/7t0 ) , Je TR On sonasoacoebocsescal onecececeses JUDG TRADE PRACTICES TRIBUNAL TRADE PRACTICES - A.C.T. Concrete Carters - review of the Trade Practices Commission determination denying authorisation to a proposed negotiation and arbitration procedure for arriving at concrete cartage rates in the Australian Capital Territory and Queanbeyan - whether the proposed conduct is likely to result in) a benefit to the public - whether the achievement of industrial harmony is a public benefit which may be taken into account - whether the public benefits outweigh the likely anti-competitive detriment. Trade Practices Act 1974: ss. 88(1), 90, 101. COLIN DAVID LAMONT on behalf of Owner-drivers in the Pre-mixed oncrete Industry RE: APPLICATION FOR A REVIEW OF A DETERMINATION MADE BY THE T RACTICES COMMISSION ACT 1 of 1988 Lockhart J. (President), Mr. A. Fitzgerald, Dr. B. Aldrich 13 July 1990 Sydney COMMONWEALTH OF AUSTRALIA TRADE PRACTICES ACT 1974 IN THE TRADE PRACTICES TRIBUNAL File No. ACT 1 of 1988 RE: COLIN DAVID LAMONT on behalf of Owner-drivers in the Pre- mixed Concrete Industry Applicant RE: Application for a review of a Determination made by the Trade Practices Commission dated 12 October 1988 (Commission file No. CA88/4) 13 July 1990 MINUTE OF ORDER TRIBUNAL: Lockhart J. (President), Mr. A. Fitzgerald, Dr. B. Aldrich THE TRIBUNAL DETERMINES THAT: the determination of the Trade Practices Commission of 12 October 1988 be affirmed. COMMONWEALTH OF AUSTRALIA TRADE PRACTICES ACT 1974 IN THE TRADE PRACTICES TRIBUNAL File No. ACT 1 of 1988 RE: COLIN DAVID LAMONT on behalf of Owner-drivers in the Pre- mixed Concrete Industry Applicant RE: Application for a review of a_ Determination made by the Trade Practices Commission dated 12 October 1988 (Commission file No. CA88/4) 13 July 1990 REASONS FOR DECISION Lockhart J., President, Mr. A. Fitzgerald, Dr. B. Aldrich Introduction This is an application by Colin David Lamont pursuant to s. 101 of the Trade Practices Act 1974 ("the Act") for a review of the determination of the Trade Practices Commission ("the Commission") made on 12 October 1988 denying authorisation to a proposed negotiation and arbitration procedure for arriving at the charges for carting concrete on behalf of concrete producers in the Australian Capital Territory and Queanbeyan. Parties Before the Commission the parties to the application were Mr. Lamont (as applicant) and a representative of the National Readymixed Concrete Association (A.C.T.) Pty. Limited ("NRMCA"), which is an association of the larger producers of concrete in the A.C.T. and Queanbeyan, namely:- Pioneer Concrete N.S.W. Pty. Limited ("Pioneer") Readymix Group (N.S.W.) Pty. Limited ("Readymix") Blue Metal Gravel (Country) Pty. Limited ("BMG") Monaro Mix Specified Concrete Pty. Limited ("Monaro"). {Two producers, Canberra Minimixed Concrete Pty. Limited ("Canberra Minimix") {also trading as Binks Minimix) and Mitchell Minimix made oral submissions to the Commission in relation to the application. Pioneer, Readymix and BMG are associated through shareholdings with corporate groups which are engaged in quarrying and cement production. Monaro, Canberra Minimix, Binks Minimix and Mitchell Minimix purchase some of their requirements from the vertically integrated groups and some from an independent local quarry, Canberra Sand and Gravel. The parties to the review before the Tribunal are: . Mr. Lamont who made the application on behalf of the Concrete Carters Association of the A.C.T. and Queanbeyan ("the Association"), an unincorporated voluntary association whose members are 62 owner-drivers in the premixed concrete industry in the A.C.T. and. Queanbeyan. The owner-drivers are members of the Transport Workers Union, Canberra branch ("the TWU"). : A.C.T. Concrete Carriers Limited ("the company"), a company limited by guarantee and incorporated in the Australian Capital Territory on 6 April 1989. The company was granted leave to intervene in the proceedings before the Tribunal. . Pioneer was granted leave to intervene. . The Commission. An issue which loomed large before the Commission was whether the real applicant for authorisation before it was, not Mr. Lamont, but the TWU of which Mr. Lamont is the secretary. The Commission found that, notwithstanding Mr. lLamont's protestations that he appeared on behalf of the owner-drivers and not as an official of the TWU, nevertheless he did in fact make his application in the latter capacity so that the true applicant was the TWU. There was some debate about this question. The capacity in which Mr. Lamont brings the application for review is not in our view a critical matter, but it is as well to put it to rest at this stage. Mr. Lamont has been the secretary and a full time employee of the TWU since 6 July 1985. 62 lorry owner-drivers have authorised Mr. Lamont to make the application for review. All work for the major producers (Readymix, BMG, Monaro or Pioneer) and cart premixed concrete from the various batching plants in the A.C.T. and Queanbeyan to building sites. Some other lorry owner-drivers and employed drivers work for Canberra Minimix and Mitchell Minimix, but Mr. Lamont was not authorised to make the application on their behalf. For reasons which shall appear later, these other companies and drivers are engaged in a different concrete market, namely, the small building market as distinct from the non-residential building construction industry. The Association is an unincorporated body which has no permanent staff. Its president is Mr. Reynolds who has been president since 1976 or 1977. All 62 lorry owner-drivers who are members of the Association are also members of the TWU. Mr. Lamont is the permanent paid secretary of the TWU and his office and staff and other facilities are made available to the Association to assist it in its affairs without charge. It is important to remember, however, that the TWU consists of some 3,000 financial members of whom 1,700 are employees and 1,300 are owner-drivers in various industries including | the concrete cartage industry. Mr. Lamont was chosen as the applicant by the members of the Association for reasons of convenience because he had the facilities of the TWU available to him for pursuing and preparing the application. We are satisfied that, although