Premier & Cabinet

Type:
Department of Premier and Cabinet Circular
Identifier:
C1994-09
Status:
Archived

C1994-09 Hilmer Report: State Audits

Detailed Outline

Further to my circular No. 94-6 of 9 March 1994, a seminar has now been organised to more fully explain to all Government agencies what is required to assess the impacts of application of the Trade Practices Act to Government activity.

The seminar will be conducted by Mr. Andrew Greenwood of Minter Ellison Morris Fletcher and will be held at the Intercontinental Hotel, 9.00am to 12.00pm, Wednesday 20 April 1994.

The seminar will elaborate on methodology for the audit and will outline both the existing provisions of Part IV of the Trade Practices and Hilmer's recommendations (see attachment).

CEOs are urged to ensure that either they or officers conducting the audit attend the seminar.

The previous deadline for this exercise has now been extended to 6 May 1994.

R. B. Wilkins,
Director-General.

GUIDELINES FOR THE AUDIT OF THE IMPACT OF THE TRADE PRACTICES ACT ON GOVERNMENT ENTITIES

1. Background

The Hilmer Report on Competition Policy recommended that the Trade Practices Act be applied to State and Territory businesses to the same extent it applies to Commonwealth businesses. Governments have agreed to audit (assess) the potential impact of this recommendation prior to making a final decision on the full set of Hilmer recommendations at the August COAG Meeting.

Governments have agreed that, where practicable, a uniform approach should be adopted to the audit. This memo outlines that uniform approach and the timetable to apply in New South Wales.

The broad elements of the methodology are:

  • Each jurisdiction will conduct a seminar for Chief Executives and key officials on the nature of the conduct provisions of the Trade Practices Act, the recommendations of the Hilmer Report on Competition Policy in relation to Part IV of the Trade Practices Act and the approach to be adopted to assessing the impact of the Hilmer recommendations. The seminar will be held on Wednesday, 20 April, 1994, 9.00am-12.00pm in the James Cook Room, Intercontinental Hotel, Macquarie Street, Sydney.
  • Each jurisdiction will direct its agencies to undertake an audit of existing arrangements in accordance with the directions detailed below. Agencies may wish to retain legal advisers for this task and a list of contact names can be obtained from the state coordinator Ms. Ann Williams, Intergovernmental Relations Unit, The Cabinet Office, 228 3712 [fax 228 4408, Level 13, State Office Block, Phillip Street, Sydney, 2000].
  • Each agency's completed audit is to be provided to the State Coordinator by 6 May, 1994.
  • Each jurisdiction will be compiling a consolidation audit report for their own jurisdiction by 13 May.
  • Each jurisdiction will be contributing to an overview report (dealing with the generic issues rather than specific impacts) to COAG. Drafting of this report is to commence on 10 May. The final report is due at end May to allow consideration by COAG senior officials prior to the final drafting of legislation to be considered by each jurisdiction prior to the COAG meeting.
  • Agencies should note that details of their submissions will be kept confidential and will not pass beyond The Cabinet Office and the Treasury.

The remaining sections of this paper:

  • Outline the approach to be adopted in assessing the impact of the Hilmer recommendations;
  • Give a brief overview of the conduct provisions of the Trade Practices Act; and
  • Summarise the Hilmer Report recommendations in relation to Part IV.

2. The Steps To Be Undertaken To Audit, For TPA Purposes, Government Business Arrangements

a. Each agency should appoint an audit coordinator and commit sufficient resources to enable the audit timetable to be met.

b. A short but sufficiently comprehensive synopsis of the principal activity or activities of each business enterprise should be developed [such as that perhaps set out in the business plans for each department or each authority].

c. A short synopsis of the typical commercial contracts or arrangements each enterprise enters into [or has entered into over the last two years] should be prepared.

d. The contracts, or random samples of the contracts, should be examined to determine whether provisions are adopted either transactionally or as a matter of course that might arguably, given the commercial environment, have the effect of being in restraint of trade [ie. substantially lessening competition between suppliers to the enterprise or acquirers from the enterprise].

