Government Minority Report
Introduction
Terms of Reference
On 03 February 2010 the Senate referred the following matter
to the Senate Economics Committee for inquiry and report.
The purpose of the inquiry was to investigate and report on
the current circumstances of issues surrounding access of small businesses to
finance, including:
(a) the costs, terms and
conditions of finance and changes to lending policies and practices affecting
small businesses;
(b) the importance of reasonable access to funding to support small business
expansion and the sector's contribution to employment growth and economic
recovery;
(c) the state of competition in small business lending and the impact of the
Government's banking guarantees;
(d) opportunities and obstacles to other forms of financing, for example,
equity to support small business 'start ups', liquidity, growth and expansion;
(e) policies, practices and strategies to enhance access to small business
finance that exist in other countries; and
(f) any other related matters.
Members of this minority report note that the Government
recognises the important contribution small businesses make to national
prosperity and supporting jobs. During the onset of the global financial
crisis, most small businesses managed to maintain services and production while
retaining staff. Evidence suggested that hours of employees were reduced, but
there were relatively few retrenchments.
Nevertheless government members had many reports of
difficulties for small business in obtaining finance, even for rollovers of
existing loans for firms that had a good credit track record.
We note that the government supported small business in a
number of ways during the global financial crisis. This took a number of
different forms, including reducing financial pressures, providing up to date
information and taking measures to improve the availability of finance through
financial intermediaries.
The Government's support for small business
1 Availability of finance
The Government senators recognise that the Treasurer's announcement
in October 2009 of an extension to the Government's investment in Australian
residential mortgage-backed securities (RMBS), further supports banking
competition.
The Government directed the Australian Office of Financial
Management (AOFM) to provide a further $8 billion of support to new issuances
of high-quality RMBS.
In making this announcement, the Treasurer specified the
additional objective of supporting small businesses year. This was highlighted
in Treasury's submission to this inquiry:
"The extension to the RMBS program includes an
additional objective of supporting lending to small businesses. Consequently,
lenders who seek support under the RMBS program are encouraged to outline how
active they are in lending to small business and to allocate part of the
proceeds raised under the program to lending to small business. This is one of
the factors that the AOFM assesses when deciding whether to support an RMBS deal.
To date, AOFM’s investment of just under $1 billion of the
additional $8 billion has allowed lenders to raise around $4.6 billion in
funds. Based on information provided by these lenders to the AOFM, it is
expected that over $400 million of these funds will be lent to small
businesses."[1]
CEO of smaller lender RESIMAC, Mr Warren McLeland, recently
advised the Government that its support for the RMBS market has "been
vital to permitting a continual flow of finance to the small business
community."[2]
Mr McLeland said that "without such support, there
would be literally thousands of Australian small business owners who would have
been deprived access to finance." He stated that this included a range of
small businesses like those in plumbing, paving, dry cleaning and restaurants.[3]
The company rate will be reduced to 29 per cent in 2013-14
and then cut it further to 28 per cent from the 2014-15 income year.
2 Small Business Tax Break
The Committee heard that the Government provided direct
assistance to small businesses through a special small business tax break.
Small businesses were able to claim an additional 50 per cent tax
deduction for eligible assets costing $1,000 or more, purchased between 13 December 2008 and the end of 2009, and installed before the end of 2010. The 50
per cent tax break was available to small businesses with an annual turnover of
less than $2 million.
This is supported by the Treasury's evidence given in their
submission to the inquiry: "The Commonwealth Coordinator General’s report
on the progress of the Economic Stimulus Plan to 31 December 2009 stated that
‘$2.4 billion in deductions have been claimed to date under the Small Business
and General Business Tax Break.’"[4]
The tax break provided small businesses with an ability to
invest in new capital items, such as computer hardware and business vehicles,
and to undertake capital improvements to existing machinery and equipment.
3 Tax adjustment to provide cash flow relief
during 2009-10
Maintaining cash flow is vital to the viability of small
businesses. To help boost cash flow, the Government reduced quarterly
pay-as-you-go (PAYG) instalments for small businesses during 2009-10.
This $720 million in cash flow relief for 2009-10 came on
top of the boost provided by the Government's discounted December 2008 quarter
PAYG instalment, giving a further benefit for small businesses in difficult
economic times.