there is a considerable community of interest between the Association and the TWU, their interests are not precisely the same and over the years there have been some differences of opinion and approach about matters in the A.C.T. between them. The company was formed for the purposes of conducting this application for review on the advice of the Association's solicitors because they thought it would be a more convenient vehicle for the pursuit of the application and that if the Association was in effect made an incorporated body it would serve to distance itself from the TWU. The company appears to be a somewhat nominal body. Mr. Reynolds is also its "President". We are satisfied that Mr. Lamont has made this application for review to the Tribunal on behalf of the 62 lorry owner-drivers who are members of the Association and that the interests of the Association and the company are the same. Although the TWU has a keen interest in the application and its result, it is not in fact the applicant for authorisation. Witnesses The hearing of this matter occupied six days. Statements were received from 12 witnesses, 9 of whom were called to give oral evidence. The chief witnesses for the applicant, were Mr Lamont and Mr Reynolds. The applicant also called evidence from Mr O'Donnell and Mr King. Mr O'Donnell was a Deputy Industrial Registrar of the Arbitration Commission in the ACT between February 1986 and October 1988. Mr King is a director of the ACT Branch of the Australian Federation of Construction Contractors. A statement by Mr. McPherson, a director of Monaro, was tendered by the applicant. Pioneer opposed the application for authorisation. Pioneer's four witnesses were all either past or present officers of the company with management duties over its ACT operations. The Commission provided statements from Mr Elvin of Mitchell Minimix and from Dr Jill Walker, a supervising project officer with the Prices Surveillance Authority. The Commission also called the only expert witness in the matter, Dr Christopher Hall, an economist. We see no useful purpose in specifically discussing the evidence of each of the witnesses and stating our impression of their credibility and reliability. Our findings of fact are based on the assessments which we have formed of the witnesses after viewing their evidence in the light of the relevant surrounding circumstances, contemporaneous documents and probabilities. Conduct for which Authorisation is Sought The conduct for which authorisation is sought is the private arbitration of cartage rates for premixed concrete as between lorry owner-drivers and the NRMCA. It is proposed that the arbitration be carried out by a tripartite board on which the lorry owner-drivers and the NRMCA have one representative each and that there be a third member who would be the ACT Deputy Industrial Registrar for the time being and be chairman of the Board. A formula for calculating costs is used. The applicant tendered an exhibit titled "The Subject Matter Of The Application Before The Trade Practices Tribunal" which describes in some detail the conduct for which authorisation is sought in the following terms: "In this application: 'The relevant areas' means the Australian Capital Territory and Queanbeyan, and having a radius of 60 kilometres in the case of the circle based on a batching plant in the A.C.T, and a radius of 60 kilometres in the case of a circle based on a batching plant in Queanbeyan. 'The Carters' means those persons who as independent contractors are from time to time engaged in the business of the delivery by road transport of pre-mixed concrete from plants producing pre-mixed concrete which plants are situated within the relevant areas or any one or more of such persons. 'The Producers' means those persons who are producing pre-mixed concrete at plants situated within the relevant areas or any one or more of such persons. 'Persons' includes corporations. 1. The Carters propose to enter from time to time into contracts, arrangements or understandings between themselves as to the rates and conditions for the delivery by road transport of pre-mixed concrete from plants producing pre-mixed concrete in the relevant areas in respect of which they intend to negotiate with the producers. 2. The Carters propose to enter into negotiations from time to time with the producers collectively as to the said rates and conditions. 3. The Carters propose a mechanism pursuant to which the Carters and Producers will negotiate as to the said rates and conditions as follows: (a) (b) (¢) (4) FIXED costs $ $$ $ That a Tripartite Board be established and on that Tripartite Board will be a representative of the Producers and a representative of the Carters and that the person occupying the position of the Deputy Industrial Registrar, Canberra Registry of the Industrial Relations Commission be the Independent Chairman of the said Tripartite Board; That the Tripartite Board will meet on a six monthly basis on or about 1 June and 1 December in every calendar year. That the Tripartite Board will make a decision in respect of the rates and conditions as between the Carters and the Producers which decision shall be binding on the Producers and Carters. That the Tripartite Board will review the said rates on the abovementioned days in accordance with the formula in the schedule hereto which review shall be binding on the Producers and Carters. RATE OF REVIEW FORMULA CURRENT PREVIOUS costs costs / f / of (a) Depreciation at 15% of Invested Capital of $ '(Invested Capital represents the Retail List Price inclusive of Sales Tax and Stamp Duty of a new International ACCO 2250D diesel engine truck) (b) Vehicle Registration (¢c) Vehicle Third Party Insurance (d) Vehicle Comprehensive Insurance (Assessed on 14 tonne rate with Government Insurance Office on basis of 50% cover on invested capital, vehicle being free of any encumbrances, there being no allowance for any 'no claim' bonus and insured to bear the first $200 of any claim) VARIABLE COSTS (Assessment made on 4.200 cubic metres and 24,000 kms p.a.) (a) Fuel (inclusive of mixer) km per litre @ per litre distillate (b) Tyres and tubes (list price) 6 of 10.00 x 20 (12 ply) tyres 6x $ 2 tubes for 2 x $ (c) Repairs and Maintenance (being 50% of depreciation - Item 1(a):$ 50% fuel