Monday, 21 November 2016

Sour grapes and self-delusion: ACCC Regulator Performance Framework self-assessment report 2015-16

Introduction
I recently had a look at the ACCC's Regulator Performance Framework self-assessment report 2015-16 which was released on 22 November 2016.  Unfortunately, while the headline seemed to suggest that the ACCC was performing well against its KPI’s, the Report also showed that the ACCC’s Enforcement area is performing poorly in relation to almost every one of its KPIs.  The ACCC needs to be genuine about the feedback it has received and take a good hard look at the way in which its Enforcement area is operating. It is simply too easy to discount feedback from business and legal practitioners as “sour grapes” and to then massage the numbers to hide the real and pressing problems.

Purpose of the Report
The purpose of this report as follows:

The framework is concerned with how Commonwealth regulators administer regulation, with the aim of encouraging regulators to undertake their functions with the minimum impact necessary to achieve regulatory objectives. It is therefore important to note that the framework does not seek to measure the performance of the ACCC in relation to the outcomes we achieve for Australian consumers and the economy. This said, there is some interaction between the ACCC’s outcomes and the way in which we seek to minimise necessary impact and these emerge in this assessment.

Glowing self-assessment with a few sour grapes
It would seem that the ACCC also performed quite well against its benchmarks, based on Chairman Ros Sims’ self-assessment of the Report:

The ACCC considers we have established a solid benchmark with the 2015-16 self‑assessment report on which to measure and compare our performance in future reporting periods.

A majority of the ACCC’s business stakeholders have a positive view of our performance. However, businesses which have been the subject of recent ACCC enforcement activity gave less positive assessments of the ACCC’s enforcement functions.

Some key areas for attention and improvement have been identified across the ACCC, particularly in relation to fostering better communication with businesses that are subject to investigations and regulatory actions.

In other words, in the ACCC’s view, its performance across most business areas was quite positive with the exception of the Enforcement area.  However, Sims appears to explain these criticisms away as nothing more than “sour grapes” – namely, the businesses which had been the subject of recent ACCC enforcement action have provided negative feedback. Indeed, the implication is that these businesses and their legal advisors have provided false information to the ACCC about the way in which the ACCC Enforcement area is operating.

Enforcement area – the real deal
Unfortunately, when you drill down in more detail to the ACCC’s Report you realise that the responses received in relation to the ACCC Enforcement area bear little resemblance to the way in which the ACCC has presented those results.

The following table shows the various responses received from survey participants about each of the ACCC’s major areas.  The total percentage of respondents that agreed or strongly agreed with a statement regarding our performance against the KPI is represented in green, while the percentage that disagreed or strongly disagreed is in red for each function area.

M&AR
%
S Bus
%
P Safe
%
InfReg
%
Enforce
%
KPI 1:  The ACCC does not unnecessarily impede the efficient operation of regulated entities
47 / 21
(+26)
53 / 13
(+40)
65 / 11
(+54)
48 / 16
(+32)
29 / 43
(-14)
KPI 2:  The ACCC’s communication with regulated entities is clear, targeted and effective
52 / 16
(+36)
59 / 13
(+46)
64 / 13
(+51)
68 / 13
(+55)
40 / 33
(+7)
KPI 3:  The actions undertaken by the ACCC are proportionate to the regulatory risk being managed
42 / 21
(+21)
44 / 21
(+23)
57 / 14
(+44)
32 / 19
(+13)
38 / 38
(+0)
KPI 4:  The ACCC’s compliance and monitoring approaches are streamlined and coordinated
33 / 14
(+19)
36 / 18
(+18)
51 / 15
(+43)
52 / 26
(+26)
29 / 50
(-21)
KPI 5: The ACCC is open and transparent in its dealings with regulated entities
59 / 11
(+48)
50 / 20
(+30)
60 / 8
(+52)
71 / 6
(+65)
25 / 42
(-17)
KPI 6:  The ACCC actively contributes to the continuous improvement of regulatory frameworks
43 / 11
(+32)
53 / 16
(+37)
45 / 12
(+27)
37 / 27
(+10)
30 / 40
(-10)

As is apparent, responses in relation to the Enforcement area were negative in relation to four of the ACCC’s 6 KPI’s, the fifth KPI came out even and KPI 2 was positive.

