Dairy Industry Position On Commerce Commission
Media Statement
Saturday 20 January 2001
DAIRY
INDUSTRY POSITION ON COMMERCE COMMISSION
EXPLAINED
Limitations in the Commerce Act meant the Commerce Commission could take only “a partial and uncertain” view of the dairy industry’s Merger Package, according to the industry’s submission to the Government posted to shareholders and industry stakeholders today. The 11-page submission was requested by the Minister of Agriculture.
John Roadley, chairman-designate of the proposed Global Dairy Company, said the industry was committed to being open as it worked with the Government on the legislative and regulatory implications of the Merger Package.
“We want our shareholders to know what we are saying to the Government on their behalf and we appreciate the Minister agreeing to that approach,” Mr Roadley said.
“The issues our submission addresses are complex. But it presents a comprehensive and compelling case that the Government is the guardian of the wider public interest and that only the Government can ensure the Merger Package produces the intended benefits to New Zealand.
“In contrast, the Commerce Act has a narrow competition law mandate. This would force the Commerce Commission to undervalue most of the benefits the merger will bring to New Zealand.
“Those benefits include having the world’s 14th
largest dairy company 100 percent owned and controlled by
New Zealand dairy farmers. It would employ 18,000 people in
120 countries, and have revenues of over $10 billion from
more than $7.5 billion in assets.
more …
“The merger
would give New Zealand its only company of truly global
scale, responsible for over a third of the world’s
international exports, over 20 percent of New Zealand’s
exports and nearly seven percent of our national
income.
“The company would be the biggest investor in research and development in New Zealand, aside from the Government, and be the number one training ground for New Zealanders seeking careers in international marketing and management.
“Only the Government can consider these issues relating to national economic policy and the industry’s position in international markets.
“The Commerce Commission’s legislation means it would have to take the normal domestic approach to its analysis of the merger. It would compare the new company with the New Zealand market and other New Zealand manufacturers, rather than with its competitors offshore.
“If we want to share in the benefits of the global economy, we must have global scale companies. A Commerce Commission review focuses on the small New Zealand economy.
“It is almost certain this approach would lead the Commission to recommend breaking up the industry, which would result in New Zealand companies underselling each other on world markets. That is not in anyone’s interest but the huge multinationals which would get cheap dairy products which they would sell to their customers at a profit.”
Mr Roadley said the industry recognised there were issues for domestic consumers and suppliers of dairy products. These were addressed by the Merger Package, the industry continuing to be under the scrutiny of the Commerce Commission, and the major review by the Commerce Commission in three years.
“On the domestic retail market, we
anticipate even more fierce competition following the sale
to a competitor of the New Zealand Dairy Group’s 50 percent
share in New Zealand Dairy Foods, a company that markets
well known brands including Anchor, Fernleaf and Fresh ‘n’
Fruity.
more …
“Suppliers’ interests will be promoted
through their ownership of the company and fair value exit
and entry provisions, factors the Commerce Commission’s
competition-based analysis is unable to consider.
“Other measures to promote the interests of consumers and suppliers include the prospect of competition from overseas competitors, a Shareholder and Supplier Council, a Milk Ombudsman and the ability for the Commerce Commission to introduce price controls after three years.”
Mr Roadley said the industry would continue to work in partnership with the Government as it considered the Merger Package. This would involve supplying any additional information that the Government required.
END
Embargoed Until 0100 Saturday 20 January 2001
5 January 2001
GLOBAL DAIRY
CO
C/- New Zealand Dairy Group and Kiwi
Co-operative
Dairies
Level 9
115 Queen Street
Auckland
The
Honourable Jim Sutton
Minister of
Agriculture
Parliament Buildings
WELLINGTON
Dear
Minister
Thank you for your letter of 22 December 2000.
We have addressed below the specific question raised in
your letter, but in order to place the issues in their
proper context we have also provided a broader overview of
the industry and the impact of industry reform on the
national interest. There may well be matters on which you
require further information or analysis and we will respond
to any further requests as quickly as we can.
