Wednesday, 21 June 2017

Bums on diggers

The other day I was poring over the NZIER's latest compilation of consensus forecasts - an invaluable resource from many perspectives, not least for establishing the base scenario underpinning current financial market pricing - and I came across something really interesting*, which I've highlighted in the table below. It's the one that helpfully shows not only the consensus expectation, but also the high and low stabs at each variable.


That's a pretty remarkable range of views on the outlook for housebuilding. At one extreme you've got a scenario where - I'm abstracting here, but I think it's okay - the wind-down of the Canterbury rebuild will outweigh new housing starts in Auckland, detracting from overall GDP, while at the other end the Auckland market will go gangbusters, growing far more than Canterbury will contract, and boosting GDP.

To put some numerical perspective on it, the cumulative difference between the bullish and bearish housebuilding scenarios is $4.9 billion by March '20, which is equivalent to 2.1% of our current annual GDP. That's the difference between an expansion that's vigorous enough to keep the unemployment rate trending down, and one that would see it drift back up again.

If we assume that the wind-down in Canterbury is the relatively predictable moving part, then much of the forecast uncertainty boils down to differing views about the likely strength of house construction in Auckland. Presumably the bearish view is based on either low starts to begin with, or capacity constraints of one kind or another (labour, land, planning chokepoints) preventing potentially higher numbers of starts from getting underway.

And then this morning I saw MBIE has just published the latest vacancies data. Here it is, showing vacancies by occupation (there's a similar pattern by skill level). There's strong and rapidly increasing demand for the occupations you'd likely be looking for on the building site.


It could be that employers are having no trouble filling these vacancies: all we know for sure is that the hiring signs are out, and we don't know whether they're actually finding the people they're advertising for. And so far the Auckland numbers aren't flashing red lights: as the table below shows, Auckland is in the middle of the pack for year on year increases in vacancies.


It's also encouraging (although it was a few months back now) that the NZIER's March quarter Quarterly Survey of Business Opinion found that
Building firms...report a continued easing in the shortage of unskilled labour, although skilled labour remains very difficult to find. With the surge in net migration driven by an increase in the numbers of people coming in on work visas in the trades profession, this is helping to alleviate some of the labour shortages as construction activity continues to grow.
Though the QSBO can be read different ways: as the Reserve Bank put it in its latest Monetary Policy Statement (p21)
As suggested by the March Quarterly Survey of Business Opinion (QSBO), capacity constraints are tightening. Firms are reporting labour shortages and, more recently, some increased difficulty in obtaining finance. This appears to be related to the tightening in bank lending standards for residential property development and pressures created by rising construction costs
My instinct is that capacity constraints in Auckland are likely to be a worry. I'm not temperamentally inclined to restrict immigration in the first place, but if people are minded to, they ought to be careful about the risk of impeding the housing build we need to do, and the equally necessary infrastructure build, which calls on much the same labour force skills.

The Labour Party in its latest immigration policy at least had the wit, albeit in a clunky Gordon Brownish micromanagement way, to realise there's a potential issue here. It proposed that
Residential construction firms could hire a skilled tradesperson on a three-year work visa without having to meet the Labour Market Test if they pay a living wage and take on an apprentice for each overseas worker they hire. The number of places will be limited to 1,000 to 1,500 at a given time, which we expect will be additional to the construction work visas issued under the existing rules.
At the moment, I wouldn't give two hoots about Labour Market Tests and apprenticeship quotas. If there's an Irish lad on his gap year after secondary school, or anybody else prepared to get the roof on the house or pour the cement on a road, bring it on.

*Bearing in mind that this is an economist's idea of  'interesting'

Friday, 16 June 2017

Three cheers for the OECD

Some people wonder about the point of the OECD: an expensive talking shop? A rich countries' club? A hand-wringing observer on the sidelines? I'm generally more positive: lots of good ideas and solid research come out of Paris, even if member governments don't always pay them the attention they should.

