This is a marriage made in hell without a fix to the policy plumbing

It may have corporate Australia on the rack, but Labor’s Future Made in Australia plan may be a triumph of hope over experience.

On Thursday, the Prime Minister outlined his vision of a bigger role for local manufacturing via his Future Made in Australia plan. Picture: NCA NewsWire/Nikki Short

Wedding bells are ringing, nowhere louder than in Anthony Albanese’s ministerial wing. When it comes to policy unions these days, Labor is committing itself to something old and something new.

On Thursday, in a sure sign of the triumph of policy hope over experience, the Prime Minister outlined his vision of a bigger role for local manufacturing via his Future Made in Australia plan. “This is not old-fashioned protectionism or isolationism,” he insisted. “It is the new competition.”

But the thinking behind this push looks borrowed even as Albanese pledges it’s true blue. And green. The global experts aren’t so sure, with the International Monetary Fund warning governments that the rapid rise in industry support in rich countries “is not a magic bullet” for growth.

The Washington-based body says poorly targeted and costly subsidies and tax breaks can harm productivity and community wellbeing. “This is frequently the case, as for example when subsidies are misdirected toward politically connected sectors,” the IMF says in its Fiscal Monitor published this week.

Productivity Commission chairwoman Danielle Wood says before making hard judgments we need to see how big any new measures may be for manufacturing, where productivity performance has been poor, and what they will target. In any case, “these subsidies will take jobs and capital investments from elsewhere in the economy where they could generate higher value,” she tells Inquirer. “In a period of tight labour markets, and many areas of growing future demand for labour, ­this compounds the costs of industry support.”

A day before Albanese’s amped-up speech in Brisbane launching the plan, Jim Chalmers proposed a set of changes to the Competition and Consumer Act, declaring them the biggest reforms to the merger regime in 50 years. The new era is scheduled to start in January 2026. It will mean the Australian Competition & Consumer Commission will be the key decision maker for future acquisitions.

The Treasurer said “by fixing the mergers regime, we make our economy more competitive”.

“If it’s more competitive, it’s more dynamic and it’s more productive and it’s better for consumers and businesses alike,” he said before delivering a speech at the ACCC on Wednesday morning.

“Most mergers are good. Most mergers are about scale. Most mergers have obvious economic benefits but there are some which are concerning, where they expand and entrench market power or where they substantially lessen competition. These reforms will mean the regime is faster and simpler, more targeted, more transparent, and stronger, but it means that good mergers can proceed quicker and concerning mergers receive a bit more robust scrutiny.”

This “new-new” in competition law is overdue and will bring Australia into line with pretty much every other rich country, where there is mandatory notification to the regulator and deals grind to a halt while the experts assess the evidence. The current process is cumbersome and as Chalmers says, hinders the path of some beneficial mergers and allows through too many that are not good for consumers or other businesses.

ACCC chairwoman Gina Cass-Gottlieb, arguably the nation’s top legal adviser to the big end of town in her private practice days, successfully made the case to the government that today’s arrangements are woefully inadequate. For instance, the watchdog is notified in 330 of the 1000 to 1500 deals done each year under the existing voluntary merger regime.

Treasurer Jim Chalmers with ACCC Chair Gina Cass-Gottlieb. Picture: NCA NewsWire/Nikki Short

As well, several serial acquisitions have slipped through the net, to the detriment of competition. Cass-Gottlieb often uses the example of pet food and vet clinic company Petstock. It was only last year when Woolworths sought approval to buy 55 per cent of the company that the ACCC discovered that since 2017 Petstock had acquired many other specialty pet retailers including Best Friends Pets, Pet City, Animal Tuckerbox and Pet & Aquarium Warehouse. It meant there were few specialty pet retailers in the way of industry giants Petstock and Petbarn.

According to Treasury’s draft proposals, “all mergers within the previous three years by the acquirer or the target will be aggregated for the purposes of assessing whether a merger meets the notification thresholds, irrespective of whether those mergers were themselves individually notifiable”.

Many observers noted the system increasingly was being gamed by the fee-chasers advising companies; the ACCC lacked the resources in lengthy wars of legal attrition.

There also was little transparency about how decisions were made. A new body of evidence will be established and that should help all parties.

For Cass-Gottlieb and Chalmers, the planets are in alignment: more competition and the promise of lower prices are in, while corporate Australia is, metaphorically, on the rack during a cost-of-living crunch. In the annals of policy supremacy, the pendulum has swung away from lawyers and the economists are feeling vindicated.

The nation’s inaugural ACCC chairman, Allan Fels, tells Inquirer the changes are “a big win for Gina and the commission”, even though Cass-Gottlieb was not able to shift the onus of proof on to dealmakers (to establish that the merger would not substantially lessen compet­ition in a market).