The
different elements of the dairy industry's proposal are
designed as a package. That package is intended to operate
not just in the interests of the dairy industry but to
satisfy broader public policy tests and serve the overall
national interest. Because there are wider issues at stake,
we believe it is appropriate for the Government to assume
overall responsibility, and to ask the question, “what is in
the national interest, and does the package achieve that?”
The subsidiary question is, what role, if any, will the
Commerce Commission play.
This letter summarises why we
believe the Government has that primary role, and why the
Commission is best placed to monitor and implement those
policy decisions, in the manner set out in the
package.
1. THE DAIRY INDUSTRY AND NEW ZEALAND'S NATIONAL
INTEREST
More than any other sector, the dairy industry's
performance profoundly affects the economic and social
viability of New Zealand communities. It accounts for over
20% of New Zealand's exports and around 7% of GDP. Over the
last 5 years, dairy products have contributed a large
proportion of New Zealand's overall export growth, and the
dairy industry has been a major engine of growth in the
economy throughout the 1990s. The industry is New Zealand
owned and controlled with most of the industry stakeholders
and employees living in New Zealand's regions and rural
communities.
The dairy industry is a driver of
innovation in New Zealand, both in terms of product
development and also pastoral and agricultural research.
The industry spends over $120m a year on research and
development, and has specific targets relating to new
product development and customisation, cost reduction,
breakthrough technology and bio-science. The dairy industry
is the largest funder of research in New Zealand, apart from
Government, working closely with Universities Crown,
Research Institutes and other entities. This commitment has
a substantial impact on the ability of New Zealand to
develop and retain the intellectual capital of its
outstanding scientific minds.
The scale and scope of the
dairy industry's activities have required the dairy industry
to develop and retain managers capable of creating and
implementing business strategies on a global scale. Few
other industries require or permit the level of commitment
to acquiring and enhancing these skills.
The New Zealand
dairy industry has an overwhelming export focus:
it exports over 95% of manufactured dairy
products;
Put another way, domestic New Zealand
dairy consumption is relatively unimportant to the viability
of the dairy industry and therefore of the economy as a
whole; and
New Zealand is a major and growing
player in the international dairy market, selling about one
third of the world's internationally traded dairy produce
(under 20% a decade ago).
The efficient development of
this industry is in the national interest. The proposed
package serves that national interest because:
It creates a streamlined company with sufficient scale to be
a major player in international markets. The proposal
eliminates a grossly inefficient artificial separation
between manufacturing and marketing, with an associated
complex process for allocating customer orders. It is the
least option for enhancing industry performance.
The downside risks are managed by the fact that fair value
entry and exit and the elimination of the export monopoly
will introduce the discipline of potential new processors
(which are themselves likely to be big global players) to
enter the New Zealand market. New marketers could be formed
by groups of current suppliers. Some existing international
marketers could expand their activities here. The new
market structure will also create an opportunity for niche
players to thrive. Divestment of a major industry asset in
New Zealand will secure competition in consumer
markets.
The Commerce Commission will have an
ongoing role which will ensure that the outcomes will be as
anticipated. The Government will retain its ability to
intervene, should that be called for in future.
2. THE
STRUCTURE OF THE INDUSTRY AND THE PROCESS OF INDUSTRY
REFORM
The industry's achievements result from the drive
and commitment of the people who have worked and made
investments in the industry over several generations. This
drive and commitment has been harnessed by unique ownership
and legislative arrangements which have allowed all
participants to combine in a single structure.
In 1998
the then Government asked the industry to assess whether
that structure would continue to best serve the country's
and the industry's interests. The industry has looked at
its old structures and decided that they no longer serve it
well for future development or growth. After nearly three
years' analysis and consultation, the industry has responded
with the current package of reforms.
That package is
dependent on Government policy and action:
The
industry's present structure is entrenched in legislation,
and is dependant on that legislation for its strength,
efficiency and unity. This is fundamental to the reform
process: the industry is now united in a structure which
Government introduced and maintained over several
generations but which has now become a source of unnecessary
cost. The Government alone can restructure the industry so
as to avoid that cost or dismantle that unity.