However, when one examines the ACCC’s self-assessment ratings an entirely different picture appears:

M&AR

CSBPS
Inf Reg
Enforce

KPI 1:  The ACCC does not unnecessarily impede the efficient operation of regulated entities
Satisfactory
Satisfactory
Good
Satisfactory
KPI 2:  The ACCC’s communication with regulated entities is clear, targeted and effective
Good
Very good
Very good
Satisfactory
KPI 3:  The actions undertaken by the ACCC are proportionate to the regulatory risk being managed
Good
Good
Satisfactory
Good
KPI 4:  The ACCC’s compliance and monitoring approaches are streamlined and coordinated
Satisfactory
Satisfactory
Satisfactory
Poor
KPI 5: The ACCC is open and transparent in its dealings with regulated entities
Very good
Good
Very good
Satisfactory
KPI 6:  The ACCC actively contributes to the continuous improvement of regulatory frameworks
Good
Satisfactory
Satisfactory
Good

The ACCC has self-assessed negative feedback from survey participants in relation to KPI 1 - The ACCC does not unnecessarily impede the efficient operation of regulated entities - as satisfactory despite 29% of respondents stating that the ACCC was doing a good job in relation to this KPI and 43% of respondents disagreeing.  How the ACCC could possibly self-assess its performance against KPI 1 as “Satisfactory” is beyond me.

The self-assessment in relation to KPI 2 - The ACCC’s communication with regulated entities is clear, targeted and effective - is more defensible. 40% of respondents believed that the ACCC was doing a good job in relation to this KPI while 33% disagreed.

KPI 3 which relates to - Whether the actions undertaken by the ACCC are proportionate to the regulatory risk being managed - comes out at a commendable “Good” rating, which seems somewhat surprising given that 38% of respondents thought that the ACCC was doing a good job and 38% of respondents disagreed. I think that a more accurate conclusion in relation to KPI 3 would have been a “Poor” rating, given half of survey respondents thought that the ACCC was doing a poor job.

KPI 4 - The ACCC’s compliance and monitoring approaches are streamlined and coordinated - comes in rightly at a “Poor” rating, with 29% of respondent’s believing the ACCC was doing a good job and a massive 50% disagreeing with that statement.  This result should be of great concern to the ACCC, even allowing for the “sour grapes” effect.

KPI 5 namely that - The ACCC is open and transparent in its dealings with regulated entities - is again very difficult to understand given that the ACCC has self-assessed itself as “Satisfactory” with 25% of respondents believing that the ACCC was doing a good job in being open and transparent, with 42% disagreeing.  In reality, the ACCC’s self-assessment for KPI 5 should have been yet another “Poor”.

Finally, in what must be the considered the most puzzling example of the ACCC’s questionable self-assessment, the ACCC concluded that in relation to KPI 5 - The ACCC actively contributes to the continuous improvement of regulatory frameworks - it merited a “Good” grading. This is despite 30% of respondents believing that the ACCC was doing a good job and 42% disagreeing.

It is quite remarkable that the ACCC has firstly sought to discount the responses which it received from businesses and their legal advisers about the ACCC’s Enforcement performance as “sour grapes”.  What is more remarkable is that it has then sought to present the statistics in a way which masks the reality and depth of the problems which exist within the ACCC Enforcement area.   

