Draft Report Says Regulatory System Favours Established Building Products

The Commerce Commission’s draft report into competition in the residential building supplies industry has identified two main factors negatively impacting competition, and recommends changes that could deliver more choice and better quality along with greater innovation for the benefit of New Zealand homeowners.

Commission Chair, Anna Rawlings, says the market study shows that ‘tried and tested’ products have become embedded in home-building practice in New Zealand – and the building regulatory system should include competition as a deliberate objective.

In some circumstances, some types of rebates paid by established suppliers to merchants appear to be reinforcing difficulties faced by competing products.

Make it easier for the introduction and expansion of new, innovative products
“Our preliminary view is that competition for the supply of key building supplies is not working as well as it could, and would be improved if it was easier for building products to be introduced and for competing suppliers to expand their business.”

Ms Rawlings said the building sector is governed by a building regulatory system, which has at its heart, the provision of safe, healthy, and durable homes for New Zealanders.

“While innovation is recognised as important to achieving these objectives, our preliminary view is that the regulatory system has a number of features that prevent competition from working well.

“Despite flexibility to use new products being available in the system, it is too slow, costly and uncertain to get them accepted for general use,” she says.

The Commission’s draft report says the Building Code and associated systems are complex to navigate and competition is not an express objective of the Building Act.

Ms Rawlings says the combined effect of the regulatory system and the decisions made by designers, builders and building consent authorities working within the system “is to favour ‘tried and tested’ building products over new or competing products”.

Concern about rebates that deter merchants from stocking competing products 
The Commission’s draft report says that the favouring of ‘tried and tested’ products appears to be compounded, under certain conditions, by quantity-forcing rebates paid by some established suppliers to merchants.

“These rebate structures reward merchants for purchasing greater volumes through a single supplier and can deter merchants from stocking competing products in their stores. This appears to be reinforcing challenges to distributing new, innovative or competing products in some product markets,” Ms Rawlings says.

“It is widely accepted that rebates are not all bad either. They can deliver benefits – for example, providing a way for suppliers to pass through lower costs per unit from supplying greater volumes. However, when quantity-forcing rebates are used by a supplier with a large share of a market, they can harm competition by reducing the ability of smaller competitors or new entrants to compete.

“Having products stocked by merchants is important for many smaller suppliers to get established and expand in the market,” she says.

As in previous market studies in the fuel and grocery sectors, the Commission has also identified that merchants are benefiting from restrictive covenants on land and entering into exclusive leases with landlords. This also has the potential to impact competition.

Ms Rawlings says a multi-sectoral approach to covenants may be required and the Commission is recommending that an economy-wide review be commissioned to consider the impact on competition of covenants across the New Zealand economy.

While vertical integration does not appear to be a factor affecting competition over the longer term, Ms Rawlings says the current pandemic-related supply chain issues and increased demand for building materials have highlighted and magnified the inherent risks in highly concentrated markets: “Where there are challenges to entry and expansion, established building products and methods can reinforce their positions”.

“Outside of the current supply shortages, any concerns regarding merchants’ ability to access key building supplies do not appear to be due to vertical integration, and there are a range of independent distribution options available to non-vertically integrated suppliers.”

Case studies illustrate factors affecting competition 
As well as looking at factors affecting competition across the range of key building supplies, the Commission’s market study also considered three key building supplies through more detailed case studies. These were ready-mix concrete (including cement), plasterboard and structural timber.

“These case studies – selected primarily as a consequence of the relatively high proportion of the cost of residential building that they represent compared with other supplies and the relatively high concentration of suppliers for these materials – demonstrate how the factors affecting competition apply to a greater or lesser extent in relation to different key building supplies,” Ms Rawlings says.

Plasterboard has been the subject of significant public commentary in recent months as current supply shortages have highlighted the lack of alternatives for some key building supplies.

The Commission’s draft report identifies that plasterboard is commonly specified by brand in building plans, and this has made it difficult for builders to substitute competing products to Winstone Wallboards’ GIB-branded plasterboard.

Building consent authorities throughout New Zealand can take different approaches to consenting decisions, adding to the difficulties in substituting alternative plasterboard (and other) products. Quantity-forcing rebates for plasterboard also appear to be contributing to difficulties for competing suppliers.