The industry seeks removal of the current heavy handed
regulation of export control, but seeks to avoid the
dismantling of the industry's unity which has been achieved
under that control.
Only the Government can make
an overall assessment of whether the industry's package is
in the national interest and only the Government can
implement the light handed regulation to replace the current
heavy handed export controls.
The proposed package, and
Government's role in it, is entirely consistent with
precedent established recently in the electricity and
telecommunications industries where the Commerce
Commission's role was as implementer of Government policy.
The Commission did not design or approve that policy. In
those cases the Commerce Commission had previously been
given exclusive jurisdiction, but that was seen to be too
narrow, or too limited in the available tools. The
Government itself reassessed and redesigned the role of the
Commission on more pragmatic lines.
In those two
industries, the historical pure Commerce Act/competition law
approach had led to impasse and years of litigation in one
case and distortion of Government policy by lines companies
in the electricity market, in the other. In the lines
company case the value resulting from this distortion passed
to the mainly foreign owners.
The key reason the industry
does not believe the Commerce Commission is the right body
to deal with the proposal is that Government can and should
continue to be involved in the process of reform described
above and in designing the best changes to the regulatory
regime. The Commerce Commission cannot take part in that
process and would be forced to make a partial and uncertain
decision on the basis of its assessment of what the
regulatory environment may look like and how the industry
will evolve within it. On the other hand, if the Government
makes its policy assessment and participates in the design
of the new regime, initial review by the Commerce Commission
becomes superfluous and is an unnecessary imposition on the
industry. However, its ongoing monitoring of the regulatory
regime designed by government and industry would be an
effective safeguard, and would be consistent with other
industries.
3. THE ROLE OF THE COMMERCE COMMISSION
The
Commerce Commission is not well placed to formulate dairy
industry restructuring policy. This is because:
National Economic Policy: Questions of economic policy and
the position of New Zealand's major industry in
international markets are involved. These issues are
unavoidable and inevitably more the responsibility of the
Government than a Commerce Commission. The narrower, albeit
important domestically, issue of the application of local
market principles are clearly the responsibility of the
Commission. Those issues are dealt with as part of the
package;
Farmers value control: Analysis of the
restructure in competition terms ("choice") is unimportant
to suppliers of raw milk who depend daily on reliable
performance of their dairy company. They have seen
disastrous results of well intentioned policies providing
"choice" in some other countries. Their real protection is
provided by their control over the co-operative ("voice").
The industry would not achieve widespread farmer support for
a restructure unless it incorporates and strengthens this
supplier "voice";
International Markets: The
Commerce Act was designed to enhance economic well being in
New Zealand by encouraging competition in domestic, not
international markets. The dairy industry exists primarily
to participate in international markets. As New Zealand’s
economic well being is dependent on the industry remaining a
dominant player in international markets, the industry’s
structure must be designed to provide it with the best
chance to prosper in those markets. The domestic market is
but a part of the picture; and
Limited tools
available to the Commission: The Commerce Commission's
mandate, expertise and experience to assess the unique
national economic and international market issues involved
in the dairy industry is limited. It has limited tools to
mitigate the risk of large mergers.
We will discuss each
of these issues in more detail below.
3.1 National
Economic Policy is the Responsibility of Government:
implementation of competition policy is the responsibility
of the Commerce Commission
The Government forged unity
between dairy companies, and ensured continuing New Zealand
ownership of the industry, as a matter of national economic
policy which has evolved over the last 70 years: Government
members in the House referred in 1932 to:
"… a relentless
search for efficiency not on the farm alone, but in
marketing and other co-operative organizations. To take the
dairy industry as an illustration, we are well advanced in
having excellent co-operative dairy factories - the best in
the world. But how much of the advantage is lost through
over-lapping and competition in collecting cream and milk,
and through the co-operatives marketing in competition with
one another."
To avoid that loss, the Government
introduced the predecessor to the Dairy Board. That
fundamental step has been augmented and developed ever
since. It is incorporated in a number of statutes,
including the current exemption from the Commerce Act set
out in the Dairy Board Act 1961, allowing transactions
between the New Zealand Dairy Board and the co-operative
dairy companies.