 In my view, the ACCC’s Enforcement area’s report card against its KPIs should look more like this:

Enforce

KPI 1:  The ACCC does not unnecessarily impede the efficient operation of regulated entities
Satisfactory
Poor
KPI 2:  The ACCC’s communication with regulated entities is clear, targeted and effective
Satisfactory
KPI 3:  The actions undertaken by the ACCC are proportionate to the regulatory risk being managed
Good
Poor
KPI 4:  The ACCC’s compliance and monitoring approaches are streamlined and coordinated
Poor
KPI 5: The ACCC is open and transparent in its dealings with regulated entities
Satisfactory
Poor
KPI 6:  The ACCC actively contributes to the continuous improvement of regulatory frameworks
Good
Poor


Conclusions
The ACCC has to “get real” about the performance of its Enforcement area.  As stated above, it not acceptable for the ACCC to attribute poor feedback from businesses and legal practitioners to the “sour grapes” factor and then to massage the statistics to hide the reality and depth of the problems within the ACCC Enforcement area.  A self-assessment which does not accept the criticisms made is not a self-assessment at all, but rather an exercise in self-delusion.



http://www.accc.gov.au/media-release/accc-completes-first-regulator-performance-framework-review

Monday, 5 September 2016

ACCC acts to restore competition to the Queensland pathology market


This article first appeared in Lexis Nexis Competition and Consumer Law News, Vol 32, No 5., July 2016, pp. 212-214

Introduction
On 16 June 2016, the Australian Competition and Consumer Commission (ACCC) announced that it had accepted court enforceable undertakings from Primary Health Care Limited (Primary) and Healthscope Ltd (Healthscope) requiring the divestiture or forced sale of extensive pathology assets in Queensland.[1]  The ACCC required this divestiture because in its view Primary’s acquisition of Healthscope’s Queensland pathology assets in 2015 had breached section 50 of the Competition and Consumer Act 2010 (CCA).

The Primary/Healthscope divestiture sends a strong warning to all businesses which may seek to complete a merger or acquisition without first seeking ACCC clearance – namely that the ACCC will not sit idly by and allow transactions which it believes substantially lessen competition to stand. Rather the ACCC will take action to reverse the effects of the transaction to “restore a competitive market structure”. Indeed, in many respects Primary and Healthscope can consider themselves to have been quite fortunate in avoiding the imposition of much more serious penalties.

Background
The divestiture undertaking came about because the ACCC believed that the acquisition by Primary of Healthscope’s Queensland pathology assets contravened section 50 of the CCA. Section 50 states:

(1)          A corporation must not directly or indirectly:

(a)   acquire shares in the capital of a body corporate; or

(b)  acquire any assets of a person;

if the acquisition would have the effect, or be likely to have the effect, of substantially lessening competition in any market.

After conducting an extensive investigation, which included the use of multiple statutory notices and the compulsory examinations under oath of executives from both Primary and Healthscope, the ACCC concluded that:[2]

The removal of the Healthscope Queensland pathology business from the relevant market/s through Primary’s acquisition of the Healthscope assets would be likely to have the effect of substantially lessening competition in one or more markets in contravention of section 50 of the Act.

Neither Primary or Healthscope agreed that the acquisition would have had the effect of substantially lessening completion in a market.  However, they both agreed to enter into the divestiture undertakings in order to address the ACCC’s competition concerns.[3]

Transaction history
In the Undertakings the ACCC sets out the history of the transaction.[4]  The ACCC stated that on 17 December 2014 Healthscope entered into arrangements with Primary to sell certain pathology assets including:

·         rights to non-pathology collection centres and laboratories;
·         rights to hospital relates pathology collection centres located in private hospitals and associated hospital complexes; and
·         property and inventory associated with Healthscope’s pathology business.

The two companies also entered into a number of service agreements and agreements to transfer employees from Healthscope to Primary. There was also an ancillary agreement to terminate ongoing litigation between the two companies.

The transaction was completed on 2 February 2015.

However, neither Primary or Healthscope informed the ACCC of the transaction. Rather the ACCC only became aware of the transaction after the event when it started to receive complaints from market participants.

