Tuesday, 3 December 2013

Running on Empty: Why is the ACCC running out of money?


Introduction
At a recent Senate estimates hearing before the Economics Legislation Committee, Rod Sims, the current chair of the Australian Competition and Consumer Commission (ACCC) admitted that the organisation had run up significant operational losses over the last three years.[1] The earlier realisation that the ACCC was operating well beyond its means prompted the Coalition government to claim that the previous Labor government had allowed the ACCC to “run down” by providing it with inadequate funding.[2]  The Business Council of Australia also weighed into the debate, claiming that the ACCC had increased its staffing levels significantly over the last decade at a rate which outstripped the rate of employment growth across the broader economy.[3]

Given the divergent views, it is somewhat difficult to work out where the truth lies in relation to the ACCC's funding.  Either the ACCC has been failing to manage its finances responsibly or its activities have been significantly underfunded for some time, which has in turn undermined its ability to enforce its legislation.  As with most issues, neither position is entirely correct.  The reality is that whilst the ACCC does not receive sufficient funding to properly carry out its legislative responsibilities, it has also been operating in an inefficient manner which has seen it achieving suboptimal outcomes.

In this blog post, I will identify the main areas of over-expenditure within the ACCC and identify where inefficiencies exist.  I will then make some proposals which may assist the ACCC in improving its financial performance in the future.

Background
The total amounts by which the ACCC has overspent its budget over the last three financial years is quite remarkable.  As outlined in its most recent Annual Report for the 2012 – 2013 financial year,[4] the ACCC has generated the following losses over the last three years:

2012-2013      $25.9 million
2011-2012      $26 million
2010-2011      $9.3 million

These losses should be seen in the context of the ACCC's total funding, as follows:

2012-2013       $150 million
2011-2012       $151 million
2010-2011       $141 million

Therefore, the amount by which the ACCC has overspent its budget over the last three financial years has increased from 6.5% of its total budget in 2010-2011 to approximately 17% of its total budget in the following two financial years.

In other words, over the last two years the ACCC has spent almost 20% more than the amount that it received from the Commonwealth Government to run its operations.

Justifications
The ACCC provided the following explanation to the recent Economics Legislation Committee as to why it had overspent its budget by such large amounts over the last three years:

(The overspend was) largely a function of the fact that we have been asked to do more. The economy is growing, so we get more mergers and we get more activity on all our fronts. We are the competition regulator, the consumer regulator, the safety regulator, we do a lot of compliance work, we deal with mergers, authorizations…

One of the problems for us has been that we are about 60 per cent staffing and about 15 per cent legal funding. All the various across-the-board cuts that have occurred through the public sector, particularly in the efficiency dividends, have really eroded our funding base quite a lot. There is very little room to move. When you are 60 per cent staffing and then you have legal expenses and property expenses, there are very few expenses you can actually do something with.[5]

In other words, the main reason for the funding shortfall was because the ACCC has been given more functions than it had three years ago. The efficiency dividend required by the former Labor government also had a negative impact on the ACCC’s funding position.

The ACCC reiterated this view when responding to comments by the Business Council of Australia (BCA) about the ACCC’s staffing levels.  In the BCA report entitled “Improving Australia's Regulatory System”, it stated that the ACCC’s staffing levels had increased from 540 staff in the 2001-2002 financial year to 876 in the 2011-2012 year.  The BCA commented that the ACCC’s staffing levels had “outstripped the rate of employment growth across the broader economy during the same period.”

The ACCC’s response to the BCA was swift. The ACCC immediately issued a media release to defend its position:

The Business Council of Australia has today issued a report showing that the Australian Competition and Consumer Commission’s staffing has increased from 540 in 2001-2 to 876 in 2011–12, or 4.95% per annum (the current number of working full time equivalent staff is actually just over 800). It seeks to make a point about the growth in regulatory spending and staff numbers.

The ACCC’s growth over this period is associated with completely new functions and responsibilities, most assumed from state regulators and other bodies. Without these additional functions, the ACCC’s base line growth since 2001-2 has been 1.8% per annum.

