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Paul Swain Speech to IIR Limited

13 March 2002 - 0910. Hon Paul Swain Speech Notes

Speech to IIR (Institute for International Research) Limited -Intercontinental Hotel, Wellington - NZ Competition Law Conference.

Topic: Trans-Tasman Regulatory Coordination: The Gains for New Zealand

Thank you for the invitation today - and providing this opportunity to speak to you about the gains to be made for New Zealand from Trans-Tasman Regulatory Coordination.

Regulatory coordination across countries involves obvious benefits to both New Zealand consumers and businesses.

It helps improve transparency and the ease with which business can operate across borders. It can help foster an open and competitive environment in which innovation can flourish.

Our especially strong links with Australia - the mobility of our people, capital, and businesses, through arrangements like CER - mean that the scope for gains with our Aussie counterparts is particularly high.

Because of these benefits the government intends to continue pursuing increased regulatory coordination with Australia.

What is important to note is that while New Zealand has moved its law closer to Australia where this makes sense, we have not slavishly adopted Australian law.

Rather we have examined each issue on its merits. This was particularly the case when we reformed the Commerce Act last year. An examination of the new Commerce Act shows that while we moved closer to the Australians in some areas, significant differences still remain. I will return to this point soon.

First of all today I would like to take a look at what exactly regulatory coordination is and why it is important.

What is regulatory coordination?

Regulatory coordination involves:

- The creation, interpretation, application and enforcement of rules;

- The establishment of institutions which give effect to rules;

- The regulation of market participants; and

- Research and education in relation to business law.

In some cases (such as the Commerce Act), New Zealand and Australia appear to have the same basic law but substantial differences still remain.

In other cases, we have different laws but regulatory coordination may be pursued through other means. These include informal cooperation, unilateral recognition by one country of the other’s law, and mutual recognition - where the law in one country is recognised and given effect in another.

For example, we are coordinating with Australia on the supervision and continuous disclosure regulations of stock exchanges. And we’re working to allow for the mutual recognition of securities offer documents.

The move to improved regulatory coordination with Australia arose in large part from the signing of the original CER Agreement in 1983. As trade barriers between Australia and New Zealand fell, businesses on both sides of the Tasman were more exposed to the regulatory systems and business practices of the other CER partner.

Why pursue regulatory coordination with Australia?

The general idea is to minimise the costs of regulatory differences and encourage economic growth.

Differences in regulatory environments make it harder for businesses wanting to operate in both Australia and New Zealand. A firm wanting to operate in the two countries has to obtain two sets of regulatory approvals and comply with two sets of rules. This can put firms off Trans-Tasman business.

In turn this reduces competition in both markets and consumers lose out through higher prices and fewer goods and services.

Regulatory coordination can lower the costs to governments of forming and administering laws - each country can benefit from the decisions, analysis and experience of the other. As the smaller country, these savings are greater for New Zealand.

In a wider context, regulatory coordination supports the broader economic and political relationships between Australia and New Zealand.

Flipside

On the flipside there are costs associated with regulatory coordination. There are direct costs - from developing regulatory policies and implementing necessary changes. And ongoing costs - resulting from process consultation and the operation of common rules.

There has been some comment in the media that Australian law may not be suited to New Zealand conditions or not of high enough standard. I have also heard some comment about maintaining “sovereignty’ or the flexibility of our laws to suit New Zealand conditions and local preferences.

What is important to remember is that while we will put in laws suited to New Zealand conditions, running a regulatory regime unique to New Zealand is not always in our best international interests.

There are significant benefits in conforming with international norms and modelling on Australian law that meets those norms - a good example of this is the changes we have made to the Commerce Act.

Good regulatory coordination means potential foreign investors do not need to learn two new sets of rules - reducing their costs significantly. This is particularly so given the small size of the New Zealand economy.

It also means investors are more likely to base themselves in New Zealand and export to Australia if our regimes are compatible.

And where we model some of our law on Australian legislation - they too follow our lead on certain key issues such as directors’ duties.

CER benefits

The gains from regulatory coordination with Australia are particularly large because of our already close economic ties. These allow our relatively small market of 3.9 million consumers to expand to around 23 million.

The ANZCERTA agreement is one of the most complete trade agreements in the world and it is complemented by some of the world’s most liberal migration policies.

Over the past decade, New Zealand’s exports to Australia have grown substantially - over the last four years, Australia has taken at least 20% of our total exports.

Australia takes around half our new technologies exports - this underscores the importance of the Australian market to New Zealand’s ability to develop innovative industries.

Mutual recognition

There has been some suggestion that mutual recognition with Australia would be an alternative to bringing our law closer to Australia’s.

Mutual recognition reduces the costs of differences in laws without requiring the laws to be identical. And sometimes this is the best avenue.

For example, the Trans-Tasman Mutual Recognition Agreement (TTMRA), which covers almost all goods and occupations, is one of the most far-reaching agreements of its type in the world.