However, the mechanisms used to achieve
that policy of industry unity were developed prior to
consolidation of the manufacturing dairy companies.
Previously many small co-operatives manufactured products
which were sold by the Dairy Board. Now 96% of all
production comes from just two companies. As a result, the
multi-company structure which has brought about a united
industry is now a source of substantial unnecessary cost and
has become an impediment to rapid, competitive industry wide
action in response to the needs of customers and the
challenges of competitors.
Those mechanisms need to be
simplified, and the old checks and balances in the Dairy
Board Act replaced with a more flexible structure which
responds to current and future needs.
The Commerce
Commission has the different focus of implementation of
competition policy. This difference is well illustrated by
differences between Government objectives and Commission
guidelines.
For example, the Government's objectives may
include:
creating employment within New
Zealand;
increasing the country's international
competitiveness;
fostering an environment which
encourages innovation and the adding of value within New
Zealand; and
maintaining a degree of control and
economic sovereignty within New Zealand;
regional development.
In contrast, provisions of the
Commerce Act, and Courts' decisions on the effect of those
provisions, have resulted in a set of guidelines, published
by the Commission, on how it should assess the public
benefits of mergers:
In general terms, the
creation of jobs or retention of jobs is not an efficiency
improvement or a net economic gain and would therefore fall
outside the definition of the public benefits (see Paragraph
8.1 Guidelines to the Analysis of Public Benefits and
Detriments in the Context of the Commerce Act, Revision
December 1997);
Efficiency should be counted
but international competitiveness should not be separately
taken into account (see Paragraph 4 of the
Guidelines);
The Guidelines suggest:
- value
added with neutral efficiency gain is not a benefit;
and
- value added in New Zealand is not a benefit as
compared with value added offshore.
(See Paragraph 8.4
of the Guidelines);
If there is no efficiency
change, the Commission does not consider that benefits to
consumers or to producers are a public benefit. (See
paragraph 5 of the Guidelines). This analytical framework
would force the Commission not to recognise the fact that
the benefit of efficiency gains would pass to foreign
consumers;
Location and control of the resulting
entity is not an issue for specific consideration (see
Paragraph 8.5 of the Guidelines).
This focus of the
Commerce Act results in a process of analysis which
undervalues issues such as:
the benefits of
having a world scale dairy business headquartered in New
Zealand. These benefits include development of world class
management skills, the multiplier effect of service and
product firms supplying Global Dairy Company and a New
Zealand focus on intellectual property development and
retention;
retention of efficiency gains in New
Zealand. For example, efficiency gains may result from
restructure, but those gains may be seized by offshore
customers of, or foreign investors in, the industry if the
restructure is aimed at efficiency alone, without regard to
wider national interests;
the avoidance of
continued head office drift away from New Zealand, with the
implications for both sovereignty and economic welfare of
the nation;
The benefits of scale in developing
and maintaining management excellence. That issue was
placed before the Commission in 1999. Constrained by the
need for a conservative approach tied to efficiency, the
Commission concluded that New Zealanders "… lack experience
in managing such large undertakings …". (That is in itself
a very surprising conclusion in view of the evident
experience of the dairy industry management). On that
basis, it concluded that the required efficiencies would not
be achieved by "NewCo". The Commission felt this was a
factor in its not authorising a world scale firm: but the
absence of that world scale firm would deprive us of the
chance to develop those very skills. That would condemn New
Zealand to a vicious circle of insufficient skills, coupled
with insufficient opportunity to develop them;
and
the desire of farmers to continue to own and
control their industry and thus their economic future. This
also has the effect of securing the ownership of the
industry in New Zealand hands. This ownership motivation
may be intangible, but in an industry which is largely owned
by individual farmers and their families, it is a major
factor for Government consideration.
The Government's
broad based consideration of the national interest elements
of the proposal is required, not the Commerce Commission's
narrow efficiency/competition based analysis of just one
aspect of that proposal, namely the merger.
In essence,
we are saying that a balance must be struck by the
Government between competition for its own sake, the
undesirable and unintended consequences of competition, and
other national goals which competition alone cannot
deliver.
