Comment

The crippling cost of bureaucracy

Eric Crampton hopes that someday the Commerce Commission will use its market studies powers to investigate the anticompetitive effects of Government (and council) regulation on our land and housing markets, construction industry, professional services, and even the cost of pharmaceutical products.

Suppose I told you that anticompetitive activity right here in New Zealand was behind a transfer of wealth amounting to, at the very least, hundreds of billions of dollars. 

The victims of the cartel are New Zealand’s poorest, who have had to endure hardship so substantial that its effects are directly visible in New Zealand’s poverty and material deprivation statistics. 

It affects everyone. It is even part of the explanation for New Zealand’s poor productivity performance. 

But it is not even on the radar of the Commerce Commission, even though the effects hit the headlines daily. 

Doing something about it would require taking seriously the root cause of the most substantial barrier to competition – across a whole range of markets.

When I studied antitrust in graduate school, some time ago now, we learned that one of the easier ways of proving cartel activity was documenting the cartel’s enforcement mechanism. 

Why? Cartels are hard to maintain. Every member of a cartel has an incentive to defect on it: the high prices caused by cartel activity bring a powerful motivation to surreptitiously chisel on the cartel arrangements. 

A good enforcement mechanism can make the cartel more durable, but also increases the risk of the cartel being discovered and prosecuted. 

But the very best cartel enforcement mechanism is also one of the simplest to maintain, once established. It can hide in plain sight. It will even be defended by those who would otherwise be the first to call for severe and punitive enforcement against other anticompetitive activities.

It also seems to make these odd cartels immune to Commerce Commission investigation or prosecution – unless you share my hope that, someday, the Commerce Commission will use its market studies powers under Part 3A of the Commerce Act to investigate the anticompetitive effects of government (and council) policy and regulation on New Zealand’s land and housing markets, on the construction industry, on professional services, and even on the cost of pharmaceutical products.

This week’s case in point is Auckland Council’s rules around naming roads – all hiding in plain sight, unseen by anyone other than those who ever try to build anything. 

The constellation of council rules and processes, and central government incentives ensuring that those rules and processes are in the best interest of growing councils, are a substantial restraint on competition and new housing supply.

You might have thought that while there should be some process around naming motorways, private developers putting in roads on their own smaller developments should be able to just pick road names – so long as those names did not duplicate ones already in existence elsewhere in town. The developer has every incentive to avoid horrible names because the developer wishes to maximise the selling price of houses in the development. No sane system would load a pile of compliance costs onto the naming of minor roads – and certainly not in a city with a massive housing shortage. 

If only. 

The Taxpayers Union’s Louis Houlbrooke pointed last week to the actual rules, and their effects. According to Houlbrooke, the Williams Corporation has been trying to build seven townhouses in Te Atatu, with a footpath connecting the seven units. A path connecting more than six units is counted as a road.

Auckland Council’s Road Naming Guidelines run to 16 pages and include community consultation, mana whenua engagement, a pre-application name check, mana whenua feedback and more. The guidelines suggest that road name approval be obtained prior to lodging a section 223 survey plan: something that happens after a subdivision is consented but before any building can take place. 

Houlbrooke notes that local board signoff on the developer’s prepared report provides an opportunity for board members or others wishing to hold up a development to obstruct things, and notes that the process can take nine to twelve months. Capital holding costs over that kind of period can obviously be substantial. 

Think about the worst name that you can imagine a developer slapping onto a road, while keeping in mind that the developer actually wants to sell houses. Is there any way that avoiding that particular name is worth the cost of Auckland Council’s road naming processes? Would avoiding that bad name really require stages of community and mana whenua consultation, or would a simple technical check that the road name has not already been used elsewhere and doesn’t breach any of the technical requirements of road names suffice? 

The simplest explanation for Auckland Council’s rule, when viewed in conjunction with the plethora of other rules that delay and hinder the construction of new housing, is that delay and process cost is deliberate. They work to prevent new housing coming to market. If that were not the intention of the rule, rather than an unfortunate side-effect, why couldn’t any road name approval process run at the same time as landscaping and construction?