e. The question should be asked, what commercial transactions does each enterprise typically strike as part of its dominant modus operandi in undertaking the business of the enterprise.

f. The synopsis will reveal the specific areas of enquiry for each enterprise or instrumentality, such as minimum supply obligations, minimum purchase obligations, licence agreements, joint venture arrangements, commercialisation agreements, all major procurement agreements, arrangements and protocols, computer procurement, infrastructure development contracts, telecommunications facilities contracts, etc. These are some examples of obvious areas where the commercial arrangements might well incorporate, typically, provisions that might have an adverse effect on competition and be subject to challenge within a TPA environment. These commercial arrangements must also be reviewed to determine whether any particular form of commercial relationship constitutes an exclusive dealing in breach of Section 47.

g. A schedule of the major forms of agreement [and a register should be maintained by each department of its major agreements] should be identified with the corresponding annotation identifying that the documents and protocols relating to that form of commercial activity have been reviewed for TPA purposes.

h. So far as the instrumentalities are concerned, each department should identify the major government agencies for which each department is administratively responsible and examine the legislative basis of the instrumentality to determine whether it presently enjoys the status of Crown immunity or whether the fundamental business operation of the instrumentality is expressly dealt with by the enabling Act so that one can determine whether any of the Section 51 exemptions might apply. Statutory marketing schemes, should be identified. A view needs to be formed about whether the commercial operations of such structures, might involve conduct which would breach Section 45 or 47 and whether there is any risk, in the established protocols and procedures of those organisations, of a challenge to the use of the organisation's market power [Section 46].

i. Enquiries should be made of the attitude and approach of the enterprise to pricing issues. How is price determined, what arrangements are made with suppliers as to price and, what arrangements are made with buyers of services from the enterprise either customer by customer or with groups of customers? Is there any price differentiation or discrimination between buyers and are there any arrangements with competitors of the business enterprise to standardise or fix or control prices within an industry for particular goods or services?

3. Overview of the Conduct Provisions of the Trade Practices Act

The Commonwealth Trade Practices Act 1974 (the 'Act') has two primary functions:

(i) To discourage anti-competitive conduct:

Part IV (restrictive trade practices) of the Act is the primary instrument of the Commonwealth Government's competition policy. This policy is based on the premise that free and active competition is essential to the economy, as a competitive environment encourages efficiency, initiatives and other forms of beneficial competitive behaviour.

Anti-competitive behaviour and market structures, such as monopolies, cartels, and exploitation of market power to harm competitors, are seen as undesirable. Part IV operates by prohibiting various forms of anti-competitive behaviour, and substantial penalties are provided for in Part VI of the Act.

(ii) To discourage conduct which is detrimental to the interests of consumers and others:

Part IV(A) (unconscionable conduct), Part V (consumer protection) and Part V(A) (liability of manufacturers) confer various rights and remedies on consumers and other persons in order to protect them from conduct (including the sale or provision of defective products or services) which is regarded as unfair or otherwise undesirable. The Hilmer recommendations focus on the Part IV prohibitions.

a. Understanding the Trade Practices Act

The considerations that arise when determining whether a provision of the Act (particularly Part IV) applies are complex. These complexities arise because of the legislative provisions themselves, the concepts and guidelines established in judicial and Trade Practices Commission decisions and commentary, and because of the questions that need to be answered each time a provision of the Act is applied to a different market or other fact situation.

b. How Does the Trade Practices Act Operate?

Restrictive Practices

A number of restrictive practices are regarded as being so inherently anti-competitive that they are prohibited absolutely, ie. without any assessment of their impact on competition.

Other practices are only prohibited if they have the purpose or are likely to have the effect of lessening competition.

Absolute Prohibitions

Restrictive practices which are prohibited absolutely are:

  • Primary Boycotts

This refers to situations where two or more competitors collaborate for the purpose of preventing or limiting the supply of goods or services to, or the acquisition of goods or services from, particular persons or classes of persons. Risk areas include trade association meetings and other opportunities for collusion amongst competitors.