3.2 Co-operatives and farmer control
Milk is
produced on a daily basis, is perishable and is bulky. Milk
production is uncontrollable in the short term by the farmer
who is thus totally dependent on the performance of the
dairy company. The dairy farmer is unique as the only
producer who must produce every day, who must have
production collected every day, and who is exposed to the
cost and pollution of dumping production if the contracted
dairy company fails to collect for any reason or dispute
whatsoever.
Because the supplier's milk collection
needs are always immediate, the supplier cannot switch
between dairy companies to solve a service problem or to
achieve greater efficiencies or returns. Furthermore, there
would simply not be the transport or processing facilities
available from other companies mid-season.
Thus, the
business of dairy farming is totally dependent on the
behaviour, competence and performance of the local dairy
company. This dependence is unique to the dairy industry,
but is a standard problem around the world, and has led to a
common solution around the world: the dairy co-operative.
This key issue has been recognised, increasingly, by the
Commerce Commission. While continuing to recognise the
theoretical possibility of competitive constraint through
switching of shareholders/suppliers to alternative
co-operatives, the Commission has consistently, and with
increasing forcefulness over the last 10 years, reached the
conclusion that, in practice, such competition does really
not exist. The co-operative structure gives
shareholders/suppliers control of the direction and actions
of co-operatives and as a result switching has no practical
role as a competitive constraint.
This point is
emphasised by the United States' approach to competition and
co-operatives. The Sherman Act is subject to an exception
under the Capper Volstead Act, which provides that the
Sherman Act should not apply to co-operatives. US
commentary emphasises that shareholders/suppliers in
co-operatives do not require the same protection from their
own organisation.
There are two consequences of the
role of the co-operative in the dairy industry:
The industry's package is the result of extensive
discussion and sometimes differing views. The agreement
which has been reached was dependent on the role of the
co-operative in the restructure, and the strengthening of
the co-operative model through the Supplier and Shareholder
Council and the Milk Ombudsman. I do not believe the
shareholders will pass the necessary resolutions if this
"voice" is in any way jeopardised, even if the jeopardy
results in more hypothetical "choice" through
competition.
Competition analysis is not
reliable if it does not have the co-operative at its centre.
Adapting the "choice" model of investor owned firms will not
do: a choice between an investor owned firm and a
co-operative is not an equal choice.
We ask the
Government to consider the proposal based on these
realities, and not assume that structure and dynamics of
other markets can be transformed without modification to the
dairy industry.
3.3 International Markets
New Zealand
may be a small participant in a global sense, but it has
established a significant position for itself through its
unified marketing structure.
The international dairy
markets are undergoing significant change:
There
are constant changes in key consumer trends worldwide,
including growth in liquid milk, cultured dairy products,
and cheeses consumption, decline in butter consumption,
increasing out-of-home and prepared meal consumption and
increasing emphasis on nutrition, health and
wellbeing.
Supermarket chains and the other
customers are consolidating on a global basis, thereby
strenthening international purchasing power. The result of
this activity is that suppliers are competing for business
of powerful global retail companies.
Many of the
international dairy suppliers who compete with the New
Zealand Dairy Industry have grown their business
significantly in recent years, (through merger and
acquisitions) to respond to the imbalance in market power,
eg:
- Parmalat has made many acquisitions around the
world, notably including Australia;
- Nestlé have
acquired Klim;
- Formation of Dairy Farmers of America -
the largest dairy co-operative in the world;
- Dean Foods
(USA) spent US$1.1 billion in 1998 on acquisitions. Having
gained strength by acquisition in the US, Dean Foods is now
acquiring dairy interests in Portugal, Mexico and Latin
America;
- The MD Foods/Klover merger representing 90% of
the domestic market in Denmark. The subsequent merger with
Arla of Sweden resulted in one of the largest dairy
companies in the world, with almost total dominance in its
domestic markets; and
- Frieslan/Coberco have merged in
the Netherlands, producing the dominant domestic company.
The other main Netherlands dairy company has combined with a
German co-operative to produce Campina Melkunie.
