Market intervention from the free enterprise party: Josh and Scott’s cartel

by | May 19, 2022 | Economy & Markets, Latest Posts

Scott Morrison and Josh Frydenberg may have railroaded an anti-competitive banking cartel through parliament without waiting for approval from the ACCC, with Treasury potentially covering its tracks. Callum Foote investigates.

Last month the Morrison-initiated Australian Business Growth Fund made its third investment, $11 million to local software company Capsifi. The fund provides investments to small and medium enterprises but its structure calls into question whether the fund is actually a cartel under Australian competition law.

The Australian Business Growth Fund Ltd (AGBF) brainchild of Morrison and Frydenberg was established in 2020 and may be the first time the six largest banks in Australia have worked together to sell a single financial product, their investments in small businesses. 

The fund was formed with an initial capital of $540 million. The federal government, NAB, Commonwealth Bank, ANZ and Westpac contributed $100 million each alongside small partners Macquarie Bank and HSBC who contributed $20 million apiece.

The government has announced plans to increase the fund to $1 billion, with the Australian Prudential Regulation Authority also providing $5 billion in special prudential concessions to the banks to make the banks invest in the ABGF. 

These prudential concessions are a luxury not afforded to other fund-raising firms in the market.

One requirement of APRA for awarding these concessions was that “there be only one such fund”, as reported by the AFR, which was invited to the roundtable with all the banks and the government.

According to Professor Rob Nicholls, an expert in Australian competition law, “the new part of section 45 of the Competition and Consumer Act which relates to what are called concerted practices has not been contested in the courts but it has a lower threshold of the normal cartel conduct which is doing something by contract arrangement or understanding. This has a real potential of addressing schemes like [the Australian Business Growth Fund] when they haven’t been cleared by a competition specialist lawyer, so that’s without Crown Solicitors, Australian government solicitors or a private firm.”

In the Senate Economics Legislation Committee Inquiry hearing regarding the legislation to set up the fund, APRA executive director responsible Heidi Richards acknowledged that it was not APRA, but rather the government “that determined the structure and the approach for this fund and conducted consultation on it”.

Australia’s Competition and Consumer Act prohibits competitors from entering into a contract, arrangement or understanding between competitors to lessen supply and not compete with one another, which seems to be a key requirement of APRA’s prudential concessions.

The ACCC has refused to comment on whether or not they provided legal advice to the Treasury over the fund, with a spokesperson saying that “the ACCC can’t comment on current or potential investigations”.

Treasury covering its tracks

OnMarket, a direct competitor with the Australian Business Growth Fund, submitted an FOI request with Treasury to ascertain whether the government sought advice from the Crown Solicitors or the ACCC regarding the legality of the fund before legislating it.

Treasury refused to confirm or deny the existence of such legal advice in an FoI ruling whose basis has been questioned by experts.

Peter Timmins, a retired diplomat and consultant who works on FOI and privacy protection issues, believes that “The decision to refuse access is in the best tradition of Sir Humphrey Appleby from Yes Minister, no friend or supporter of transparency. 

“To paraphrase: we aren’t going to tell you whether we have any document relevant to your application. If we do have something – and we aren’t saying one way or another mind you – we wouldn’t give it to you because it is or would be legally privileged. And no we don’t have to back up that claim providing any justification for that claim-it is or would be legally privileged just because we say so. Believe us – we’re from the government, here to help you.”

The FOI act does include a provision that an agency may refuse to confirm or deny it holds documents, but in strictly limited circumstances not relevant in this case.  

According to Timmins “the argument that Treasury can simply make a privilege claim without providing detail of the basis for the claim is contentious. The recently appointed Freedom of Information Commissioner might have another view.”

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Anti-competition

Over a two-year period, 2017-2019, in Australia there was an average of 61 equity capital market transactions that raised an average total of $507 million within the universe of SMEs meeting the ABGF investment criteria. The shareholders have proposed that ABGF invests $5-$15m in 30-50 SMEs per year (a total of ~$400m per annum). That is, the ABGF is intending to take 50% – 85% of the market. 

Small-to-medium enterprise fund-raiser OnMarket’s CEO Ben Bucknell wrote in a formal complaint to the Commonwealth Competitive Neutrality Complaints Office that the ABGF breached competitive neutrality regulations. OnMarket also raised concerns with the government through submissions to the Senate Economics Committee when it was investigating the bill, the ACCC and APRA back in 2020 over the legality and impact of the fund.

OnMarket doesn’t believe that the fund does much, if anything, to increase the funding to SMEs “our concern is that the ABGF will crowd out existing industry, private-sector funding. They can do this because the government gave $5 billion of exclusive prudential concessions to the banks to invest in the ABGF and no other vehicle. By doctoring APRA’s prudential ratios this allows them to cherry-pick the best SMEs, that would have received funding anyway, rather than expand the pool of capital to those SMEs that are struggling to get it.”

The crossbench had an equally dissenting view on the fund when it was first proposed. In February 2020 there was an unusual crossbench alliance of Rex Patrick, the Greens and Pauline Hanson opposing the Morrison government’s bill to legislate the fund.

Then the pandemic hit Australia and the crossbench could not travel to Canberra. Despite promising not to pass any non-covid related measures the government party passed the bill in the next session as a “Covid measure” even though the bill had been written in November the previous year before Covid was discovered in China.

The maximum penalty for cartel behaviour is a fine of 10% of revenue and up to 10 years in prison.

Competition expert Professor Nicholls believes that “schemes like this are potentially precisely what this new part of section 45 regarding concerted practices was designed to capture. However, because it hasn’t been tested, the ACCC will almost certainly be looking out for when it can try and get some precedent in the court for this new part. Schemes like this have the potential to give the ACCC their test case.”

Treasury and the Prime Minister’s Office have been asked for comment.

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Callum Foote is a journalist and Revolving Doors editor for Michael West Media. He has studied the impact of undue corporate influence over Australian policy decisions and the impact this has on popular interests.

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