  • Price Fixing between Competitors

Any arrangement which has the purpose or effect of fixing, controlling or maintaining prices for, or any discount, allowance, rebate or credit in relation to, goods or services to be supplied or acquired by any of the parties to the arrangement is deemed to breach the TPA. This prohibition is extremely wide and encompasses any restraint upon price flexibility.

  • Third Line Forcing

This occurs where a company supplies goods or services from another person (including a related corporation of the supplier).

  • Resale Price Maintenance

Any direct or indirect attempt at enforcing resale price maintenance is prohibited. The practice of recommending prices for goods and services is not prohibited provided that certain conditions are complied with.

Prohibitions Dependent upon Anti-Competitive Purpose or Effect

  • Contracts, arrangements or understandings which have the purpose or are likely to have the effect of substantially lessening competition in a market.

Risk areas include market sharing agreements and agreements which restrict the supply or quality of goods.

  • Misuse of Market Power

A company which has a substantial degree of power in a market is prohibited from taking advantage of that power for the purpose of:

eliminating or substantially damaging a competitor;

preventing the entry of a person into any market;

deterring or preventing a person from engaging in competitive conduct in any market.

Examples of such conduct could include refusals to deal, termination of existing supply or trading arrangements, predatory pricing, price discrimination and third line forcing.

  • Exclusive Dealing

This refers to the interference by a company with the freedom of its buyers to buy from other suppliers and with the freedom of its suppliers to supply to other buyers. Risk areas include the following common business practices:

exclusive distribution the purchase of goods on condition that the supplier will not supply goods to another distributor in a territory;

exclusive purchase the supply of goods on condition that the buyer will not acquire similar goods from another supplier; and

restrictions on the resupply of goods to particular persons or in particular areas.

if these practices have the purpose or likely effect of substantially lessening competition.

  • Price Discrimination

Suppliers may not discriminate in the price charged to different purchasers of equivalent goods if the discrimination is so large and happens so often that its effect is to substantially lessen competition.

Normal discounts, though, will not usually contravene the TPA, nor will discrimination which is justifiable because of different costs of manufacture, distribution, sale or delivery of the goods. A supplier is also free to give a preferential price to meet a competitor's price.

  • Mergers Resulting in Substantially Lessened Competition

A merger is prohibited if it would have the effect, or be likely to have the effect, of substantially lessening competition in a market for goods or services in Australia or a State or Territory.

Authorisation

Certain of the restrictive practices prohibited by the TPA may be authorised by the Trade Practices Commission ('TPC'). Authorisation protects the persons engaging in the restrictive practice from prosecution. Authorisation is available for:

  • anti-competitive agreements;
  • primary boycotts;
  • exclusive dealing;
  • third line forcing; and
  • mergers,

but not for:

  • misuse of market power;
  • resale price maintenance;
  • price discrimination; and
  • price fixing agreements.

Penalties

Various penalties and remedies may be sought for a breach of the restrictive trade practices provisions of the TPA. These include:

  • monetary penalties (of up to $10 million for companies and $500,000 for individuals);
  • injunctions;
  • damages;
  • divestiture of shares or assets in the case of prohibited mergers; and
  • ancillary orders of various kinds to remedy the loss or damage suffered including specific performance, rescission and variation of contracts, damages and orders to provide repairs and spare parts.

c. Unfair Trading Practices

Prohibited Practices

  • Misleading or Deceptive Conduct

This is an extremely wide prohibition. Whether or not particular conduct is misleading or deceptive is a matter of fact to be determined by the overall impression conveyed. Conduct includes omissions. Examples of such conduct include fine print terms and conditions (particularly where these are in the form of exclusions or disclaimers), general terms of trading, failure to inform consumers of variations to price, the use of out-of-date promotional material, undisclosed cancellation charges and undisclosed extra charges.

  • Unconscionable Conduct

When supplying consumer goods or services, companies must not behave unconscionably'. Examples of unconscionable conduct include high pressure sales techniques; harassment; use of standard form contract which leave no room for negotiation; and taking advantage of people who for various reasons (such as inability to speak English well) are not able to understand the extent of their obligations.