The New Zealand dairy industry competes in
world markets which are characterised by protection through
export subsidies, import tariffs and support price
mechanisms which effectively depress the world market
price.
The industry is effectively excluded from
the world's richest markets by tariffs, and is forced to do
business in markets where access is relatively unrestricted,
but tariffs, on average, are still around 30%, and returns
are lower. Last financial year the industry paid NZ$524
million in tariffs, an average of $37,800 for each New
Zealand dairy farm.
Further, virtually every
country, but with the notable exception of New Zealand, has
price support mechanisms for their local milk. In other
words, almost all dairy industries in the world have a
Government assisted local market to support their
industries. In Australia, for example, the Government is
providing A$1.74 billion to assist Australian dairy farmers
during the current transition period.
To meet these
challenges, the New Zealand dairy industry needs to develop
closer integration between marketing and manufacturing in
New Zealand to allow fast, flexible responses to the demands
of customers. The dairy industry's viability, efficiency
and contribution to New Zealand's national interest must be
assessed in that international context.
But the
Commerce Act is designed for the domestic market: its long
title is "An act to promote competition in markets in New
Zealand …" This focus would lead to the normal domestic
approach to the merger part of the package. The starting
point would be a comparison of the size of the Global Dairy
Co with the New Zealand market, and with the other
manufacturers in New Zealand. The Commission has already
shown a preference for two smaller companies.
Professor
Lewis Evans argues that to force New Zealand firms to be
small by New Zealand standards through the normal approach
to mergers is likely to make it difficult for those firms to
compete in other countries, and may even raise costs for New
Zealand consumers. (See The ISCR Competition and Regulation
Times, Issue 3). Not pursuing the Global Dairy Co strategy,
and fragmenting the present unified dairy industry structure
would condemn New Zealand to the margins of world commerce
and trade. It would mean that in a world of large dairy
industry firms, the scale of the largest New Zealand owned
participant will be defined by reference to the small New
Zealand domestic market. This approach has specifically
been rejected by smaller EU countries which do not wish to
see their economies dominated by German and French firms
because of their domestic competition policies.
The
application of the Commerce Act's domestic focus to the
international business of the New Zealand dairy industry
would force the industry to take one of two sub-optimal
routes:
maintain the world class international
marketing scale of the New Zealand Dairy Board but suffer
the artificialities and costs of regulated export controls
and the inefficiencies of the current ownership and product
transfer system; or
break up the New Zealand
Dairy Board/New Zealand Dairy Group/Kiwi unity in deference
to a domestically focussed analysis. This would lead to a
massive loss of value to New Zealand. Two competing
co-operatives would be too small to capture the attention of
the very large retail players emerging around the world, but
too big to be effective with players. We would lose the
industry's best chance of competing on world markets.
Moreover, the breakup would inevitably lead to:
Division of the industry.
Both would have an
international expansion strategy.
Both parts
would be capital constrained.
Both would seek,
first, joint venture partners offshore, and then offshore
capital.
As a result, there would eventually be
overseas control of one or both of the companies.
If New
Zealand also removed export controls as part of this second
route it would allow large scale international dairy
companies to enter the small New Zealand market. Those
large companies would use their international scale and
strategies (scale and strategies denied to New Zealand
companies) to undermine the position of the relatively small
New Zealand companies. This would result in New Zealand
losing the strength which has been achieved to date in the
international marketplace, with a resulting reduction in
returns to New Zealand. It would also result in the
breakdown of co-operative control and ownership of the
industry, as the foreign investor owned firms followed their
normal pattern of seeking to impose contracted milk
supply.
3.4 Commerce Commission Process and Mitigation
Tools
The Commission has only a one time look at mergers.
On that look it must create two scenarios, one for the
outcome of the merger and one (sometimes with variations) if
the merger does not occur.
This process is a flawed one
for developing national economic policy:
The
merger analysis is driven by the commercial motives and
decisions of the two companies involved, not by a broader
national perspective.
The non-merger analysis is
an unprovable hypothesis. With no superior ability to
project what the participants, their competitors or the
Government might do in the future, the Commission inevitably
projects a future which does not happen. This is not a
criticism of the Commission but a reflection on the process.