costs Item 2(a)$ (d) Miscellaneous Costs (being 10% of Items 2(a), 2(b) and 2(c)] LABOUR COST Award wage (A.C.T. Award) based on 14 tonne rate with Industry Allowance, plus 50% ( ) x 52 RETURN OF CAPITAL Based on price of vehicle {1(a)] multiplied by 20% TOTAL TOTAL CALCULATIONS VERIFIED BY: Increased costs - % increase is - ~10- In short, the application proposes the calculation every six months of a notional cost of operation of a concrete delivery vehicle operated by a lorry owner-driver in the ACT/Queanbeyan market in accordance with typical practice, and an adjustment of existing cartage rates according to the percentage increase in the notional calculated cost. The formal procedure would be undertaken by a body made up of an independent chairman sitting with one representative each from the carters and the producers. The proposed formula for cost calculation is known as the McLagan formula. Its origins in an arbitration conducted under Commissioner McLagan are described later. The merits of the McLagan formula for its stated purpose were not at issue before the Tribunal. Each of the items comprising the formula estimates, on an annual basis, an element of the fixed or variable costs of operating a concrete delivery vehicle. For each item a sensible basis for estimation seems to have been adopted. Evidence was given that, when an element in the formula' has in the past become obsolete following a shift in cartage practice, an agreed adjustment to the detail of the formula has been possible. In any event, adjustment in cartage rates would follow determination of a relative change in estimated costs, and would not be dependent on the absolute value of the total cost estimate. Consistency in the basis for cost estimation is thus the prime requirement, and the proposed conduct appears to achieve this adequately. -11- Because the proposed conduct is a periodic private arbitration, the parties would not be bound at law to implement its successive outcomes. The use of private arbitration follows from jurisdictional problems that would arise under the Industrial Arbitration Act 1988 if any dispute between lorry owner-drivers and concrete producers in the ACT was brought before the Industrial Relations Commission, because lorry owner- drivers are not employees. The proposed conduct is very similar to conduct that applied in the ACT/Queanbeyan market by common consent until the last arbitration in early 1988, after which the lorry owner-drivers made application to the Commission for authorisation. The Statutory Test The application to the Commission was made on 2 May 1988 under s. 88(1) of the Act which gives the Commission power to authorise conduct which might have the effect of substantially lessening _ competition. The Commission may only = grant authorisation if the relevant statutory test within s. 90 of the Act is met. That test requires that the Commission shall not make a determination granting authorisation unless in all the circumstances it is satisfied that . the provisions of the arrangement have resulted or are likely to result in a benefit to the public; and -12- . the benefit outweighs or would outweigh the detriment to the public constituted by any lessening of competition resulting from or likely to result from giving effect to the provisions of the arrangements. History of the McLagan Formula The conduct the subject of the application for authorisation had its genesis in 1971 in a decision of Mr Justice Williams as private arbitrator resolving a dispute referred to him following a protracted industrial stoppage by both employee drivers and lorry owner-drivers. Mr Justice Williams determined that individual contracts should be negotiated between each company and its owner-drivers. A formula was used as a basis for such negotiation. The subject of cartage rates came before Commissioner Taylor of the Australian Conciliation and Arbitration Commission sitting asa private arbitrator in 1976, again as a result of the parties failing to agree on an appropriate review of the rates. Incorporated in the decision of Commissioner Taylor was a reference to the agreement of the parties to review the formula. During the period 1977-1982 the revised formula was generally applied for setting rate increases. However, towards the end of this period there was a renewed level of industrial disputation resulting from the lorry owner-driver's perception -13- that the application of the formula had failed to maintain rates at a viable level due to discounting of cost increases at various times over the period. As a result the matter was once again referred to a Commissioner for private arbitration. In 1982 Commissioner McLagan established new base rates to which the formula was to be applied at regular intervals to calculate rate increases. He also proposed that a Tri-Partite Board be established to meet at six-monthly intervals to review the formula. The Tri~Partite board was to be composed of a representative of the concrete companies, a representative of the lorry owner-drivers and the deputy Industrial Registrar, Canberra Registry, who was to be the Chairman. The Tri-Partite Board met at six-monthly intervals until 1988 when meetings were suspended pending the outcome of this application for authorisation. Since the suspension of the meetings there have been no further disputes as to cartage rates, in marked contrast to the disruptive disputes which occurred prior to the establishment of the formula and a formal method for regularly reviewing its application. Background to the Application Earlier Tribunal Case This is not the first occasion on which authorisation has been sought by carters of concrete in the A.C.T. for systems of negotiation of contract cartage rates. In 1976 applications were -14- made to the Commission for authorisation and clearance in respect of a somewhat similar system of negotiation of rates. The Commission dismissed both applications (see [1976-1977] ATPR (Com) p. 15,657, applications by John Henry West-Newman). Two other applications were considered by the Commission in 1976-1977 being New South Wales Road Transport Association (see {1976] ATPR (Com) p. 16,598) and the Concrete Carters Association of Victoria ([1976-1977] ATPR (Com) p. 15,663, application by G. & M. Stephens Cartage Contractors