  • Specific False or Misleading Representations

The TPA prohibits misrepresentations about:

the attributes of goods or services (such as the standard, quality, value, grade, composition, style, model or history);

whether goods are new;

the agreement of a particular person to acquire goods or services;

the sponsorship, approval, performance characteristics, accessories, uses or benefits of goods or services;

the sponsorship, approval or affiliation of the supplying company;

the price of goods and services;

the availability of repair facilities or spare parts;

the place of origin of goods;

a buyer's need for goods or services; and

the existence, exclusion or effect of any condition, warranty, guarantee, right or remedy.

  • Misleading or Deceptive Conduct as to Employment

Conduct which misleads or deceives as to the availability, nature, terms or conditions or any other matter relating to employment is prohibited. Risk areas include the content of advertisements for personnel, what is said or left unsaid at interviews and representations as to salary, promotion prospects, level of seniority and general working conditions.

  • Other Unfair Trading Practices

Other prohibitions include:

the failure to specify the full cash price for goods or services when part of the price is advertised;

the offer of bogus gifts and prizes;

bait advertising, ie. advertising goods or services at a specified price if there are reasonable grounds (of which the trader is aware or should reasonably have been aware) for believing that the trader will not be able to supply those goods or services at that price for a period that is an in quantities which are reasonable in the circumstances;

referral selling, ie. inducing customers to buy goods or services by offering a rebate or commission in return for giving the seller the names of prospective customers if the rebate or commission is contingent on an event occurring after the sale;

accepting payment without intending to supply as ordered or without having reasonable grounds for believing that the seller can supply as ordered;

misleading representations about the profitability or risk of work-at-home schemes, or a scheme which requires investment of money and associated work by the investor;

harassment and coercion;

pyramid selling, ie. the promotion of schemes in which a person makes payment to a corporation with the prospect of receiving payment for the introduction of other participants to the scheme;

sending unsolicited credit cards; and

demanding payment for unsolicited goods or services.

Penalties and Remedies

Various penalties and remedies are available for breach of the unfair trading provisions of the TPA including:

monetary penalties (of up to $200,000 for companies and up to $40,000 for individuals);

injunctions;

damages;

corrective advertising; and

ancillary orders to remedy the loss or damage suffered including specific performance, rescission and variation of contracts, damages and orders to provide repairs and spare parts.

d. The Structure of the Act

Application of the Trade Practices Act

For Constitutional reasons, the primary application of the majority of the Act is to corporations ('corporation' being defined in Section 4(1) of the Act to mean a body corporate that is a foreign corporation, a trading corporation formed within Australia, a financial corporation formed within Australia, a corporation incorporated in an Australian Territory, or a holding company of a body corporate of one of these kinds).

It should be noted that the word 'person' as used in the Act includes corporations as well as natural persons.

Some provisions of the Act extend the operation of the Act to non-corporate persons in certain circumstances as permitted by the Constitutional heads of power.

Section 2A(1) Application of Act to Commonwealth and Commonwealth Authorities:

This subsection provides that the Act:

'binds the Crown in right of the Commonwealth in so far as the Crown in right of the Commonwealth carries on a business, either directly or by an authority of the Commonwealth.'

The Commonwealth and each of its authorities, in so far as they carry on businesses, are to be treated as if they are corporations (subsection 2A(2)). However, Subsection 2A(3) provides that the Crown in right of the Commonwealth will not be liable to be prosecuted for an offence under the Act.

The Act does not currently apply to the Crown in right of the States, or to Authorities of the States, being Authorities which are, by virtue of the legislation under which they are established, entitled to Crown immunity. It can be difficult, however, to determine which State authorities are entitled to that immunity.

Section 6 Additional operation

  • Most of the provisions of the Act are extended to apply to conduct engaged in by all persons in trade or commerce between Australia and places outside Australia, among the states or territories, within a territory, or by way of supply of goods or services to the Commonwealth or an authority or instrumentality of the Commonwealth.
  • Part IV(A) (unconscionable conduct) and some of the consumer protection provisions apply to conduct engaged in by all persons to the extent to which the conduct involves the use of postal, telegraphic or telephonic services, or a radio or television broadcast.