Which even the OECD itself recognises: here, for example, is a rather sad graph from the handout that came with the OECD's latest Economic Outlook, which looks at how many of the growth-enhancing reforms the OECD has suggested that countries should undertake have actually been carried out.


Conversely, governments can sometimes smuggle policy ideas into the OECD (and the IMF, and other institutions) and can then give themselves the protective cover of "See? This isn't me and my political agenda, this is the international experts talking".

But in any event, I was delighted to see the OECD (prompted or otherwise) picking up on some good ideas about improvements to our competition policy. They're in the OECD's latest Economist Survey of New Zealand, which you can read online here.

First, they've endorsed the idea of the Commerce Commission being able to conduct proactive "market studies" in a well-designed way. As they put it
market studies...would help markets work better, especially when obstacles and distortions to competition are not caused by competition law violations...Clear definition of the purpose and goals of market studies, the involvement of stakeholders, adequate funding and the capacity to demand information (including confidential information) will be important to drive the success of this initiative (p105)
I've been banging on about this for the last couple of years (here and here and here and...) as has the likes of our Productivity Commission. This is an idea that's obvious, simple, desirable, cheap, best practice, and well-canvassed (MBIE's done an exhaustive tyre-kicking consultation), and it's high time for MBIE Minister Simon Bridges to fire the starting gun.

The OECD has also had something to say about our "abuse of market power" legislation (the vexed section 36 of our Commerce Act). It's a bit disingenuous of the OECD to say "The legislative treatment of firms with market power should be reviewed" (p106), since they must know that MBIE's tyre-kicking has included a review of s36: they probably mean it more pejoratively, with a heavy emphasis on the should. In any case they go on to say
Currently, New Zealand's (and Australia's) treatment of firms with market power is unusual. Firms are prohibited from taking advantage of market power only if they are doing so for the purpose of restricting entry, preventing or deterring competitive conduct or eliminating a competitor. Framing the law around intent can be problematic as proving the purpose of commercial conduct has proven difficult for competition regulators. In Australia amending legislation has been drafted to add a mechanism that brings firms under scrutiny based on the effect of commercial conduct on competition (an "effects test") (p106)
There must have been a very funny backroom editorial debate before they settled on our "unusual" regime: "unorthodox" and "idiosyncratic" must have been plausible contenders, but however you phrase it, we're in a policy backwater of our own, and we need to get out of it.

This isn't, to be fair, as much of a walk in the park as the case for market studies: every competition policy regime struggles with these issues. But if the general tone of the OECD's advice is, go the Aussie route with their 'Harper' amendments, I'm fully behind them, for reasons I've also been pushing over the years (especially here, but also here and here and...). Another one for Minister Bridges to put to bed. And he might as well get on with it, as we'd be better off with the Aussie scheme than the European one, which we might end up having to consider if we're serious about the proposed NZ - EU free trade agreement.

There's other good competition stuff in the OECD's report. It says
Other actions to support competition include passing the Commerce (Cartels and Other Matters) Amendment Bill, which would clarify the scope of prohibited cartel behaviour and remove exemptions from the Commerce Act that allow price fixing in international shipping. As argued in previous Surveys, the exemption from Commerce Act provisions for airlines under the Civil Aviation Act should also be revoked (pp105-6)
Totally correct. Why as a trading nation we ever thought it would be a good idea to hobble ourselves with self-inflicted impediments to our freight and tourism is beyond me. It's archaic. Archaic and benign, I quite like: Latin, organ music, stamp collecting. Archaic, inefficient, and anti-competitive, not so much.

Finally, they've got a shopping list of ideas around the Commerce Commission itself, all of which look sensible to me. They've repeated, for example, their previous advice to have "periodic independent assessments of Commerce Commission decisions" (p106). The Commission has been quite good at doing its own, even though some folks (not me) believe it's a waste of space: they say, you can't easily see what would have happened, absent the Commission's decision. It's nonetheless worth attempting, and making it independent would be an improvement.