Pty. Limited ("the Stephens Cartage Case"). The Commission took the view that industry wide negotiations on owner-rates would provide a detriment to competition which would not be outweighed by the benefit of industrial harmony that might arise from the arrangement. On the other hand the Commission accepted that a group of lorry owner-drivers who were engaged by a particular company could negotiate collectively with their company in relation to the calculation of their rates for cartage. The §tephens Cartage Case came before this Tribunal differently constituted [1977] ATPR 40-042. The Tribunal did not adopt the same approach as the Commission. Indeed, it granted authorisation to the industry wide negotiations. The Concrete Carters Association of Victoria sought to have industry wide negotiations on behalf of its owner-driver members. The Tribunal took the view that there were irresistible pressures in the industry towards an industry wide and level rate and that company based bargaining was not practical. The Tribunal said that the -15- presence of the Transport Workers Union as an alternative negotiating force on behalf of the Concrete owner-drivers pointed to the reality that, in the absence of authorisation for the Concrete Carters Association, the union would assume full representation of the owner-drivers and would ensure the maintenance of industry wide rates and conditions. The Tribunal said that "whatever may be true of other industries, other times and other places, it is clear that, in both the cartage and pre-mixed concrete industries at the present time in the Greater Melbourne Region, the occupational status of owner-drivers is the source of significant benefits". The Tribunal saw the maintenance of the occupational status as being in the interests of productivity, competition and economic efficiency and therefore of benefit to the public. The Tribunal therefore authorised the Association to negotiate on an industry wide basis. Markets All evidence and submissions are consistent in stating that there are two relevant product markets: * the market for pre-mixed concrete in the ACT/Queanbeyan district (sometimes called hereafter the "concrete market") * the market for pre-mixed concrete delivery services, so that pre-mixed concrete is transported from the point of production in the ACT/Queanbeyan district to the point of use (sometimes called hereafter the "cartage market"). The Concrete Market The market for pre-mixed concrete involves the mixing of concrete in a batching plant to standards specified by a customer, and its delivery at an agreed time to a construction site where it will be poured promptly. Reliable product quality and delivery service are important to success in the market. For technical reasons pre-mixed concrete must be placed in its final location within 90 minutes of mixing and preferably sooner. This limitation restricts the distance within which pre- mixed concrete can in practice be delivered from the plant that produces it. The designed capacity and location of a pre-mixed concrete plant is pitched to suit the projected market for pre- mixed concrete within the practical delivery distance from the plant. The concentration of demand for concrete in Canberra and nearby Queanbeyan, and the distance of these centres from other cities or substantial towns, has the effect of geographically isolating the ACT/Queanbeyan markets from outside competition for concrete and concrete cartage. It is not practical to deliver concrete to Canberra or Queanbeyan from say Yass, Goulburn or Cooma; nor is it practical to supply demand for concrete in those -17- places from Canberra or Queanbeyan. The predominant pattern of the ACT/Queanbeyan concrete market has four major producers, operating six batching plants ("yards"), supplying pre-mixed concrete at contracted tender prices to major construction projects managed by five major construction contractors. The four major producers of pre-mixed concrete in Canberra and Queanbeyan are Pioneer, Readymix, BMG and Monaro. All of these except Monaro operate nationally. Although the ACT/Queanbeyan market is geographically isolated, the national producers can be expected to adopt management and marketing policies in the area that are consistent with their national policies. Pioneer and Monaro each operates one batching plant, while Readymix and BMG each operates two. All yards are located in industrial precincts of Canberra, except for the Monaro yard which is in Queanbeyan. Concrete is delivered from batching plant to the point of use in special purpose delivery vehicles each fitted with a rotating barrel, normally with a capacity of 5 cubic metres. The demand for concrete in the ACT/Queanbeyan market is mostly associated with major construction projects. MThe five members of the Australian Federation of Construction Contractors, ACT Branch, presently use over 80% of all concrete produced in the district, according to evidence tendered by the AFCC -18- Director, Mr. King. The dependence of the ACT concrete market on major construction projects has been reflected in substantial fluctuations in demand over recent years. A period of high demand between 1986 and 1988 has since been followed by sharply reduced demand levels which are forecast to persist. Because sales by major producers. are so dependent on the winning of competitive tenders to supply concrete to construction projects, it seems clear that most concrete is sold at contracted tender prices rather than at published list prices. The evidence demonstrates that actual concrete prices in the ACT/Queanbeyan market are very comparable with prices applying in other capital city markets. Evidence shows also that the market shares of major producers can fluctuate substantially according to their success in winning supply contracts to major construction projects. Price competition in the relevant concrete market is plainly very strong. However, evidence from witnesses called by Pioneer and in exhibits indicates that open competition can be hindered by a perceived lack of confident capacity to supply. This lack of capacity does not arise from limitations in the batching plants; all major producers appear to have ample batching capacity to meet substantial fluctuations of or increases in demand. Rather, the