That the parties decided to complete the transaction without seeking ACCC approval is very surprising.  As stated by ACCC Chairman Rod Sims:

Primary and Healthscope completed the transaction without notifying the ACCC, despite being on notice that the ACCC would have serious concerns about the likely competitive effect…

It is of considerable concern to the ACCC that well-advised firms such as Primary and Healthscope chose to complete the transaction in the way that they did.[5]

Sim’s reference to the parties having been on notice of the ACCC’s concerns was a reference to the ACCC’s earlier 2012 decision to block the sale of the very same Healthscope assets to Sonic Healthcare Limited (Sonic).   As stated by the ACCC in relation to that matter:

The proposed acquisition (by Sonic of Heathscope’s pathology business) in Queensland would result in the removal of a substantial competitive constraint on the two major pathology providers in that state. Whilst Sonic and Primary are the clear market leaders in Queensland, Healthscope is an important competitor in that market.[6]

One can well understand the ACCC’s concerns about a Primary – Healthscope merger given that it represented a tie-up between the first and third largest pathology providers in Queensland, in circumstances where the ACCC had already blocked a proposed tie-up between Sonic and Heathscope, the second and third largest pathology providers in Queensland.


Undertakings
Pursuant to the Undertaking, Primary has been required to divest virtually all of the assets which it acquired from Healthscope. As stated by the ACCC, the Undertakings “largely reverse the acquisition”. The Divestiture Assets are listed at Schedule 4 to the Undertakings and include:[7]

·              Service Level Agreements with leases;
·              Service Level Agreements without a lease;
·              Rights to use and occupy leasehold properties for collection centres;
·              Rights to use and occupy leasehold properties for laboratories and associated collection centres; and
·              Furniture, equipment, laboratory equipment and consumables.

In other words, over 70 full-functioning collection centres are required to be sold.

The ACCC has also approved a prospective buyer for the divested assets, namely Medilab Pathology, which is described as an experienced pathology provider based in Sydney.

Accordingly, the effect of the divestiture will be that Medilab will become a new entrant to the Queensland pathology market. The ACCC has approved Medilab as an appropriate entity to acquire the Divestiture Assets because of it did not operate any existing pathology businesses in Queensland.

While Medilab has been approved by the ACCC as an Approved Purchaser of the Divestiture Assets, this does not mean that all of the Divestiture Assets have to be sold to Medilab.  It is also possible for other pathology providers to become Approved Purchasers. 

Schedule 2 of the Undertaking includes a “Proposed Purchaser Notice Form” which other pathology providers can lodge with the ACCC in the event that they wished to purchase any of the Divestiture Assets.[8] Such a situation may arise if Medilab decides that it does not wish to purchase a particular Divestiture Asset, in which case, Primary would be able to seek another buyer, but only an Approved Buyer as determined by the ACCC.

Forced Divestiture
The Undertaking sets out a time frame for the sale of the Divestiture Assets to Medilab, which is described as the Initial Sale Period.  Whilst the Initial Sale Period has remained confidential, it is likely to be a period of approximately twelve months during which time all negotiations with Medilab concerning the sale of the Divestiture Assets, including the sale price, will have to be concluded.

If the sale of all or part of the Divestiture Assets does not occur within the Initial Sale Period, the forced divestiture provisions in the Undertaking will take effect.  These provisions state:[9]

In the event that the divestiture of any of the Divestiture Assets to an Approved Purchaser is not completed by the end of the Initial Sale Period, then those Divestiture Assets become unsold assets (Unsold Assets) and the provisions of clause 9.

If any of the Divestiture Assets have not been sold by the end of the Initial Sale Period, the Undertaking requires Primary to dispose of the remaining assets through a Divestiture Agent, approved by the ACCC.  As is apparent the existence of forced divestiture provisions in the Undertaking places a great deal of pressure on Primary to agree to commercial terms with Medilab during the Initial Sale Period or face what will effectively be a “fire sale” of the remaining assets.