And they've got various other good governance ideas. "There are no limits", they say on p106, "on reappointment of Commissioners, which is contrary to the OECD's best practice principles. Continuity and institutional memory would be better served through staggered terms for Commissioners and the Chief Executive". As someone who served an, um, unusually long term, I'd have hated it.

But that is why it's such a good idea.

Tuesday, 13 June 2017

The future of the telco regulatory regime

Late last week Simon Bridges, the Communications Minister, reappointed Stephen Gale for a three-year term as Telecommunications Commissioner. It's a good move: like his two predecessors, Douglas Webb and Ross Patterson, Stephen's capable, intelligent and congenial, and - belatedly - a bit of continuity could go a long way.

We've also got a clearer idea of the regulatory agenda Stephen will manage: earlier the Minister had announced the final decisions on reform of our current telco regulation regime and included a helpful Q&A thingie for the non-obsessed. True telco tragics can read the detailed Cabinet paper.

A lot of the agenda had been signalled from afar - you can follow the trail here - and there have been no major last minute surprises. We've known for a while, for example, that from 2020 Chorus and the other companies rolling out fibre networks will  be regulated as utilities, using the same sort of rate-of-return 'building blocks' regulation that has been applied to electricity lines businesses under Part 4 of the Commerce Act.

Can't say I'm enthralled by the form of regulation: it's a clunky and expensive 1950s process, and you'd think we'd have been better off with something off a more modern 'incentive regulation' menu. And as a side effect we're going to get another process where the Commission (as it currently does for Transpower) will need to approve new investments going into the regulated asset base.

I can see the rationale as an anti-gold-plating device, but government agencies choosing which private sector investment projects get the go-ahead is a bit on the medieval side for me, and is another argument for something more hands-off, with a greater role for Chorus (and others) wearing more of the downside but potentially keeping more of the winnings. But here we are. At least we won't have to reinvent the wheel as we've already given the Part 4 process a thorough going over in the courts, and if you're going to go the rate of return route, the Commission's way of going about it is as good as any.

But rate of return regulation aside, there's quite a lot to like in this policy package. There's a useful focus on rolling back regulation when it's no longer needed, most obviously deregulation of the Chorus copper network in areas where fibre has been rolled out, but also more generally. As an earlier 2016 Cabinet paper had said (reproduced in para 73 of Appendix 1 of this latest Cabinet paper)
Another important regulatory design principle is to provide for active deregulation where appropriate. I propose that the Commission be required to review whether any geographic area, service, asset or market should be deregulated prior to each regulatory reset. This would include looking at whether any competition has emerged for rural copper services such that they could be deregulated
Oddly, though, the current requirement  in s157AA to periodically revisit the Telco Act itself  has been dropped. I'm no fan of makework policy analysis, but I do wonder whether the package should have included an ongoing requirement to review the telco regime from time to time.

The two hot spots that Stephen Gale and his team will have to deal with are the wholesale mobile market, and the bunch of issues around service quality and customer complaints.

On the mobile side, there's no knock-out evidence that the wholesale mobile market isn't working as well as it might: the low level of 'MVNOs' (mobile virtual network operators, who stick their retail brand on a wholesale input they get from the big guys) is suggestive, but by no means definitive. If there are issues, the sticky points appear to be the efficacy or otherwise of colocation and roaming agreements, and the Commission is going to get a more streamlined process for more effective regulation if needs be. Currently colocation is a 'specified' service, which means that the non-price elements are set by the Commission, but it could be tightened up a notch to 'designated', which would also set the price.

The Minister said that he will "be writing to the Commission requesting that they undertake a study of the wholesale mobile market". Good. But that yet again underlines how stupid our current arrangements are on what the Commission can or cannot look at. The Telecommunications Commissioner (who is part of the Commission) must report annually on the state of the telco market. And the Minister (as he's just said he's going to) can also ask him to look at particular telco issues. But the rest of the Commission can't take a proactive look at anything else. The sooner this nonsense collapses under the weight of its own absurdity, the better.

