Academic says building supplies market study isn't bold enough to bring real competition

Commerce Commission chairman John Small says he would find it difficult to recommend the Government should break-up dominant construction firm Fletcher Building on the strength of what it has uncovered in the building supplies industry.

On Tuesday morning, the Commission released its final report into the residential building supplies market. 

It found competition was being thwarted by rebates payments offered to building retailers and the regulatory system favours branded, familiar building products like those produced by Fletcher-owned firm Winstone Wallboards and its GIB plasterboard. The Commission also announced an investigation into Winstone Wallboard's rebate scheme, but the company also announced Tuesday morning it was changing it.

The Commission made nine recommendations to the Government to tackle weak competition, including introducing competition as an objective to be promoted in the building regulatory system and to create clearer compliance pathways for a broader range of key building supplies.

The Commission’s recommendations have been criticised by University of Auckland macroeconomist Robert MacCulloch, who says the Commission hasn’t gone far enough in slapping down dominant firms like Fletcher Building.

MacCulloch says Fletcher Building, which is clearly a dominant market player, should be broken up. He says the rhetoric and messaging from the Commission and politicians about dominant firms and monopolies isn’t strong enough to have a meaningful impact.

“I think it's a lack of guts to take them on, to take on the big firms …. The [market study] is just not bold enough.”

He says the Commission is “tinkering with small changes” and playing a "cat and mouse" game with dominant firms, who try to do just enough to stay out of trouble.

MacCulloch was scathing in his economics blog, Down to Earth Kiwi, saying “in some ways the firm has been the East India Company of NZ - practically indistinguishable from the government itself”.

He has been advocating for a more aggressive approach to competition in New Zealand, arguing pandemic funding through the wage subsidy, cheap access to money for banks to lend and the decision to only allow supermarkets to open while the nation was in lockdown has been a boon for the big banks, big companies and the supermarket duopoly.

In contrast, MacCulloch says the public is facing a cost of living crisis.

But Commission chairman Small rejects the Commission has a case to break up the building giant. He says it looked closely at the vertical integration between Fletcher Building and its retail arm Placemakers, and Carter Holt Harvey and its retailer Carters, and whether there was worrying conduct taking place.

“We were pretty interested to see whether there was any evidence of that kind of conduct. And there wasn’t.”

He says the Commission would only recommend a firm be broken up if that was obviously the best way to improve competition.

“As an economist I would find it really difficult to make that recommendation that we’ve crossed that line.”

Small said he wanted to be clear that he’s not saying the Commission would never make such a recommendation, but the hurdle to do so is “quite high”.

Instead, the commissioner pointed to other interventions the regulator makes that he said contribute to better competition. For example, Small said the Commerce Commission could tell a company considering acquiring another firm that it might have to divest assets, such as in the Z Energy takeover which saw the Gull petrol chain sold off.

He also rejected the claim the Commission wasn’t gutsy enough to take on big firms.

“We routinely take on big companies all the time, prosecuting them and securing penalties. Recent examples include most of the big banks, Vodafone, and we are regulating some of the world’s largest companies, Visa and Mastercard.”

Commerce Minister David Clark said the Government would take action on the recommendations to increase competition and bring down costs for consumers, and expected to make an announcement of its next steps by March 2023.

National Party commerce spokesperson Andrew Bayly said the only disappointing thing about the study is that it is going to take the Government so long to consider the recommendations, a complaint echoed by MacCulloch.

Bayly said National supports the recommendations of the Commerce Commission and it is important that more innovative products and systems are able to be used in New Zealand. 

“We are also supportive of offsite manufacturing and allowing iwi to more easily consent houses on iwi land.”