The ACCC’s new functions and responsibilities in the past ten years include:

·  The establishment of the Australian Energy Regulator (2005) following CoAG agreement to create a national energy market regulator has seen the transition of gas and electricity regulatory and enforcement functions from state regulators to the AER over the past 8 years.
·  In 2007, the ACCC became responsible for the development, monitoring and enforcement of water market and charge rules in the Murray Darling Basin.
·  Under the Wheat Export Marketing Act 2008, the ACCC is responsible for monitoring compliance of port operators for bulk export wheat.
·   Following the completion of its Fuel inquiry in 2007, the ACCC was directed by the government to undertake monitoring of the prices, costs and profits of unleaded petrol in Australia.
·  The ACCC assumed responsibility for the regulation of the Hunter Valley rail line from IPART in 2011.
·  In 2009, the ACCC became Australia’s national product safety regulator.

While the underlying staff growth of 1.8% per annum is below real GDP growth, this staffing increase has had to accommodate increased roles in our core areas, such as the regulation of the NBN, the introduction of the Australian Consumer Law, the criminalisation of cartel conduct and carbon price claims, to name a few.

Indeed, in the ACCC’s core responsibilities, such as in enforcing competition law, the ACCC’s staffing has likely not increased at all since 2001-2 despite the greater size and complexity of the Australian economy.

While vigorous in its defence, the ACCC’s news release it entirely disingenuous. The ACCC’s response claims that it has acquired a wide range of additional functions since 2001, whilst making no mention of the significant functions which it has lost since the 2001-2002 financial year, most notably its education, monitoring and enforcement role in relation to the introduction of the GST.

The introduction of the GST in 2000 resulted in the ACCC gaining an extensive economy-wide role in providing information to businesses and consumers about the operation of the new tax, as well as a role in conducting extensive price monitoring and enforcement activities.  Indeed the ACCC’s role in relation to the introduction of the GST was in many respects the largest and most challenging function which the ACCC has ever been required to undertake in its history.

Therefore, it is quite inaccurate for the ACCC to claim, as it has, that it was the range of new functions which is has gained since 2001-2002 which has lead to the steep rise in staff numbers by 62% over the period.  Indeed, it is arguable that the loss of the GST function means that the ACCC now has a much less demanding role than it did in 2001.

Staffing levels
ACCC staffing levels have fluctuated over the last few years.  In the 2009-2010 financial year, the ACCC had 756 budgeted staff positions but only 732 actual staff numbers. In other words, the ACCC had 24 less staff on its books than the amount for which it was receiving funding.

This situation changed quite dramatically in the next financial year when the number of budgeted positions rose from 756 to 778.  Unfortunately, the actual number of staff employed at the ACCC also rose over the course of that year from 732 to 790.  In other words, the ACCC hired 18 more staff than to could afford to pay, based on its budgeted numbers.

In the 2011-2012, the ACCC received funding for a record 813 staff members. This level of staff funding was only slightly above its actual staff numbers of 807 staff.

The significant reduction in budgeted staff positions occurred in the 2012-2013 financial year, when the ACCC only received funding for 745 staff, a reduction of 68 staff positions from the previous year.  It also seems that the ACCC was unable to reduce its actual staff numbers significantly in response to this reduction in its staffing budget.  Despite receiving funding for 68 less staff members in 2012-2013, the ACCC was only able to reduce its actual staff numbers by nine positions. In other words, the ACCC operated throughout the 2012-2013 financial year with 53 unfunded staff members. Needless to say, this is very poor public administration.

Interestingly, the recent suggestion that the ACCC had not been properly funded by the former Labor Government seems questionable given the level of staff funding provided to the ACCC in the current financial year. In the 2013-2014 financial year, the ACCC has received funding for 802 staff positions which is an increase of 56 positions from the previous year, and four more positions than the ACCC’s actual staff numbers in the previous year.

Management structure
One concerning aspect about the ACCC’s current management structure is that it appears to be remarkably top heavy.  In other words, there appears to be a disproportionately large number of senior managers being paid large salaries, including significant performance pay.

For example, the ACCC currently operates with one Chief Executive Officer and two Deputy Chief Executive Officers who are all at the Band 3 Senior Executive Service level.  It seems somewhat strange that an organization with only 800 employees would effectively need three CEO’s to manage the organization. 

Indeed, there would be very few private companies with significantly larger workforces that would need to employ three CEO’s.