capacity constraint arises from a perception among managers -19- of Pioneer that additional delivery vehicles will not or may not be available to handle a major increase in business. Pioneer asserts that barriers to entry of additional cartage capacity for delivery of Pioneer concrete are enforced by or on behalf of the applicant, limiting Pioneer's ability to gain additional market share. This matter is addressed at greater length later. The other two concrete producers, Canberra Minimix and Mitchell Minimix, specialise in the sale of small quantities of pre-mixed concrete to small house-builders and the like, using delivery vehicles with a capacity less than half of the capacity of vehicles used by the major producers. Evidence indicates that this) "minimix" market can be considered distinct from the relevant concrete market to which the conduct the subject of the application before the Tribunal pertains. None of the 62 lorry owner-drivers who authorised this application are engaged in delivering to the "minimix" market. The Cartage Market Evidence before the Tribunal shows the salient characteristics of the ACT/Queanbeyan market for concrete cartage services to be as follows: * The major concrete producers have chosen to have their product delivered by contracted lorry owner-drivers rather than by their own trucks driven by employees. ~20- * The producers have adopted marketing and management practices that allow lorry owner-drivers no room to compete for business, while leaving each lorry owner-driver burdened with the attendant business costs and risks. * In the absence of competition, anti-competitive practices and procedures have emerged in the concrete cartage market that are centrally directed to assuring adequate income for lorry owner-drivers and securing their investment in concrete delivery trucks. * The working of the cartage market in recent years has been critically influenced by these practices and procedures. * As the likely net income of an lorry owner-driver has become more predictable, and the security of engagement more certain, participation in the concrete cartage business has become in some degree a negotiable property, and lorry owner-drivers have been able to sell their businesses at prices that include a good-will element in addition to the value of their vehicles. The major concrete producers in Canberra and Queanbeyan adopt the general practice of engaging contractors to deliver pre-mixed concrete to customers, thus constituting a market for concrete delivery services. The delivery vehicles are, and for several years have been, all supplied by lorry owner-drivers. -21- Lorry owner-drivers are individual small businessmen who derive a gross income according to the cartage rates paid by the concrete producers and the volume of concrete delivered, and achieve a net livelihood after paying the costs which they bear in financing and operating their trucks. For the past several years, the number of lorry owner-drivers engaged by the major producers has been 62. The cartage market in ACT/Queanbeyan does not allow free competition between all lorry owner-drivers for work at all yards. Indeed, the Tribunal heard no evidence of any competition at all. Concrete producers adopt a marketing policy of having their delivery trucks painted in a distinctive livery, effectively "branding" the product being delivered, and precluding the use of the truck to deliver concrete made by another producer. The tie of each lorry owner~driver to one producer is reinforced by the convention that the mixing barrel mounted on the lorry owner-driver's truck (without which the truck cannot be used to deliver concrete) is supplied and owned by the concrete producer. Every lorry owner-driver is therefore competitively constrained, in that entry to the market and continuance of business in the market requires acceptance of a tie to one producer, and strict adherence to that producer's requirements. The volume of work performed depends on the success of the producer in winning business, and cannot be -22- influenced favourably by the actions of the lorry owner-driver. In this respect and also in certain other respects, the situation of the lorry owner-driver is more closely analogous to that of an employee in the labour market than to the customary situation of a sub-contractor associated with the construction industry. There does not appear to be any formal written contract entered into on engagement, nor apparently has either party sought it in recent years. The producer appears to give no undertaking beyond the generally applicable cartage rates that will be paid. There is no agreed term of engagement and an lorry owner-driver can (at least notionally) be dismissed at short notice by unilateral decision of the producer. No invoices are submitted for payment by the lorry owner-driver; payment is made at regular intervals by the producer on the basis of work records kept by the producer. In this situation it is not surprising that the analogy to the employee in the labour market extends to the generality of union membership among lorry owner-drivers, and the threat and occasional use of collective industrial action through the Association or through the TWU on the Association's behalf. This is not a response for which the lorry owner-drivers can be criticised. It may perhaps be formally justified as a reasonable evocation of countervailing power. The arrangements in place have developed directly and understandably from a structure devised and continued by the concrete producers. ~23- Concrete producers could alternatively elect to own the delivery vehicles and to employ drivers. The national concrete companies adopt this course, at least in part, in some other regional concrete markets. In doing so, they assume directly the capital risk and operating costs of the trucks, but gain a greater management flexibility because the threat of industrial action over cartage rates is reduced. Evidence shows general agreement that lorry owner-drivers exhibit a higher motivation for efficiency and cost control than employed drivers, but are strongly motivated also to protect their investment and livelihood by collective industrial action or threats of such action directed to continuity of engagement and securing a level of income sufficient