And if the problem is simply that one developer has not found the regulatory process workaround that others have found, would that not also be evidence of a barrier to competition and entry?

The constellation of council rules and processes, and central government incentives ensuring that those rules and processes are in the best interest of growing councils, are a substantial restraint on competition and new housing supply. The distortions caused by that set of rules, according to economist Peter Nunns, add $1,015 to the cost of a square metre of land in central Auckland – and have cost the country between 1 and 5 percent of GDP in lost productivity. 

Either New Zealand has happened accidentally upon just the set of council rules that makes it almost impossible for housing supply to keep up with demand, and upon the set of incentives from central government ensuring those rules’ endurance, or there is something more systematic about things. Sets of rules with this systematic of effect in restraint of competitive land supply would seem ample cause for Commerce Commission investigation – if the activity were undertaken by the private sector rather than government. 

If private cartels had ever worked to comparable effect, there would be deserved public clamour for the jailing of those responsible under the recent amendments to the Commerce Act, consequent to investigation of the cartel under a Commerce Act Part 3A market study. 

But can you even imagine the Commerce Commission setting Part 3A investigation of the extent to which the state is responsible for any of the country’s anticompetitive ills? 

It is not hard to come up with a list of places to look.

For example, what are the combined effects of New Zealand’s building materials certification regime when combined with council incentives under joint-and-several liability? Is there any good reason that it would be rather difficult to import and use building materials from trustworthy, comparable places like Vancouver, Seattle or Tokyo? 

What are the effects of zoning on substantial competition in retailing? Is it even possible for any new larger-footprint retail players to emerge given existing zoning restrictions? Isn’t the simplest explanation for decades of minimum parking rules that those rules raised the cost of entry for potential competitors?

We regularly hear complaint about lack of competition in banking and insurance, but nobody seems particularly keen on looking seriously at the legislative and regulatory barriers that would face new entrants. If there are large excess profits to be had in serving the New Zealand market, why is no one picking up those twenty-dollar bills sitting on the sidewalk?

America is seeing interesting new players in insurance. Lemonade, for example, runs insurance on an entirely different model where the insurer makes its money through a monthly fee. What would a market study reveal about the potential for new entry here, given the substantial costs the government has set in front of anyone who might wish to join our small market? 

What are the anticompetitive effects of licensing rules that make it very difficult for new bottleshops to open?

What would a Part 3A market study have to say about the effects of New Zealand’s rules requiring that every pharmacy be owned by a registered pharmacist?

It makes sense that every pharmacy should have a registered pharmacist on staff, dispensing prescriptions. But that hardly means that the company owner needs to be a pharmacist. We do not require that every automotive garage be owned by a trained mechanic.

Is there any better explanation for the pharmacy ownership rule than that the state is acting as a cartel enforcement mechanism, helping to protect existing firms from competition? 

Good competition policy deters anticompetitive activity. 

New Zealand’s recent criminal cartel offence provisions require proof of the intent to engage in cartel conduct. So, it is not all that plausible that anyone involved in setting up any of these regulatory regimes would face prosecution, even if Crown activities came under the provision’s remit. The best part of the most powerful cartel in New Zealand is how it exempts itself from the rules it applies to others. 

... imagine a version of MBIE that worried it might be subject to cartel criminalisation provisions for the anticompetitive regimes it has established. 

When the Government introduces lots of regulatory barriers to real competition and sets incentives for local governments restraining effective competition among them too, it is no surprise that we observe a lot of things that look like there isn’t enough competition out there. And it is easy to see how governments then come to the conclusion that activist competition policy is needed to undo the effects of the regulatory barriers that the government imposes. 

But it is great fun to imagine how regulatory quality, and real competition, might improve if regulators worried about starring in a later Commerce Commission investigation should their drafted rules do more to protect competitors from competition than to further any real public interest.

And even more fun to imagine a version of MBIE that worried it might be subject to cartel criminalisation provisions for the anticompetitive regimes it has established. 
 

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