The TTMRA, came into force in May of 1998. It’s a non-treaty agreement between the Australian States, Commonwealth and New Zealand aims to implement mutual recognition principles relating to the sale of goods and the registration of occupations.

Its purpose is to allow goods that may be legally sold in Australia to be sold in New Zealand and vice versa, regardless of different standards etc.

In other words, the Arrangement allows goods to be traded freely between New Zealand and Australia and enhances the freedom of individuals to work in both countries.

This also means that skills and qualifications obtained in New Zealand will be recognised in Australia and vice versa.

This is of particular importance for the sale of goods such as electrical equipment which must adhere to strict safety standards.

The TTMRA is a good example of mutual recognition at work. But it’s important to note that mutual recognition is possible only if the core of the two countries’ regulatory regimes is the same. So mutual recognition usually goes hand in hand with convergence of the relevant laws.

I would like now to turn to some examples of trans-tasman progress achieved to date.

Commerce Act

Last year we passed legislation beefing up the Commerce Act - essentially we gave the Commerce Commission more teeth and brought New Zealand law more in line with Australia.

The key to this was amending prohibitions in sections 36 and 47 of the Commerce Act. To bring these areas relating to abuse of market power and anticompetitive mergers and acquisitions closer to the equivalent Australian prohibitions we adopted the Australian competition thresholds.

The new prohibition in section 47 for anticompetitive mergers and acquisitions has changed from a threshold of “dominance” to one of “substantially lessening competition”. This threshold has applied in Australia since 1993, and is used in other jurisdictions such as Canada and the United States.

The problem with the threshold of “dominance” was that it allowed some potentially anticompetitive mergers to proceed with no ability for the Commerce Commission to intervene.

One example is the 1999 application by Trans Alta to acquire Contact Energy.

This was a case of two strong competitors in a segment of the wholesale electricity market. While the lower cost hydroelectric power stations had the higher market share, they provided no competitive discipline on the two companies operating as the marginal price setters most of the time. Hence, this merger could have resulted in a merged entity that did not have high market share being able to raise prices, particularly in dry years.

Another example, is the Progressive Enterprises application to acquire Woolworths. The Commission recently concluded that the merger would result in a material increase in the potential for co-ordinated market power and therefore declined the application. The Commission was not able to consider these potential anticompetitive effects under the threshold of “dominance”.

At the same time, we have maintained quite different procedures for applying the prohibitions in New Zealand. Our clearance procedure is more transparent than the Australian one and provides greater certainty for business.

Our Commerce Commission has also taken account of New Zealand conditions when applying the new threshold. The new safe harbours are similar to those used in Australia, but have been adapted to take account of the unique characteristics of many New Zealand markets. So far the Commission has only declined one of the 18 applications for clearance since the amendment on the basis that it may substantially lessen competition. While it is still early days, I think this should give the business community some confidence.

MOU

In August 2000 the New Zealand and Australian governments signed a Memorandum of Understanding on Business Law Coordination.

The aim of the MOU is to help reduce costs associated with trans-Tasman business operations. Under the MOU, a firm should only have to comply with one set of rules and deal with only one regulator.

The MOU’s objectives include driving business costs down through removing differences in laws and administrative systems, improving the effectiveness of the law, and reducing the cost of capital to business.

Business law reform

The importance of the MOU’s guiding principles can be seen in the reform of business laws I have undertaken.

For example the government has introduced:

- New insider trading provisions which bring New Zealand’s regime more into line with Australia’s. These include continuous disclosure provisions, increases in directors’ duties and the establishment of the Securities Commission as a civil enforcement agency. The changes will be introduced in the Securities Markets and Institutions Bill which is currently before Select Committee;

- A new Takeovers Code which came into force on 1 July last year. This provides New Zealand with a takeovers regime which is similar to Australia’s as well as other international jurisdictions, thereby creating greater confidence for international investors in the integrity of our market;

- The Electronic Transactions Bill which will provide for statutory legal requirements for writing, signature and retention and production of documents to be met using electronic methods. The Bill has a common foundation with the Australian Act: both are based on the UNCITRAL model law making this an example of multilateral co-operation.

In addition, the government is reviewing several aspects of insolvency law, including consideration of whether to adopt the UNCITRAL model law on cross-border insolvency. Officials at the Ministry of Economic Development have an ongoing dialogue with their Australian counterparts on all the issues that form part of this review. As Australia is also starting to review its insolvency laws, this is a valuable opportunity to co-ordinate our respective laws in this area.

Conclusion

To sum up, it is critical for a small open economy like New Zealand to take into account the policies and regulatory frameworks of its key economic partner - in our case - Australia.

Regulatory coordination provides many benefits to New Zealand consumers and businesses. It lowers business compliance costs and the costs of regulation and improves competition to name but a few.

This all serves to enhance Trans-Tasman business activity and New Zealand growth.

Thank you for your time.


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