4 Economic Stimulus Plan
Although an economy wide measure, small businesses benefited
significantly from the Government's $42 billion Nation Building – Economic
Stimulus Plan introduced to support jobs, build infrastructure and invest in
long-term economic growth. Around 70 per cent of the stimulus plan is
investment in nation-building infrastructure. Tradesmen, other independent
contractors and small business suppliers benefited from this investment in
local infrastructure.
5 Assistance from the Tax Office
As part of the May Budget, the
Government provided $100 million over four years to the Australian Tax Office
to assist small businesses and other taxpayers experiencing financial distress
to remain viable and in the tax system. To assist small businesses that are
having difficulty meeting their tax obligations, the Tax Office’s Small Business Assistance Program works with individual
small businesses to help them meet their obligations
In addition, small businesses with
short-term cash flow problems were permitted to have the due date of their
quarterly or annual tax activity statement payments (e.g. PAYG and GST
instalments) extended for up to two months.
6 Small business advice and support
The Government invested $42 million to enhance small
business advisory services. The service was provided through the existing
Business Enterprise Centres on matters such as developing business plans,
preparing applications for finance and cash flow.
The Small Business Support Line,
launched by the Government on 3 September 2009, provides initial advice to
small business owners and puts them in touch with specialist advisers on
matters such as obtaining finance, cash flow management, retail leasing,
diagnostic services, promotion and marketing advice, and personal
stress/hardship counselling. Support Line advisers link into the nationwide
network of Business Enterprise Centres and other small business advisory
services around Australia.
The existing Small Business Credit
Complaints clearing house has been integrated as part of the service. Issues
are referred to the Australian Bankers Association for a response.
Reserve Bank of Australia
We note the Reserve Bank of Australia’s submission to the
Committee:
“Lending to small businesses has been little changed over
2009, after growing steadily over prior years. The slowdown reflects both
reduced demand from small businesses and a general tightening in banks’ lending
standards. Small businesses in most industries have been able to access funding
throughout the financial crisis,
albeit on less favourable terms than previously.
Since late 2008, the interest rates on small business lending
have been below their averages over the past decade, as the large net reduction
in the cash rate has more than offset the increases in banks’ lending spreads.
Fees have risen, but for most businesses they are only a small part of the
overall cost of a loan.
Competition in the small business lending market has eased
from the strong levels just prior to the onset of the financial crisis, but should recover as the economy
continues to strengthen.”[5]
According to the RBA, "Small business borrowers have
faced lower loan-to-valuation ratios, stricter collateral requirements and
higher interest coverage ratios."[6]
This is consistent with Australia and the world experiencing
the worst global financial crisis in 50 years.
International Regulation
In asking questions of the National Australia Bank (NAB),
Senator Pratt raised the issue of the significance of international Basel II
Capital adequacy rules. She expressed her concern that these rules encourage
banks to favour residential mortgage lending over business lending. She sought
information as to how significant those rules are in the situation that small
businesses currently face.[7]
Mr Joseph Healy, Group Executive, Business Banking, NAB,
responded: “As I mentioned, Basel II makes it more attractive for banks to lend
for household mortgages than to business. If you look at the amount of lending
into the household sector over the last twelve months, as opposed to the
business sector, that will give you an answer to that question. I do not
believe it is necessarily a question of one or the other...”[8]
Reduced Competition
Senator Pratt expressed her concern in relation to the major
banks understanding the nature of farming businesses with the National
Farmers' Federation:
“Clearly the more the banking sector understands the nature
of farming businesses, the better it can be at lending. It does appear here
that we are risk of losing a specialist service, resulting in further
consolidation to the four big banks from the loss of expertise, and emphasis on
it at the ANZ.”[9]
In his opening statement, Mr Peter Anderson, Chief
Executive, Australian Chamber of Commerce and Industry, in his opening
statement before the committee commented: “It is also worth noting that just a
couple of weeks ago, on 8 April, the Australian Bankers Association, in
responding to a report by the Australia Institute, said in a public statement
that close to 60% of banking fees are not paid by households but by businesses
– in other words, we have seen, and our submission points to, the fattening of
margins by retail banks at the expense of small business lending. It is not
just margins in terms of repricing credit; it is margins in terms of a range of
other fees and costs imposed on customers.”[10]
This view was partly shared by Mr Steven Munchenberg, Chief
Executive Officer, Australian Bankers Association:
“...However, we are aware that there has been a number of
