, and the responsible department is the Ministry of Business, Innovation and Employment. So that’s the answer there.

In respect of amendments, the review and the code amendments are two entirely separate things. So the review has its own special and separate cycle, and that’s important—that a thorough-going review occurs at the relevant intervals. But if a market behaviour emerges which clearly needs addressing, then the commission may make a determination to amend the code. The process for amending the code is set out in clause 12A of the bill there that talks about a draft determination and consultation and the relevant steps to be taken.

Thank you. So I’m just looking at—I presume you were referencing clause 12(2)(a), is that correct, Minister? I presume that’s what you’re referring to, where the commission can change the code, as you just referenced (a)—

Hon Dr Duncan Webb: 12A.

ANDREW BAYLY: 12? Clause 12(2)(a)?

Hon Dr Duncan Webb: I was referring to clause 12A—large “A”—of the Supplementary Order Paper.

ANDREW BAYLY: Oh, it was the Supplementary Order Paper; sorry. OK, fine.

Just on clause 12(4), which states, “The grocery supply code may apply to, and impose duties on,” I presume that duty is not a financial duty but actually an obligation to change practices—just to check that.

Just coming back to clause 13—and my colleague Melissa Lee raised this point earlier—one of the big things about the supply code is making sure that there’s adequate arrangements in place to be fair and equitable between suppliers and the grocery retailers. And one of the big issues is transparency around pricing. I think it comes under the supply code, but one of the issues—and Melissa Lee spoke about greengrocers, you know, vegetable crops, etc., and traditionally there’s been a market for them in places like the fresh food markets in Auckland—for instance, at Mount Wellington—that operated for many, many years. And there’ll be other parts around the country that operated, so there was always a very transparent pricing arrangement so people knew what the demand was and what the supply was and, ultimately, what the price was on particular days.

With the move progressively towards suppliers being required to bid to supply supermarkets and the pricing and the lack of transparency around the volume being offered and the pricing that was ultimately accepted and bid by the suppliers, the only groups that have access to that information are the operators of that bidding framework, which is the regulated grocery retailers at the moment. Does the Minister expect that the supply code will deal with the issue about making sure there’s greater transparency around when suppliers have to bid to supply the regulated grocery retailers, that there is transparency around the amount of volume bid and the final price and the price offered? So that’s a very, very important point because if the grocery supply code doesn’t deal with that, then the lack of transparency is a remaining issue in the industry.

Thank you, Madam Chair. The content of the supply code, other than its broadest of outlines, as already mentioned, isn’t really an appropriate topic here. It’s still being worked through. But if Mr Bayly has views on what the content of that code might be, I’d be very happy to hear them in another forum.

The question is that the Minister’s amendments to Part 2 set out on Supplementary Order Paper 353 be agreed to.