Bernard Hickey says the Commerce Commission and the Govt need to help the RBNZ and consumers by cracking down harder on the monopolies and taxes that drive endemic inflation

By Bernard Hickey

Market power is a thing to behold, as is the power of governments to tax and charge.

This power allows companies and governments to raise prices, profits and taxes much faster than in the rest of the economy.

This inflation creates super profits, drags on productivity growth and forces interest rates higher than they otherwise would need to be.

Ultimately, these monopolies and tax increases act like a handbrake on economic growth and consumer purchasing power.

New Zealand is rife with these concentrations of market power, both in the free market and in state owned businesses.

The simplest way to measure just how much this has cost is to look at non-tradable inflation.

This measures the inflation generated by those parts of the economy that don't have to compete with the rest of the world.

This tradable sector includes banking, insurance, electricity, building materials, education, real estate and health industries. These services sectors make up over 70% of our economy.

Over the last decade non-tradable inflation averaged 3.4% per year, while tradable inflation averaged 1.3%.

This inflation expresses itself in much higher power prices, insurance premiums, banking profits, real estate commissions, house building costs and professional services fees.

The Productivity Commission has investigated the services sector to find out why it's failing to keep prices under control. New Zealand is a laggard in the OECD in productivity, being second from bottom in the Commission's comparisons and generating less than half of the productivity growth seen in the likes of Britain, the United States and even Greece.

The Commission pointed out these sectors are often less competitive and it called on the Government to reform the "unconventional, complex and imprecise" laws about the use of market power, which are in section 36 of the Commerce Act.

The Commerce Commission, which has to prosecute abuses of market power, has also called for reform of Section 36.

Their are plenty of live examples of industries where companies with dominant market positions and comfortable relationships with each other have elevated prices.

The Commerce Commission is prosecuting Carter Holt Harvey over price fixing in the Auckland timber market after giving Fletcher Building immunity because it is cooperating.

The Commission is also investigating Fletcher Building's supply arrangements for plasterboard with building supplies merchants, which of course include Fletcher's own Placemakers and Carter Holt's Carters chain. Fletcher says its Winstone Wallboards has a 94% share of the market.

The noise is also building around IAG's takeover of Lumley. IAG already owns AMI, State and NZI, so buying Lumley would increase its share of the home, contents and vehicle insurance market to 66% from 60%.

The Commission is investigating and may force IAG to sell off some assets.

Tower's Chairman Michael Stiassny has rightly warned about the concentration risks and Green co-leader Russel Norman has also called on the Government to ensure a more competitive insurance market. Norman too has called for reform of Section 36.

The Commission will no doubt peruse Statistics NZ's figures showing premiums have risen 45% over the last 10 years, almost twice the inflation rate for the Consumer Price Index.

Interestingly, insurance premiums rose only slightly faster than the non-tradable sector's price inflation of 40.9% over the last decade.

This week's stoush in the market for real estate advertising emphasises just how New Zealand businesses operate. The ideal from a business point of view is to create a cosy relationship between companies that allows consumers to be over-charged.

Five real estate agency franchisors have settled into a comfortable relationship with the two publishing groups, APN and Fairfax, that means vendors are now over-paying for the display advertising published in the likes of the Property Press and property supplements.

Only the arrival of the new technology of internet listings and the intervention of another near-monopoly, Trade Me, is challenging the over-pricing.

Trade Me has already killed off the monopoly pricing of the two newspaper groups in classified advertising. It is now attacking the lucrative market for glossy, colour display ads for houses. Overseas, home sellers now typically spend over 70% of their ad budgets online and the rest in print, whereas in New Zealand that split is still the reverse at 70% on print ads and 30% online.

Trade Me is using its natural network monopoly market power in internet listings to quadruple prices for the agency offices in an effort to accelerate the reversal of that split in New Zealand.

Ultimately, though, Trade Me should face the same anti-monopoly scrutiny once the technology-driven switch is complete.

But the worst of the inflation is coming out of Government, both central and local.

Rates have risen 74.6% over the last decade and the broader category of central government fees and charges has risen 53.5%.

Household energy costs, which are created mostly by the state-owned power generators and lines companies, have risen 66% over the last decade.

It's a pity neither the Commerce Commission nor the Productivity Commission are able to investigate or prosecute governments, which dominate the services sector.

Sadly, the Productivity Commission's report into the services sector was precluded from looking at the electricity sector or the Governments themselves.

This is where politicians and voters need to step up and help the Reserve Bank and themselves by bearing down on these prices and taxes, and striving for higher productivity. One of the least noted sections of the Reserve Bank's December Quarter Monetary Policy Statement was that increased petrol and tobacco taxes are expected to increase the Consumer Price Index by 0.3% for each of the next three years.

There is some hope that new technology and the advent of cloud computing could do for services sector competition what years of weak regulation and poorly designed legislation has not.

The Productivity Commission also called for Government to make it much easier for service industries to use cloud computing. We're seeing a sneak preview of this in small business accounting where Xero was nimble and connected enough to get Government dispensation for hosting New Zealand tax records in the cloud on servers offshore.

There is ample opportunity for medical services, financial services and education to migrate into the cloud.

A lot more needs to be done because monetary policy needs mates. The current Government has brayed loudly about how it thinks a big-spending Labour/Green Government would force a monetary policy reaction higher in interest rates.

But governments of all colours could and should do a lot more to increase their own and the private sector's competitive intensity, along with keeping fees and rates inflation to a minimum.

Anything less would be to allow a nation of monopolies to keep building and running their own troughs that bog the economy in the mud of inflation.

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A version of this article was first published in the Herald on Sunday. It is used here with permission.