to cover their fixed and variable costs. Evidence of Mr. Reynolds showed clearly that the conduct which is the subject of this application was devised with the objective of reducing industrial disputation over cartage rates, whilst meeting the concern of lorry owner-drivers that incomes should rise to reflect cost increases. Barriers to entry to the cartage market Evidence on behalf of Pioneer revealed a second parallel strand of conduct by lorry owner-drivers to secure their income, which further illuminates the manner in which the cartage market has worked and confirms the effective absence of competition in that market. ~24- Barriers to entry into the ACT/Queanbeyan cartage market by additional delivery vehicles have been erected by established concrete carters, acting collectively and using the implied threat of industrial action unless they are consulted on and agree to any addition to delivery truck numbers. Pioneer asserted that the refusal of the Association or its yard delegates to agree to increased truck numbers operating from the Pioneer yard has damaged Pioneer's competitive position. and has hindered action to increase market share. Other submissions were consistent with the broad thrust of the Pioneer evidence, and included correspondence from other concrete producers and from the NRMCA directed unsuccessfully to relieving a shortage of trucks during a period of high demand in. 1985. The concern of the Association to limit truck numbers in the cartage market was frankly confirmed by Mr. Reynolds in evidence, and explained by him as being directed to protection of the investment of lorry owner-drivers against the effect of sharing available work among a greater number of trucks. The limitation on truck numbers has meant that established lorry owner-drivers have been fully employed to the extent that the market at any time allowed, and that they have had access to overtime work in busy periods. Mr. Reynolds' evidence on his experience in the ACT/Queanbeyan cartage market clearly exposed the potential business difficulties of lorry owner-drivers in a fluctuating -~25- market where income can rise and fall substantially in the shorter term, while the fixed capital charges associated with truck ownership bear on the lorry owner-drivers over the lives of the vehicles. In the period from 1975 to about 1983, a steadily growing market was over-supplied with trucks, and many lorry owner-driver businesses failed financially. Between 1975 and 1980 some 58 lorry owner-drivers left the market, apparently due to financial failure. In the mid-1980's, Canberra's construction industry experienced a major boom which peaked in 1987-88. During this period and since, the number of lorry owner-drivers engaged by the major contractors was kept stable at 62 at the insistence of the Association, who refused any permanent increases in truck numbers. Some limited exchanges of trucks occurred between yards, and an occasional short-term transfer of a vehicle from another district; but even these mitigations of an endemic truck shortage were only reluctantly agreed to by the Association. In 1988 demand for concrete declined sharply, and is said to have again come approximately into balance with truck numbers. One concrete producer was especially short of business in recent months, putting at risk the business of some lorry owner-drivers operating at that yard. However, Pioneer gave evidence that it wishes to add to the number of trucks it presently engages, as a basis for pursuing an increased market share. Pioneer has sought to bring the additional vehicles from elsewhere and has -26- not won the agreement of the Association to such action. Pioneer has not sought to expand its truck numbers by inviting transfer of under-utilised trucks from other yards in the Canberra area. The limitation of truck numbers through collective pressure from established lorry owner-drivers is not the subject of this application, although in the absence of authorisation under the Act the conduct is plainly questionable. Evidence with respect to the issue was useful, however, to the Tribunal in other respects. One effect of the limitation of truck numbers in constraining the market, and limiting participation in the normal course to established lorry owner-drivers, has been the emergence in recent years of a price for entry into the market by a new lorry owner-driver - the goodwill element of the price at which an established lorry owner-driver would sell his business. The magnitude of the goodwill element was the subject of conflicting evidence - figures as high as $60,000 were mentioned - and plainly goodwill would fluctuate according to general market prospects and in particular the market prospects of the producer to whom the in-coming lorry owner-driver would be tied. However, the existence of a price for entry into the concrete cartage market reinforces more direct evidence as to the existence of barriers to market entry. Taken together with the proposed conduct, efforts by the -27- Association to limit truck numbers are openly directed to making the incomes of lorry owner-drivers a matter for collective industrial negotiation between lorry owner-drivers and the concrete producers rather than a matter to be resolved by competition in the marketplace. Together, the two practices would have, and are plainly designed to have, a comprehensive anti-competitive effect. Public Benefit Industrial Harmony The applicant argued that several public benefits would flow from authorisation of the proposed conduct. However, the primary benefit on which the applicant relied was said to be the extent to which the proposed conduct would promote industrial harmony. Before considering the extent to which authorisation would in fact promote industrial harmony it is necessary to address the prior question of whether, as a matter of principle, industrial harmony should be considered as an appropriate public benefit under the Act. This question arises because it was submitted by counsel for the Commission that industrial harmony is the avoidance of a negative occasioned by the lorry owner-drivers | themselves, and thus to claim this as a benefit offends the purpose of the Act. Whilst there is some force in this submission, ultimately -28- we are of the view that the