concerns expressed for some time now about both access to finance from the
banks but also the price that small businesses are paying for that finance. In
the large part we think these concerns are based in changes that banks have
reasonably and prudently made in their approach to lending through the course
of the global financial crisis,.....Nonetheless, the banks have stood by their
small business customers and, indeed, have picked up a lot of customers from
lenders who are no longer operating because of changes in credit markets.”[11]
Senator Hurley,
in raising the issue of competition between banks to Mr Jim Murphy, Executive
Director, Markets Group, Treasury. “..in terms of competition between
banks, is it the smaller banks or the smaller institutions that loan more
readily to small business or take the risks?”[12]
Mr Murphy in response stated:
“There are two aspects of that. One, the large majority of
funding for small business will come from the major banks. The second point is
that, yes, the fringe players – or non-banks or finance companies – have
traditionally lent to the riskier end of small business or the riskier end of
business. So to some extent both factors have worked against small business in
a downturn; whereas both factors will come back into play to assist small
business because all financial institutions are there to make a profit. So, as
the economy picks up, they will probably start lending more to small business –
this is the majors – and as well as that, drop the price of it, one would
hope. Also as the economy picks up, the smaller players will come more into
operation and become more available for lending to small business.”[13]
"As the economy strengthens, competition for business
lending is likely to pick up; there are already some signs of this in the
Reserve Bank’s liaison with medium and large sized businesses." (See graph
below) [14]
Mr Graham Johnson, General Manager, Industry Technical
Services, Supervisory Support Division of the Australian Prudential
Regulation Authority responded to whether or not small business is being
treated differently:
“I think there are two dimensions to that. One is the demand
for credit, particularly after the GFC. Having gone through a period of
economic stress like we had, from the evidence available to us, businesses as a
whole had less demand for credit. The large end of town, for example, was
raising equity and deleveraging, and the smaller end had a fall-off in their
approaches to the banks and other lenders for loans.
On the supply side, after something like the global financial
crisis, the increase in arrears rates and non-performing loans, the authorised
deposit-taking institutions and other lenders actually tightened up their
lending terms, as would be expected after something like the global financial crisis.
The ADIs did things like reducing the maximum loan they would give to
particular classes of borrower, they lowered maximum loan to valuation ratios,
had higher interest coverage ratios—those sorts of things—to tighten up their
terms, with more stringent covenants, and hence there was a drop-off in the
available supply. From that point of view, there were two elements—a demand
impact and a supply impact. I do not really know which one dominated.”[15]
In response to further questioning regarding the ease of
obtaining credit prior to the GFC, Mr Johnson responded:
“I think that is a fair characterisation. Prior to the GFC
the spreads on lending were probably the lowest they had been for the
statistics that had been collected. There had been 15 years of economic good
times, and non-performing loans were at historical lows. I think there was a
movement towards lending perhaps without the risk based pricing that should
have really been there just prior to the GFC hitting, and then there was the
correction after that. Our view is that probably we will not go back to the low
spreads that we saw just prior to the global financial crisis.”[16]
In response to a question from Senator Pratt concerning the
permanent tightening on lending based on authentic risk assessment, Mr Johnson
commented that:
“...lending conditions go through a cycle. They tighten when
things get like they have been. As things improve and the outlook gets better,
the loan to valuation ratios, maximum loan terms and those sorts of things will
probably move back to closer to what they were.”[17]
Recommendation from Majority Report
6.3 The Committee recommends that the Trade Practices Act be
amended to reinstate specific anti-price discrimination provision and inhibit
firms achieving market power through takeovers or abusing market power and that
‘market power’ be expressly defined to that it is less than market dominance
and does not require a firm to have unfettered power to set prices. A specific
market share, such as, for example, on third (set based on international
practice) could be presumed to confer market power unless there is strong
evidence to the contrary.
Discussion
This recommendation combines a number of issues that are
dealt with separately under the TPA; firstly whether a firm has market power
which it misuses, secondly whether a firm misuses this market power to price
discriminate in an anti-competitive way, and thirdly what role the TPA should
play in limiting takeovers which will result in market power.
While related, these concepts may be better addressed as
discrete but interconnected topics.
Abuse of market power
- Section 46 in its current form captures those circumstances which
the Committee’s draft recommendation appears to be targeted towards.