Nor will the commission be granted a “call in” power to review deals below the (to be determined) threshold, but may investigate those mergers for anti-competitive breaches.

Fels says ACCC losses in court have not been due to poor litigating skills but interpretation of the “substantial lessening of competition test”, which replaced the “dominance test”. The current test came into effect three decades ago, when Fels was chairman of the Trade Practices Commission, precursor to the ACCC. Judges have tended to put an emphasis on behavioural effects, as well as, or in place of, a structural test of a merger.

In hindsight, Fels says a better approach would have been to replace the dominance test with a prohibition on deals likely “to cause a substantial degree of market power or that increased market power substantially”. “Courts are good at deciding on past events, like a crime, and not so good at making decisions about a possible future economic event,” he says.

Cass-Gottlieb pushed hard for greater attention to the structural conditions for competition. Mergers, she argued, should be assessed on whether a dominant position in a market was enhanced, not simply “on the magnitude of the incremental change arising from an individual acquisition”.

Takeovers in Australia tended to be made by very large firms, she said in a speech last month. Analysis shows the largest 1 per cent of firms account for around half of all acquisitions, and merger activity by large firms has increased over time.

Chalmers has got merger policy back on track, according to Fels. Treasury’s guide to the changes says the ACCC must permit a merger to be put into effect unless it “reasonably believes that the merger would have the effect, or be likely to have the effect, of substantially lessening competition in any market, including (but not exclusively) if the merger creates, strengthens or entrenches a position of substantial market power in any market”.

The Productivity Commission’s Catherine de Fontenay says the independent adviser is in favour of the proposed reforms. “We think this is a very good change,” the commissioner says, especially the single road to merger clearance that will stop parties from gaming the system or avoiding scrutiny.

In its submission to the review, the commission suggested the current ACCC authorisation approach be extended to all clearances, so parties would have to convince the decision maker that on the balance of probabilities the deal will not or is not likely to substantially lessen competition.

De Fontenay says policy should aim to create incentives for transparency, fewer errors and more timely decisions because at present, “the firm has the information on the likely impacts of a merger and may choose to strategically withhold information”.

Fels also gives a tick to new safeguards because there will be a right of appeal, though somewhat limited to the facts already established, to the competition tribunal headed by a judge, with expert economic and business members. There’s no doubt the pressure will be on the ACCC to perform, to meet stricter deadlines, and to justify the fee recovery of perhaps as much as $100,000 a pop.

But the real test for business is determination of the thresholds that will trigger mandatory notification of a deal, with some measure of revenue likely to be the benchmark, rather than the more difficult to gauge metric of market share.

Business Council chief executive Bran Black said the government had accepted important points advocated by the lobby for Australia’s largest companies, including that there be no change to the onus of proof in the merger test, clear decision-making timelines and streamlining foreign investment competition assessments.

“This is a significant piece of reform, and we are encouraged that the government has listened to business and taken on our concerns regarding the importance of outcome certainty, timeliness and transparency,” Black said, adding more work was required on the details. “When implementing this reform, we need to ensure Australia’s merger regime doesn’t add further red tape to businesses. For example, the BCA expects to see reasonable and practical thresholds for merger notification.”

Getting this far, with big business on board to a large degree, is a testament to the Treasurer’s ability to work behind the scenes with the capital class, even as Labor has poked it in the eye repeatedly on workplace laws. More reforms have been flagged, notably on non-compete clauses that hinder the movement of talent, as well as an ambitious agenda with the states on a new era of National Compet­ition Policy that delivered a permanent increase in national income of $5000 a household according to Assistant Minister for Competition Andrew Leigh.

Chalmers seems to have found his happy place in this policy sphere, using the horsepower of Treasury, cutting-edge tools and big data sets to change the conversation on reform. The Treasurer has landed his own version of the three Ps: good process is good policy is good politics. Although, in 2024, one person’s consensus is another’s corporatist state.

Yet Albanese’s likely aggressive response to the re-emergence of manufacturing subsidies in the US, Europe and Asia involves much greater risks than in the past, where we took a huge punt against our comparative advantages and living standards tanked. Of course, this time it will be different, the Prime Minister must tell himself.

For it to work as Labor envis­ages, and not implode into the forlorn money pit of the past, there needs to be more attention to the blockages in the policy plumbing: red tape, a finance drought for young innovators, the messy skills system, failing infrastructure, dire housing shortages and a tax system that’s not fit for purpose.

Leaving those things as they are while pumping in torrents of free money to lagging industries in a clunky, low-productivity economy looks like a marriage made in hell.