achievement of industrial harmony is a public benefit which may appropriately be taken into account in determining whether authorisation should be granted. As discussed above, the lorry owner-drivers are more akin to employees than small business operators. In this setting it would be to ignore labour market. realities not to recognise that industrial disputation is one of the limited number of options available to the lorry owner-drivers when seeking changes to their rates. Thus the establishment of a method of setting rates which demonstrably decreases the likelihood of industrial disputation should be regarded as a benefit. This benefit is clearly a public benefit as the impact of delays in the delivery of concrete or even uncertainties resulting from the threat of industrial disruption is felt by the end user of the product. The conclusion that the achievement of industrial harmony constitutes a public benefit, is consistent with previous decisions of this Tribunal, most notably in the Stephens Cartage Case at 17,476. Whilst we have concluded that industrial harmony is a public benefit which may appropriately be taken into account in assessing this application, we nevertheless accept counsel for the Commission's argument that industrial harmony is a somewhat nebulous concept and perhaps more to the point, rather fragile. Thus, in order for us to accept that a public benefit exists, the evidence must clearly establish that the granting of -29- authorisation will lead to significantly greater industrial harmony in the future than a likely alternative. There is clear evidence that, since the McLagan formula was first applied in 1982, there have been no major industrial disputes regarding rates, whereas prior to that time there were numerous severely disruptive disputes. However, this evidence must be seen against a background of a general decline in industrial disputation which may reflect the existence of more effective processes of dispute resolution. In the Tribunal's view it seems probable that the application of the McLagan formula significantly contributed to industrial harmony in the relevant market at the time. However, it is the likely course of future conduct that is directly relevant to the application before us. Historical evidence can only provide a rough guide to the probable future behaviour of the participants in the markets here, given self-evident change in the framework for industrial dispute resolution in Australia. Industrial action is generally not undertaken for its own sake; it is only a means to an end. It is in no person's interest to strike unnecessarily where some other means to the same end is available. Although it is impossible to predict with any real degree of certainty, it can be anticipated that it will be to the advantage of both producers and carters to find some method of setting rates without industrial disputation. -30- It is not for the Tribunal to stipulate or suggest what method might be followed in the absence of authorisation. However, we are not convinced that, in the absence of authorisation, significant long term industrial disharmony need be or would be a necessary outcome. Other Public Benefits The other public benefits which the applicant suggested would result from authorisation have, in our opinion, little relevance or substance. They are of marginal significance, or not really a likely outcome of authorisation or would constitute a private rather than a public benefit. For example, stabilisation of lorry owner-driver's income is of direct benefit only to the lorry owner-drivers themselves. The likelihood of increased stability in the concrete industry is dependent on very similar factors to the likelihood of industrial harmony. The applicant nominated maintenance of the status of lorry owner-drivers as a significant public benefit. This submission probably derives from what was said in the Stephens Cartage Case. However, the circumstances in that case were somewhat different, the decision being strongly influenced by the Tribunal's desire to minimise the influence of the Transport Workers' Union in the carters market. There has been no evidence put forward in this case that the Transport Workers' Union would or could seek to enforce a switch to employee drivers. The future preferences of -31- the concrete producers are unclear. There is no cogent evidence supporting the proposition that, if authorisation is not granted, the concrete producers would switch to employee drivers. The producers would not necessarily all reach the same conclusion, and would make this change only if they thought they could reduce their cartage costs by doing so, and otherwise meet their market needs. If, as the applicant claims, lorry owner-drivers provide a better and more efficient service than employee drivers, they will not be replaced. If they do not provide a better service there can be no public benefit in entrenching their position. As recognised in the Stephens Cartage Case the existence of a possibility that concrete producers might switch to employee drivers provides a useful ceiling to the rates that can be charged by lorry owner- drivers. Either way, we do not accept that this head of public' benefit would exist. Detriment In order to determine whether the limited public benefits identified above are sufficient to justify authorisation it is necessary to determine whether they outweigh any likely anti-competitive detriment. The conduct the subject of the application for authorisation involves the fixing of a price for services across the whole of a market. Within product markets it is generally assumed that price fixing agreements are ~32- anti-competitive. However, as has been recognised earlier, the position of the lorry owner-drivers is more akin to that of employees than small businesses and hence in assessing the likely anti-competitive effects of the proposed conduct the economic analysis applicable to labour markets is more appropriate. One significant difference between labour markets and other product markets is that labour markets are characterised by long term relationships. This is particularly evident in the way the market for concrete carters is set up. As explained earlier, once a truck is put on in a yard it will generally remain for the rest of its useful