The other hot spot is the sector's poor customer record, and that's something senior management in the industry should have thought harder about earlier on: when you have papers going to Cabinet pointing out that "The telecommunications sector generates more consumer complaints than any other sector in New Zealand", you're positively inviting the government to wade into your industry. As it has: the Commission will start reporting on the level of quality (yet another bizarre example of how it's allowed to look at some things but not others), will have the power to devise and impose codes of conduct, and will periodically review how the industry's own Telecommunications Disputes Resolution Scheme (TDRS) is travelling, with the explicit threat that it will be replaced by a new body if it doesn't hit the spot.

The Cabinet paper says (para 8) that "the current regulatory settings...are over-reliant on industry self-regulation". Maybe that's right in this case, and in any event self-regulation has been falling out of favour as a a consumer protection policy option. Personally I think it's the first option that should be on the table, not least because if there are problems, the onus for fixing them should lie on the problem-makers in the first instance. If that falls over, then of course tougher measures should follow, but we should try and make the light-touch options work first. Hopefully the TDRS will get the message.

Quite apart for doing a better job for their customers, I also think industry sectors ought to get their self-regulatory act together in their own enlightened self-interest. If, for example, the various parties in the electricity sector hadn't feuded among themselves over the shape of an industry-led Electricity Governance Board, they wouldn't have had the price control provisions of Part 4 of the Commerce Act and an Electricity Authority foisted on them.

It's only a minor detail in the whole package, but I was irritated by the flimsy rationale for hiding the increased costs the Commission would face from its new consumer roles. It can't be a huge or sensitive number - might be perhaps a couple of million dollars a year, chickenfeed in the greater fiscal scheme of things - but the dollar number has been redacted from the Cabinet paper.  The excuse is the section of the OIA that says hiding it is "necessary to..maintain the constitutional conventions for the time being which protect...the confidentiality of advice tendered by Ministers of the Crown and officials", which translates into "it's being kept secret because if we told you what we said it wouldn't be secret anymore". Give us a break: we ought to be able to see the cost of what's been proposed.

Thursday, 1 June 2017

Howzat!?

All over New Zealand there are High Court judges cowering in corners, whimpering "please don't let it be me, please don't let it be me..."

Because someone's going to get lumbered with the Sky TV / Vodafone appeal against the Commerce Commission, while someone else is going to draw the short straw for the NZME / Fairfax appeal. You can imagine the goss over the G&Ts in the beaks' bar: "There'll be economists. And counterfactuals. And TSPs and two-sided platforms and a UFB. Why me?"

The Skyfone one shouldn't be too bad. It's essentially a "yes it is", "no it isn't" kind of argument: how could the Commission have drawn the conclusions it did from the evidence it considered? However it goes, I doubt that it's going set any big precedents for how the Commission interprets the Commerce Act.

There is one line of argument that might say something about how the Commission should go about assessing the "likelihood" of counterfactuals. For those fortunate enough not to follow these kinds of cases, the Commission assesses the effect of things like a Sky TV / Vodafone merger by comparing it with what would have happened in any event otherwise (the 'counterfactual'). Sometimes that's not clear: there might be several different but plausible things that might happen. And in that case, as para 2.32 of the Commission's  Merger and Acquisitions Guidelines says, my italics,
If competition would be substantially lessened in the scenario with the merger compared to any one of those likely states of competition without the merger, then the merger will have a likely effect of substantially lessening competition.
The Skyfone appeal argues (at 2(I)(iv) on pp7-8) that the Commission
Failed to stand back and consider whether each of the preconditions for the Commission’s theory of harm would all be likely to occur – which would have led the Commission to conclude that the cumulative probability of these preconditions occurring is remote.
That's a plausible runner about the likelihood of the counterfactual world, and we'll see how it is received. Overall though I'd say the appeal will face heavy going: as a general rule arguing that an expert tribunal has ballsed up its day job isn't the easiest thing to push uphill. But everyone's entitled to have a go, and in Sky TV's case, it's a completely rational thing to do. Sky TV lost some $220 million in market value after the merger decline was announced (share price from $4.35 to $3.78, times 389.1 million shares, equals $221.8 million). That's worth spending quite a bit, even on a long shot, to regain.