Highly paid staff
Another concern relates to the number of highly paid staff within the ACCC. In the ACCC’s most recent annual report, the ACCC listed a total of 54 staff that would be considered highly paid staff.[6] Of these 54 staff, 49 staff were being paid in excess of $180,000 per year. In other words, over 5% of all ACCC staff are being paid more than $180,000 a year.

The annual report also shows that 14 staff are receiving salaries of between $210,000 to $239,000 per year, whilst a further 11 staff are receiving salaries of between $240,000 to $269,000 per year.

It is also apparent that the ACCC’s Senior Executive Service are much more expensive than the above salary figures would suggest.  In the ACCC’s annual report, it records the total remuneration paid to the ACCC Senior Executive Staff in the form of salary, annual leave accrued, performance pay, other allowances, superannuation and long service leave.[7]  This table shows that the ACCC’s 54 SES employees cost the ACCC a total of  $17,768,883 in 2013 which equates to $329,053 per employee. 

This level of remuneration for the ACCC’s Senior Executive Service appears to be quite excessive, particularly given that the ACCC is a public sector organization.

Performance pay
The ACCC annual report also records the total amount of performance pay being paid to its staff.[8] It appears that total performance pay of $1,185,026 was paid to 86 staff members in 2013. This equates to an average performance pay of approximately $13,800 per staff member.

While this is less than the amount of performance pay paid to staff in 2011-2012 financial year, which was approximately $1.3 million, one has to question whether a public sector organisation should be paying almost $1 million worth of performance pay to its employees each year.

Consultancies
Another area which has experienced significant growth over the last three years is in relation to consultancy agreements. The ACCC disclosed in its annual report that in the 2012-2013 financial year it entered into 62 new external consultancy contracts worth a total of $4.4 million. This is in addition to 17 ongoing consultancy contracts which account for a further $4 million.[9] 

Therefore, in the 2012-2013 financial year, the ACCC spent a total of $8.8 million, or approximately 6% of its total budget, on external consultancies.

The amount spent by the ACCC on consultancies in the 2012-2013 financial year was 22% higher than the amount it spent on external consultancies in the previous financial year (ie $7.2 million) and 30% more than it spent in the 2010-2011 financial year (ie $6.9 million).

One has to ask why the ACCC has to enter into so many external consultancies and why it is paying so much for these consultancies. Another important question is why have external consultancies increased by 30% in dollar terms over the last three years.

This trend is even more concerning in the light of the fact that the ACCC has access to a large and highly paid, and one would assume highly skilled, Senior Executive Service. The question is why the ACCC cannot apparently meet its need for specialist technical advice from amongst the ranks of its existing Senior Executive Service.

How can the ACCC improve its bottom line?
During the ACCC’s evidence at the recent Senate Estimates hearings, it claimed to have implemented a range of strategies to reduce its costs, including by:

·  offering voluntary redundancies;
·  reducing travel costs;
·  cutting back on newspaper subscriptions; and
·  reviewing its accommodation needs.

However, these measures only offer piecemeal solutions to the ACCC’s financial crisis. 

As suggested above, a significant cost is the ACCC's Senior Executive Service.  Not only does the ACCC’s Senior Executive Service appear to be disproportionately large, comprising 54 staff members, but this select group of employees is very costly, costing the ACCC approximately $329,000 per employee per year.

The ACCC must conduct an urgent and in-depth review into the size and cost of its Senior Executive Service to determine whether it needs such a large Senior Executive Service and whether some of these employees are being paid too much.

The ACCC should also conduct an urgent review of its performance pay scheme. Such a review is particularly important when one analyses the ACCC’s performance in relation to major litigation over the last three years.  Whilst there have been a number of notable successes, including the airline cartel cases and the Apple iPad case, there have been a number of quite spectacular and costly losses including:

·  Metcash – Franklins merger opposition;
·  Google sponsored links case;
·  ANZ price fixing case; and
·  Cement Australia section 46 case.

Simply put the ACCC’s recent performance in major litigation cannot justify the organisation continuing to pay such generous performance pay.

It would also be sensible for the ACCC to review its practices in terms of entering into external consultancies. The ACCC is relying too heavily on external consultants to provide the types of advice which the ACCC should be able to obtain from its own Senior Executive Service.