The process forces the Commission to adopt a
"virtual legislation programme" on which it bases its
decisions. Parliament's role is imagined, and then locked
into the Commission's decision. This is illustrated by the
1999 draft determination where the Commission's non-merger
scenarios included an assumption that the export restriction
would be removed by Parliament even if the merger did not
proceed. Incorporation of that assumption into the
Commission's analysis was a factor in concluding that the
"Merge Co" should not be approved. By this process, the
Commission's view of a Parliamentary decision, not the
decision of Parliament itself, determined (or at least
significantly influenced) the industry's attempts at
restructure.
The result of these factors is that the
Commission adopts an extremely cautious approach before
accepting benefits of merger, and is wary of the potential
detriments: it has no ability to rectify the position if
its projections are wrong.
This is fundamentally
different from a Governmental review. The Government can
aim for the best outcome, in the knowledge that unforeseen
outcomes, unfavourable events or other changes not
contemplated when the original decision was taken can
readily be addressed and rectified by the Government or
Parliament at a later stage.
The Commerce Commission has
only one tool to mitigate the risks of a large firm created
by merger: it can accept an undertaking to divest. This
mitigation is structural, in that divestment happens once
and thereafter the Commission leaves the structure of the
market to implement the desired efficiency outcomes.
Implicitly, that leads to the "small country, small company"
vicious circle described above.
The Commission has no
power to participate further. The Commerce Act prevents the
Commission from accepting undertakings by firms to behave in
a manner which would enhance or protect competition. As the
Commission observed, the contractual commitments offered by
the industry in 1999 could not form part of the divestment
undertaking, they cannot be accepted as such, and are simply
matters to which the Commission can give such weight it
considers appropriate.
Again, this is fundamentally
different from the Government's position. The Government
has available a wide range of devices to enforce economic
performance and tailor economic structures to achieve
outcomes. It has knowledge and control of its own
legislative and regulatory programme. Those tools would not
be available if only the Commerce Commission were involved.
The package proposed by the industry has proposed use of a
wide range of tools to protect domestic consumers, protect
milk suppliers and monitor the anticipated gains: virtually
none of these would be available to the Commission.
4.
CONCLUSION
The boards of New Zealand Dairy Group and Kiwi
have put together a package which responds to the
Government's wish to see reform of the industry and which
incorporates their own vision for the best future of the
industry. They believe the package is in the best interests
of the country, and addresses all issues, including
competition. They are confident that their shareholders
will support that package, including the regulatory
constraints it would impose.
The proposal does not create
a precedent but follows the general approach adopted by the
Government of tailoring economic principles to the
circumstances of each particular industry.
The
Government, and not the Commerce Commission, is the
appropriate judge of the benefits of the proposed
restructure. The Government is the appropriate guardian of
the public interest and the Government alone has the tools
to ensure the implementation of all aspects of that
re-structure deliver the anticipated benefits.
Yours
faithfully
John Roadley Henry Van der Heyden Greg
Gent
Chair Chair
New Zealand Dairy Board and Chair
Designate New Zealand Dairy Group Kiwi Co-operative
Dairies Limited
Global Dairy Company
SUMMARY OF CORRESPONDENCE WITH
GOVERNMENT
Embargoed Until 0100 Saturday 20 January
2001
John Roadley, Greg Gent, Henry van der Heyden, John Spencer and Craig Norgate met with the Minister of Agriculture shortly before Christmas to brief him on the Merger Package and the necessary legislative and regulatory measures. This established a consultation process on the detail of the Amalgamation Proposal.
The Minister wrote to the Industry on 22 December requesting more information on the Merger Package. On 5 January, the Industry responded in a letter that has been released publicly with the Minister’s consent. Key points from that letter are:
The international market place is changing rapidly.
Globally, international dairy companies are merging into
huge competitors. Our customers are combining to acquire
buyer power. Critical mass is crucial if New Zealand is to
both maintain and grow its position in an increasingly
competitive global environment.