4. Hilmer Report Recommendations on Part IV of the Trade Practices Act

The Hilmer Committee was generally satisfied with the Part IV conduct rules, and its recommendations for change can be regarded as refinements rather than substantive change. These recommended refinements include:

  • removing the capacity for price fixing agreements relating to services to be authorised;
  • third line forcing (a requirement that a third party's product be brought in conjunction with the seller's product) should be treated in the same way as other forms of non-price agreements and be prohibited only if it substantially lessens competition;
  • allowing resale price maintenance to be authorised; and
  • repeal of the outright prohibition on price discrimination, so that it would be prohibited only where it contravenes the general prohibition against agreements which substantially lessen competition or where it represents a misuse of market power.

The key issue concerning the competitive conduct rules is the proposed extension of the Act to currently exempt areas.

The full set of recommendations in relation to the Trade Practices Act are listed below.

a. Content

Price Fixing Agreements

  • Currently, agreements between competitors to fix prices are prohibited per se, ie. without the need to prove their effects on competition. Joint venture pricing, price recommendation agreements between 50 or more persons and buying groups' pricing are exceptions to the per se prohibition, but are prohibited if they substantially lessen competition. Authorisation is not available for price fixing agreements involving goods but is available in relation to services and the three forms of price agreements excepted from the per se prohibition.
  • The Report recommends per se prohibition of price recommendation agreements. Authorisation would not be available for any price fixing agreement involving goods or services, except in relation to recommended price agreements between 50 or more persons, joint venture pricing and buying groups' pricing. The joint venture provision would be subject to minor technical clarification.

Other Horizontal Agreements

No changes are proposed in relation to other (non-price) agreements between persons operating at the same level of the production chain. In general, these are prohibited if they substantially lessen competition, although different tests apply in relation to the boycott provisions.

Misuse of Market Power

  • After a thorough appraisal of alternative approaches, the Report proposes the retention of the existing provisions which prohibit the taking advantage of a substantial degree of market power for certain proscribed anti-competitive purposes.

Non-Price Vertical Agreements

  • Vertical agreements are those in which firms at one stage in the production process impose restrictions on the conduct of firms at another stage. In general, non-price vertical agreements are only prohibited if they substantially lessen competition. Authorisation and notification are available to obtain exemption from the prohibitions. One class of agreements, known as 'third line forcing' (a requirement that a third party's product be bought in conjunction with the seller's product), is subject to per se prohibition. Notification is not available for third line forcing, but authorisation is.
  • The Report proposes that third line forcing be prohibited only if it substantially lessens competition, and that notification be available. It also proposes that the provisions dealing generally with vertical agreements be extended to apply to transactions involving the re-supply of services.

Resale Price Maintenance (RPM)

  • RPM is the practice whereby a supplier requires retailers to sell at or above a minimum price. RPM is currently prohibited per se, but only in relation to goods. The Report proposes that the prohibition extend to transactions involving services and, recognising that in some circumstances RPM can be in the consumer's interest (eg. where it encourages after sales service), proposes that the authorisation be available.

Price Discrimination

  • Currently, firms may not charge different prices to different purchasers of goods of like grade and quality if the difference in prices is of such magnitude or of such a recurring or systematic character that it is likely to substantially lessen competition. The Report proposes the repeal of this provision.

Mergers

  • In January 1993 the mergers provisions were amended to prohibit mergers which substantially lessen competition, and it was announced that a scheme of pre-merger notification would be introduced whereby firms proposing to merge would have to provide advance notification to the Trade Practices Commission (TPC). The Report recommends that any review of the merger provisions should await further experience with the practical effects of the new test.

b. Scope

There is a wide range of exemptions to the Trade Practices Act, only some of which the Report recommends should remain.