Other sources of inefficiency
Litigation
As a practitioner who has regular interactions with the ACCC, as well as a former ACCC employee for 15 years, it is quite easy to identify areas where the ACCC is not operating efficiently.

For example, one area of inefficiency relates to the way in which the ACCC runs its litigation. The ACCC has a tendency to overstaff its litigation in relation to small and medium sized cases. While it is invariably the case that larger corporate respondents will retain large legal teams consisting of lawyers from the top tier legal firms to fight the ACCC, the same is not true of small and medium respondents. It is relation to these smaller respondents that the ACCC ends up incurring too much legal expense.

The ACCC will often retain two or even three senior lawyers from a top tier legal firm or the Australian Government Solicitor to work on even relatively small cases.  For example, in a recent case, the ACCC had a legal team consisting of three senior lawyers from a top tier legal firm and a senior barrister. This was despite the respondents only being represented by a small firm solicitor and a junior barrister.

The ACCC also appears to have developed a practice of overspending on barristers when running smaller cases. Often the ACCC will retain a senior barrister, or even a senior and a junior barrister when running relatively small and simple cases against unsophisticated opposition. 

I recall that when I worked at the ACCC, we would often use a sole junior barrister on smaller cases to save money, as well as to skill-up these junior barristers. For example, we decided to use only a junior barrister in the high profile Ian Turpie impotency trial (namely Robert Bromwich, now the Commonwealth Director of Public Prosecutions). On another occasion, we decided to use a sole junior barrister to run a five-day trial in the Original Mama’s case. Both barristers rose to the challenge and did exceptionally well in each case.

The ACCC also have a habit to throwing enormous amounts of legal resources at large scale litigation in a haphazard way. This was particularly evident in a case I was involved in for a client who had agreed to give evidence as part of the ACCC's case.  It was apparent to me from my interactions with the ACCC in that case that whilst it had assembled a very large legal team of experienced lawyers and barristers to run the case, there was also a total lack of organization and planning. Indeed, it seemed to me sometimes that the ACCC's legal team lacked any any clear case theory. Needless to say, the ACCC lost the case.

Companies in liquidation
Another area of concern relates to the ACCC’s tendency to continue pursuing litigation against companies which have gone into liquidation.  I fail to see how a judgment or penalty against a company which no longer exists is a sensible use of the ACCC’s limited resources. 

The ACCC will still have to spend a significant amount of money to secure a penalty and costs order against the company in liquidation. The only difference with these cases is that the ACCC knows beforehand that it will not recover any of the penalty or costs which may be ordered by the court.

For example each of the following cases, involved a company which had gone into liquidation:

·  Elite Publishing
·  E-Direct
·  Energy Watch
·  Yellow Page Marketing BV/Yellow Publishing Limited
·  Global One Mobile Entertainment Ltd / 6G Pty Ltd
·  Marksun Australia Pty Ltd
·  SMS Global

As far as I am aware, the ACCC never saw a cent of the penalties and costs awarded in these cases.

Case selection
While the ACCC’s case selection practices have improved dramatically over the last few years, there are still some notable anomalies.

For example, earlier this year the ACCC accepted an undertaking from Toyota Australia relation to representations that the upholstery in certain vehicle interiors was ‘leather’, when in fact the upholstery was only partially leather.[10] 

I find it hard to understand why the ACCC pursued this matter, given that it seeks to prioritise matters based on the level of consumer detriment.  If the ACCC had believed that Toyota’s conduct had created a significant degree of consumer detriment, one would have expected to see the ACCC demanding consumer remedies as part of the settlement. 

However, the only remedies sought by the ACCC in relation to this matter were that Toyota:

·  publish corrective notices;
·  implement a supplementary trade practices compliance program;
·  provide training for Toyota Australia sales and marketing staff and dealers; and
·  implement a procedure for the review of product information materials.

In other words, there were absolutely no consumer remedies sought by the ACCC in this case.