Risky behaviour
The ACCC made particular reference in its media release to its decision not to seek additional remedies against both Primary and Healthscope for having undertaken this transaction without having first sought an ACCC clearance:[10]

The ACCC has decided not to commence proceedings against both Primary and Healthscope seeking penalties and other remedies including divestiture. In making this decision, the ACCC’s motivation has been to restore a competitive market structure in Queensland as expeditiously as possible, and the onerous undertakings given by Primary and Healthscope achieve that.

The other remedies which would have been available to the ACCC had it decided to take legal action against Primary and Healthscope for a breach of section 50 of the CCA included pecuniary penalties and disqualification orders.

In terms of pecuniary penalties, the ACCC could have sought penalties from both Primary and Healthscope of the greatest of:

·            $10 million;
·            three times the total benefit reasonably attributable to the illegal conduct or
·            10% of the annual turnover of each of Primary and Healthscope in the twelve months ending at the end of the month in which the illegal conduct occurred.

In other words, Primary could have been exposed to a total pecuniary penalty in relation to this transaction of as much as $161 million based on its total 2014-2015 revenue of $1.618 billion.[11] Healthscope’s exposure could have been as high as $240 million based on its total 2014-2015 revenue of $2.4 Billion.[12]

While it is unlikely that a court would have imposed pecuniary penalties of this magnitude in this particular matter, businesses must be aware that the penalties being imposed by Australian Courts for contraventions of the CCA are rising and are likely to continue to rise. It is just a matter of time before the Court start imposing much larger pecuniary penalties for contraventions of the CCA, including the pecuniary penalties equivalent to 10% of total annual revenue.

The other significant remedy which the ACCC could have sought in relation to this transaction were orders disqualifying directors and senior managers of both Primary and Healthscope from managing these corporations or any other corporations for a number of years.  This is a particularly relevant consideration for all full time directors of large publicly listed corporations, such as Primary and Healthscope, who may be excluded from their primary profession for many years for having engaged in a contravention of the CCA.

Conclusions
The risks of consummating a merger without first seeking ACCC approval can be very serious, particularly in circumstances where the parties did so with knowledge that the ACCC had competition concerns about the transaction. In this instance, Primary and Healthscope may have been quite fortunate to achieve the outcome which they did, particularly in terms of avoiding litigation, the imposition of significant pecuniary penalties and orders disqualifying their senior executives from managing corporations for a number of years.  Having said that Primary and Healthscope have probably not yet felt the full effects of this unfortunate transaction in terms business disruption, management time, legal costs and ultimately the costs of having to dispose of the relevant assets at bargain basement prices.



[1]  ACCC Media release, ACCC to restore competition for pathology services in Queensland, dated 16 June 2016 at http://www.accc.gov.au/media-release/accc-acts-to-restore-competition-for-pathology-services-in-queensland
[2] Ibid.
[3] Primary Health Care Limited, Undertaking to the Australian Competition and Consumer Commission, dated 15 June 2016 at http://registers.accc.gov.au/content/index.phtml/itemId/1196395 and Healthscope Ltd, , Undertaking to the Australian Competition and Consumer Commission, dated 15 June 2016 at http://registers.accc.gov.au/content/index.phtml/itemId/1196407 (Undertakings)
[4] Ibid.
[5] ACCC, above n 1.
[6] ACCC Media Release, ACCC to oppose Sonic’s acquisition of Healthscope’s pathology business in Queensland, dated 11 October 2012 at http://www.accc.gov.au/media-release/accc-to-oppose-sonics-acquisition-of-healthscopes-pathology-business-in-queensland
[7] Undertakings, above n 3.
[8] Ibid 32-33.
[9] Ibid 16-20.
[10] ACCC, above n1.
[11] Primary Health Limited, 2015 Annual Report at http://www.primaryhealthcare.com.au/irm/content/annualreport/2015/#1