The NZME / Fairfax one will be trickier. It does have the same "yes it is", "no it isn't" components that Skyfone has, particularly around the issue of what markets are affected, but it could also lead to new case law on the Commerce Act, and it also questions the Commission's processes.

On the factual bunfight, the Commission said, for example in para 628 of its final decision, that there were three affected markets: online New Zealand news, Sunday newspapers, and community newspapers. The appeal says that each of these should have specifically been analysed as a two-sided market (readers on one side of each platform, advertisers on the other), and that on a proper view of the evidence there would be no loss of competition in any of them. The appeal also runs an alternative line that there might be a single two-sided market for everything: I wouldn't bet the house on that one, guys.

The appeal raises some wider issues. The big one is what should be counted as benefits or detriments, and how. The Commission had said that the big downside would be the loss of editorial diversity, a 'loss of plurality' from two big media groups merging. I had no trouble with that: as I argued here, a loss of product range options can clearly be seen as a consumer detriment. And even if it couldn't, I'm with the Commission when it said (at X39, my emphasis) that "it is clear from previous legal cases and common sense that we can and should take all the consequences of the merger - positive and negative - into account". But it didn't help (although what it said was in my view absolutely right) that the Commission looked as if it was philosophising on what is or is not an essential bit of the social infrastructure of a democracy.

That's been seized on in the appeal, where para 16 argues that the Commission must stick to the economics, and that (as case law puts it) it mustn't go in for "pure speculation" or "mere intuition". Para 17 goes on to say that even if the Commission is allowed to count things like plurality, it didn't do it right, and that other benefits (mostly cost savings) outweighed any plurality losses.

It doesn't throw in (as I would have) that the Commission didn't have any go at quantifying what the plurality loss might look like: the Commission said at para 1654 that "Such effects are unable to be quantified". And it would have been a heroic exercise, yes, we know that. But absent some numbers, an appeal could argue, "The Commission says the loss is significant. It says that implicitly it must be more than $200 million, the top end of the potential benefits. But how does it know? For all the Commission knows, the loss could be big, like the Commission says - $150 million maybe - but that would be less than the benefits. So how does it know the loss is more than $200 million?"

There are also some questions around the Commission's processes. Some of them look unfounded: "granting extensive anonymity and confidentiality to a large number of third parties submitting in opposition" doesn't fly for me, on either the facts or the logic. But there's possibly a more substantive point where the appeal says, you sprung a big surprise on us very late in the day about what counterfactual you had in mind. From the outside it's hard to tell exactly what's going on there, though there was a late flurry of correspondence between the Commission and the applicants well after the Commission's conference last December, which was somewhat unusual. Nobody - including the Commission - wants a process that doesn't tickle out all the evidence and give it a fair go, so the court running a health check on how it operates may be quite a good thing.

There's also an "appearance of predetermination" argument. As an article by Nick Grant in the NBR surmises ('NZME, Fairfax 'go full noise' with StuffMe appeal') it might be a complaint about an ill-judged 'StuffME' hashtag the Commission briefly used: not as professional as it should have been, but not a hanging matter, either. I doubt if it was enough to taint the whole proceedings.

We can't see everything - there's a wholly blacked-out bit in paragraph 19(c), for example, in the 'Natural justice and fairness' section of the NZME / Fairfax appeal - but on what we can see, what are the umpires likely to do with these appeals?

I'll be surprised if I see the Commission trudging back to the pavilion.