Another odd use of resources relates to the Samsung Electronics case.[11] In this matter, Samsung provided an undertaking to the ACCC concerning alleged misrepresentations about the energy savings of its Bubble Wash washing machines compared to conventional washing machines.  Despite the ACCC’s view that the company had misled its customers about these products, it did not require Samsung to offer any of its customers a refund of their purchase price.  Rather, the only consumer remedy obtained by the ACCC in this case was that Samsung extend its manufacturer's warranty by three years.

I also represented a small Australian business in an ACCC investigation in relation to country of origin representations. The ACCC focused its investigation on the representations being made by my client in relation to products which it was exporting to places such as China, Korea and Europe

Apart from the very real question of whether the ACCC even had jurisdiction in relation to this conduct, I could not see how the pursuit of this investigation was a justifiable use of the ACCC’s resources. After all, no Australian consumers were being affected by my client’s conduct.

The ACCC ultimately closed its investigation after a few months when it realized that my client was not breaching the Australian Consumer Law in relation to products it was selling to non-Australian consumers in overseas markets.

The treatment of legal costs
The indications are that the ACCC’s financial position will deteriorate further in the 2013-2014 financial year. 

The ACCC will have to pay the legal costs orders made against it after losing two high profile and long running cases – namely the Google sponsored links case and the ANZ price fixing case. It is likely these two costs orders alone will be more than $5 million.

One change which the ACCC should propose to the current government relates to the way in which legal costs from litigation should be treated from an accounting perspective. As I understand current arrangements, the ACCC is required to pay any costs orders made against it out of its recurrent funding, whilst any costs orders made in the ACCC’s favour are paid into consolidated revenue, rather than into the ACCC’s accounts. 

This approach to legal costs does not make any sense.

A more sensible approach would be to permit the ACCC to add any costs which it recovers in litigation to its recurrent budget. This would add significant revenues to the ACCC's overall budget, given its very high success rate in litigation.

Conclusions
The ACCC’s financial position has deteriorated significantly over the past three years, due primarily to the current Chairman’s ambitious enforcement program. Rod Sims is clearly focused on pursuing larger, more complex and ultimately more important enforcement cases that his predecessor.  However, with this strategy comes obvious risks - namely that the ACCC will start losing a greater number of cases than it has in the past.

A significant impact on the ACCC’s financial position will be the legal costs it has to pay when it does end up losing large, long running cases.  The ACCC has already felt the financial impact of its loss in the Metcash-Franklins case which no doubt cost the organization many millions of dollars in legal costs.  It is also looking at paying further large costs orders following its losses in the Google sponsored links case and the ANZ price fixing case. Indeed, a loss in the Visa section 46 case could very well bankrupt the ACCC entirely. However, the ACCC must not be dissuaded from pursuing important enforcement cases due to the fear of losing and having to pay significant legal costs. 

Having said that the ACCC must also be honest in admitting that its organization’s structure it far too top heavy and that it’s Senior Executive Service is too expensive at $17 million a year. It should also acknowledge that it is spending too much money on external consultancies.   The ACCC must take the initiative in conducting its own root and branch review of its senior management structures, its use of external consultancies and the way in which it conducts litigation. If it conducts such a review in an open and transparent manner, it will quickly realize that it can make significant reductions in its cost of doing business, which will in turn help it to get a lot more bang for its buck.





[2] ACCC to run out of Money, says Joe Hockey, Sydney Morning Herald, 7 November 2013 at http://www.smh.com.au/business/accc-to-run-out-of-money-says-joe-hockey-20131107-2x2wd.html
[3] Improving Regulation requires Sharper Focus on Regulators, Business Council of Australia, 22 November 2013 at http://www.bca.com.au/newsroom/improving-regulation-requires-sharper-focus-on-regulators
[5] Above footnote 1, 37.
[6] Above footnote 4, 279.
[7] Ibid 278.
[8] Ibid 219.
[9] Ibid 231.

[10] Toyota Australia gives an undertaking to ACCC on ‘leather’ claims, ACCC news release, 12 February 2013 at http://www.accc.gov.au/media-release/toyota-australia-gives-an-undertaking-to-accc-on-%E2%80%98leather%E2%80%99-claims

[11] Samsung Electronics Australia provides ACCC with undertaking over energy savings claims, ACCC news release, 21 January 2013 at http://www.accc.gov.au/media-release/samsung-electronics-australia-provides-accc-with-undertaking-over-energy-savings

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