Our industry’s strength comes from its unity and existing global scale provided by Government legislation dating back to the 1930s. There has been a solid partnership between the Government and farmers, which has been rewritten over the years in response to changes in the world economy and New Zealand’s place in it. That partnership and our structure now needs to be reviewed, to ensure that the new company and wider regulatory framework builds on our strengths and remedies the weaknesses of our existing structure.
The Government has the required mandate, processes and experience to ensure that the package as a whole, including the merger, will produce the intended benefits over time.
We believe the Government should authorise the merger of Kiwi Dairies and the New Zealand Dairy Group without the merger proposal being subject to Commerce Commission authorisation approval, for several reasons.
The Commerce Commission process involves an analysis of the merger proposal in competition terms. This analysis is based on “choice” between competitors and the idea that by being able to choose between production companies, suppliers will be protected from anti-competitive behaviour. This analysis does not take into account the value that farmers place on their "voice" in controlling their industry.
The importance of recognising the value of the co-operative structure cannot be understated. As a result of this co-operative structure, the new company will be owned and controlled by New Zealand dairy farmers - there will be no opportunity for people outside the company to take control of the industry. It is our view, given the international trend of mergers to create critical mass, the creation of one large scale company is the only way to retain ownership of our industry by New Zealand farmers, also ensuring that investments off-shore provide returns to the New Zealand economy.
Further, when the Commerce Commission decides whether or not to authorise a merger it must weigh the expected benefits of the merger against the possible detriments. While the Government is able to give appropriate national policy weighting to objectives like the creation of employment, regional development and increasing the country’s international competitiveness, the Commerce Commission’s focus on efficiency limits its ability to consider the broad range of issues.
The focus of the Commerce Act results in a process of analysis which undervalues issues such as:
The benefits of having a world scale
dairy business headquartered in New Zealand;
The
value of retaining efficiency gains in New
Zealand;
The avoidance of continued head office
drift away from New Zealand;
The benefits of
scale in developing and maintaining management excellence in
New Zealand; and
The desire of farmers to
continue to own and control their industry and thus their
economic future.
The ability of the Commerce
Commission to assess the unique national economic issues
involved in dairy industry reform is limited by both its
mandate and its processes which are designed to deal with
the important but narrower issue of the application of local
market principles.
The process followed by the Commerce Commission when assessing mergers involves a one off analysis based on a series of hypothetical assumptions about the way Parliament, industry participants, their competitors and the Government may act in the future.
This process results in the Commission adopting a cautious approach before accepting the benefits of a merger and being wary of potential detriments. If the assumptions made by the Commission prove to be wrong in the future there is no way to rectify those assumptions and hence opportunities can be lost for no good reason.
Unlike the limited tools available to the Commerce Commission, the Government has the ability to aim for the best outcome for New Zealand with the knowledge that any unforeseen problems can be dealt with by the Government or Parliament at a later stage through the legislative and regulatory processes that are under its control.
Finally, the analysis undertaken by the Commerce Commission under the Commerce Act would lead to the normal domestic approach being taken to the merger part of the package. The starting point of this analysis would be a comparison of the size of the Global Dairy Co with the New Zealand market, and with other manufacturers in New Zealand.
We believe that this approach would lead to the industry being forced to take one of two sub-optimal routes in the future which would both have the potential to result in overseas control of all or a part of our dairy industry. The issues dealt with by the Commerce Commission are important issues. It should be remembered that the reform package does deal with the types of competition issues that the Commerce Commission will be concerned with.
Not only does the reform package incorporate the divestment of the New Zealand Dairy Group’s 50 percent shareholding in New Zealand Dairy Foods, it also incorporates a wide range of other devices to protect domestic consumers and milk suppliers. Only the Government has the ability to take these additional protections into account when assessing the merger and to make these tools available.
It is for these key reasons that we asserted in our letter to the Government that, “[t]he Government, and not the Commerce Commission, is the appropriate judge of the benefits of the proposed restructure. The Government is the appropriate guardian of the public interest and the Government alone has the tools to ensure the implementation of all aspects of that re-structure deliver the anticipated benefits.”
ENDS