life. The existence of such long term relationships between employers and employees means that in the context of labour markets it is unrealistic to think of employees as competing on the basis of price. An employer will not normally employ a new driver because the driver is offering to work for less than existing drivers. Similarly, it is unlikely that lorry owner- drivers would be willing to work for less than other drivers in the same yard in order to obtain work or gain entry into the industry. The natural barriers to entry would prevent this in any case as a new driver with a new truck would probably have higher costs than existing drivers and would not be able to survive at a lower rate. -33- Thus, competition between carters is not likely to result in differential cartage rates being paid to lorry owner-drivers operating out of the same yard. In this sense a refusal to authorise would probably not significantly enhance' the competitiveness of the market. However, there is scope for competition between yards and this is inhibited by the existence of a formula which automatically grants nominal cost increases as cartage price increases across the industry. In circumstances in which the formula is based on the price of a new truck, drivers may automatically obtain an increase in rates which does not reflect any actual increase in their costs in the short term. To the extent that this generates some leeway in the rate increases, each yard should be able to negotiate with its drivers to establish the extent of the increase that will be paid. It is foreseeable that there could be circumstances in which yards in difficulty would wish to resist rate increases and drivers within the yard would accept a lower increment than obtained in other yards in order to maintain the volume of work. By preventing any possibility of this type of flexibility in rates the proposed conduct does present an anti-competitive detriment. This detriment becomes even more significant when it is considered in the wider market context and in particular the barriers to ready entry of additional vehicles on which the Association has insisted. Clearly this restriction has an anti-competitive effect in that it inhibits competition between producers and decreases their ability to respond to opportunities -34- or to changes in demand. Taken together with the proposed conduct, it tends to preclude useful competition in the cartage market. However, the anti-competitive detriment attributable to the restriction on truck numbers is attributable to the conduct sought to be authorised only if that conduct is causally related to the maintenance of the restriction on truck numbers. The evidence on this point was not very helpful, as neither the Commission nor Pioneer was able to provide a convincing explanation as to the causal nexus between the conduct the subject of the application and the limitation on truck numbers. We have come to the conclusion that the establishment of a more flexible system for setting cartage rates would not significantly diminish the power or desire of the Association to maintain this restriction. However, this conclusion that there is no direct causal nexus does not mean that the existence of a restriction on truck numbers has no impact on the possible anti-competitive detriment attributable to authorisation. The evidence given by the expert witness Dr Hall, whilst not going so fax as to assert a causal nexus, did indicate that the restrictions on truck numbers and the conduct the subject of the application were related. Operating together they provide a degree of assurance to the incomes of lorry owner-drivers. That is, the application of the proposed conduct ensures that rates increase roughly in line with costs and the limitation on new entry assists in maintaining the volume of work available to each -35- driver. The existence of a degree of assurance to the level of income each driver can expect to earn is likely to increase the amount of goodwill lorry owner-drivers might recoup when selling their business to new drivers. The evidence confirms that this has already occurred with payments for goodwill having increased from nothing at the time the McLagan formula was first applied to significant sums today, perhaps as high as $60,000. The existence of goodwill need not necessarily indicate the absence of competitive pressures in a market, if for example it reflects the value of intangible assets such as a client base built up over a number of years. However, in the market for concrete cartage goodwill payments purchase nothing more than the right to enter the market. Such payments increase the already significant barriers to entry in this market. Furthermore, increases in goodwill payments are likely to put pressure on the rates charged by lorry owner-drivers both because drivers who have paid a significant amount for goodwill will have higher financing costs and because drivers will wish to protect the value of their investment by ensuring that rates remain high. Thus, although we are not satisfied that the conduct the subject of the application has significantly contributed to the restriction on truck numbers, which would have clear-cut anti-competitive effects, nevertheless the existence of this parallel practice of restricting truck numbers means that the a ~36- anti-competitive detriment likely to result from authorisation is far more significant than the mere application of the proposed conduct suggests when considered in isolation. onclusio We therefore decline to authorise the conduct for which authorisation is sought. I certify that this and the preceding thirty-five (35) pages are a true copy of the Reasons for Decision herein of the Trade Practices Tribunal. Associate Collette Log Dated: 13 July 1990 Counsel for Colin David Lamont: Mr. C.C. Hodgekiss and Mr. J.J. Fernon Solicitors for Colin David Lamont: Pamela Coward & Associates Counsel for Trade Practices | | | | Commission: Mr. A.J.L. Bannon Solicitors for Trade Practices Australian Government Commission: Solicitor Counsel for Pioneer Concrete (NSW) Mr. D.A. Cowdroy Q.C. Pty Ltd: and Mr. H.R. Gracie | Solicitors for Pioneer Concrete Mark Diamond & (NSW) Pty Ltd: Associates | Dates of Hearing: 26, 27, 28, 29, 30 March and 2 May 1990 Date of Decision: 13 July 1990