- Through amendments made to the TPA in 2007, section 46 currently
states that a firm can have a substantial degree of market power even where it
does not substantially control the market, and does not have absolute freedom
from constraint by the conduct of competitors, and that more than one
corporation may have a substantial degree of power in a market.
- It is unclear whether the Committee is recommending the
introduction of a trigger point, such as a predetermined market share, to
act as a threshold for investigation, or whether the Committee seeks to go
further than a trigger by recommending that a market share be determinative of
breaches of various provisions of the TPA.
- The ACCC already considers market share when determining whether
a corporation has a substantial degree of power in a market. It is not clear on
what basis the inclusion of a requirement to do so would alter the assessment
of possible breaches of section 46.
- There is a risk that the introduction of explicit consideration
of market share may reduce consideration given to other equally or more
important factors, and that it may reduce the consideration given to those
firms whose market share is below the threshold, despite the possibility that
even low market share firms may have market power.
- Market share as an indicator of market power will vary in each
market, for example it is possible a firm may have market power while having a
share of the market in the range of 15 per cent, and similarly, a firm may have
no market power despite having a share of the market greater than 50 per cent.
- It is also important to note that in addition to market share not
necessarily indicating market power, the existence of market power is not an
abuse by itself. The firm must take advantage of that power for a prohibited anti-competitive
purpose for a breach to occur.
Price discrimination
- In 1993, the Hilmer Committee recommended that section 49
(prohibiting price discrimination) of the TPA be repealed. This recommendation
was accepted and section 49 was repealed in 1995.
- The concern was that section 49 generally discouraged competitive
prices and so worked against economically efficient outcomes.
- The Hilmer Committee concluded that price discrimination
generally enhances economic efficiency, except in cases which might be dealt
with by section 45 (anti--competitive agreements) or section 46 (misuse of
market power).
- The Hilmer Committee's recommendation echoed the concerns of
previous inquiries, including the Swanson Review in 1976 and the Blunt Review
in 1979.
- The Blunt Committee’s terms of reference required it to explore
avenues for improvement of the market position of small businesses.
Notwithstanding this, it recommending a repeal of section 49.
- The Dawson Review (2003) supported the findings of the Hilmer
Committee and concluded that no changes should be made to the TPA in relation
to price discrimination.
- It noted that the US law governing price discrimination has been
widely criticised for being too complex, deterring price competition and
promoting price uniformity. While originally directed at large retailers, in
practice it has been applied mainly against small businesses who grant
discounts in order to compete against large sellers or those engaging in
vigorous competition.
- The Federal Trade Commission now only takes action against price
discrimination under the broader competition law.
Mergers
- The existing test already prevents the achievement of market
power through merger and acquisition takeovers as proposed in the draft
recommendation.
-
Section 50 of the TPA prohibits mergers or acquisitions that
would have the effect, or likely effect, of substantially lessening competition
(SLC) in an Australian market. The ACCC assesses each merger on its merits
according to the specific nature of the transaction, the industry and the
particular competitive impact likely to result in each case.
- The ACCC and other competition agencies consider market share as
just one part of their competition analysis in assessing the likely competition
effects of a proposed merger, while also taking into account numerous other
considerations such as the closeness of competition between the merger parties,
competition from imports, substitutes, the threat of competitive entry, the
presence of maverick firms, dynamic characteristics of the market,
countervailing power of customers, and vertical integration of the merged firm.
Focussing on market share to the exclusion of these other important factors may
obscure the true competition effects of a merger.
-
Australia’s SLC test for mergers is consistent with merger laws
in many other OECD countries including the US, Canada, UK and New Zealand.
Minority Senators' Recommendations
Recommendation 1
The government should continue to explore initiatives to support
small business by innovative measures that will assist their general financial
viability and facilitate their access to finance.
Recommendation 2
The government should continue to monitor banks’ behaviour towards
small businesses through its regulatory bodies. The government should also set
up its programs targeted to small business to allow for timely feedback on
financing and related issues, and ensure that the Minister for Small Business
has immediate access to this information.
Recommendation 3
The Government should consider an ongoing assessment of Basel II
capital adequacy rules, to ensure that capital requirements are commensurate
with real risk.
Senator Annette Hurley
Deputy Chair
Senator Louise Pratt
Senator Doug Cameron
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