Authorisation and Notification

  • Authorisation is available for most conduct which is prohibited by the Trade Practices Act. Under this procedure the TPC may grant exemption from the Act for particular conduct if its public benefits outweigh its anti-competitive detriment. A related procedure, available in relation to certain vertical agreements, is notification, whereby firms gain immunity from the Act upon notification of their conduct to the TPC, but this immunity may be revoked by the TPC if the conduct lacks sufficient public benefit.
  • The Report recommends that the authorisation procedure should constitute the principal mechanism for granting immunity from the Act's prohibitions. It also recommends that in assessing public benefit, primary consideration be given to economic efficiency, but does not preclude the consideration of other matters. The Report suggests the waiver of recently introduced fees in appropriate circumstances, such as financial hardship.

Regulations Made under the Trade Practices Act

  • Section 172(2) currently permits exemptions from the Act to be granted by regulations made under the Trade Practices Act. These regulations may be made in relation to primary product marketing arrangements; conduct of the Commonwealth or its agencies; and certain arrangements made pursuant to international agreements between governments.
  • The Report recommends that the current regulation-making power be replaced by one that is unlimited as to subject matter but strictly limited as to duration, and proposes two years as a suitable period. The rationale for this is to provide a mechanism for responding to urgent matters, and to provide a suitable opportunity for legislation to be enacted for ongoing exemption from the Trade Practices Act, if required. It is recommended that the Australian Competition Commission (ACC the proposed successor to the TPC and the PSA) be required to monitor these regulations and publish a list as part of its annual report.

Exemption by Other Commonwealth Statute or Regulation

  • Section 51(1)(a) provides that Commonwealth Acts (other than the Trade Practices Act or Acts relating to patents, trademarks, designs or copyright), or regulations made under such Acts, may specifically authorise or approve conduct which would otherwise contravene the Trade Practices Act.
  • The Report recommends that exemptions under this provision be granted only by Acts, and not by regulations, and that such Acts expressly state that the approval or authorisation is for the purposes of s.51(1)(a). It is recommended that the ACC be required to monitor these exemptions, publish a list in its annual report, and undertake periodic reviews to determine whether such exemptions continue to be justified in the public interest. The Report suggests that the Commonwealth Government consult State and Territory Governments before exercising this power in a manner that has significant impact on their interests.

Exemption by State/Territory Statute or Regulation

  • Sections 51(1)(b), (c) and (d) currently provide that State or Territory statutes or regulations may specifically authorise or approve conduct that would otherwise contravene the Act. The Commonwealth may pass regulations which override such State or Territory statutes or regulations.
  • The Report recommends that these provisions be repealed. If the provisions are not repealed, the Report suggests that they be limited by requiring that the exemption be specified in legislation rather than regulation; that the legislation expressly state that the authorisation or approval is for the purposes of s.51(1); and that exemption could only be granted in relation to horizontal and vertical agreements of the kind currently proscribed by ss.45 and 47. The Commonwealth's power to override State action would remain.
  • States' usage of these provisions has been quite limited. In general, where anti-competitive outcomes have been desired, they have been achieved in a manner which does not contravene the Trade Practices Act. For example, State laws which prohibit professional advertising may have anti-competitive consequences. But these consequences would not result in a contravention of the Trade Practices Act if ss.51(1)(b), (c) and (d) were repealed. Professionals who refrained from advertising would do so not because of any collusive contract, arrangement or understanding or because of any misuse of market power for anti-competitive purposes. Rather, they would do so to comply with the law.
  • However, repeal of these provisions would remove some exemptions. Where an exemption is removed it would generally remain possible for affected persons to seek authorisation from the TPC on public benefit grounds.

Limitations Through Constitutional Factors

  • As currently drafted, the Trade Practices Act draws primarily upon the Commonwealth's constitutional power to regulate corporations, although it applies to unincorporated businesses to the extent that they engage in interstate or overseas trade or commerce, operate in a Territory or in so far as they supply the Commonwealth. It does not apply in relation to State banking or State insurance.
  • The Report recommends that current limitations on the Trade Practices Act arising from constitutional factors be removed. Mechanisms for achieving this by co-operative action between the Commonwealth and the States are di

Overview

Compliance

Not Mandatory

AR Details

Date Issued
Jun 13, 2014
Review Date
Jun 13, 2024
Replaces
Replaced By

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