Ms Rawlings says initiatives employed through the Government-appointed Ministerial taskforce for plasterboard showcase how regulatory difficulties to entry and expansion potentially may be overcome to enable greater competition, not only for plasterboard, but also for other building supplies.

DRAFT RECOMMENDATIONS
The Commission’s draft report identifies a range of recommendations to improve competition and produce better longterm market outcomes for homeowners and other end-consumers – while at the same time meeting the core objectives of the building regulatory system to deliver safe, healthy, durable homes.

“The best options for improving competition over the longer-term involve enabling suppliers of key building supplies to enter and expand more easily,” Ms Rawlings says.

The draft recommendations are in three inter-dependent groups, which reflect the combination of regulatory, behavioural and strategic impediments that are making it difficult for new or competing building products to enter and for suppliers to expand their businesses in competition with existing suppliers. All recommendations will be subject to further consultation and further analysis and deliberation. The resulting suite of recommendations may therefore change in the final report.

Enhance the regulatory system:

• The Commission’s draft recommendations include introducing competition as an objective to be promoted in the building regulatory system, creating more compliance pathways for a broader range of key building supplies, and making it easier for designers and market participants to use and adopt new or competing building supplies.
• It also considers that better engagement with Māori is key to achieving their aspirations and ensuring that Māori perspectives are better reflected in the building regulatory system.

Support sound decision-making:

• In addition, the Commission makes draft recommendations directed at the decision-making behaviours of designers, builders and building consent authorities involved in the implementation and application of the regulatory system. This includes identifying and developing methods to centralise information sharing about key building supplies.
• The current MBIE-led review of the building consent system may provide a pathway for further policy development in relation to draft recommendations relating to the regulatory system.

Address strategic business conduct:

• Other recommendations are directed at the strategic business conduct that the Commission has identified as affecting competition in markets for key building supplies. This includes recommendations relating to quantity-forcing supplier-to-merchant rebates and use of restrictive land covenants and exclusive lease arrangements.
• These initiatives aim to discourage conduct that may harm competition and ensure the rules about misuse of market power and other conduct are understood, and are appropriately addressed.

With regard to restrictive covenants and exclusive leases, Ms Rawlings said it may well be the case that a multi-sector approach is required, and further research could inform this decision.

“We are making a draft recommendation that an economy-wide review be commissioned to consider the impact on competition of covenants across the economy and assess whether a wider multi-sector solution is required.”

SUBMISSIONS ON DRAFT REPORT

Interested parties are invited to make submissions on the draft report, due by 4pm Thursday 1 September 2022. The Commission also intends to hold a consultation conference in the week of Monday 26 September 2022 to inform the final report due to be released on 6 December 2022. This consultation will be used to test the preliminary findings and draft recommendations with interested parties, and to clarify comments received on the draft report.

Further information about the residential building supplies market study is available on our

website

.

Background

The Minister of Commerce and Consumer Affairs asked the Commerce Commission to examine whether competition for the supply or acquisition of key building supplies is working well and, if not, what can be done to improve it. The Commission’s market study examines factors that may be affecting competition for the supply or acquisition of key building supplies used to build the major components of residential buildings.

The study has considered the industry structure and nature of competition within each level of the industry supply chain for key building supplies.

However, the Commission has focused most strongly upon conditions for entry and expansion of new or competing products. In the Commission’s view, these conditions are critical to facilitating workable competition for key building supplies.

The major components of residential buildings are the foundation, flooring, roof, walls (structural and non-structural, interior and exterior) and insulation. Examples of key building supplies in the scope of the study include concrete, steel and sheet metal roofing, timber and steel framing, weatherboard and other forms of cladding (eg. bricks), window/door framing and glazing, glass wool, polyester and polystyrene insulation and plasterboard.

Consistent with the terms of reference set by the Minister of Commerce and Consumer Affairs, the market study looked into:

• The industry structure for key building supplies;
• The nature of competition for these key building supplies, including any industry pricing practices or acquisition requirements that impact on competition; and
• Impediments to the entry or expansion of new or innovative building supplies, such as 'green' building supplies or novel prefabricated products.

About market studies

A market study, referred to as a ‘competition study’ in Part 3A of the Commerce Act, is a study into the factors affecting competition for particular goods or services, to find out how well competition is working and whether it could be improved.

By gathering and analysing information on an industry, the Commission can identify whether there are features preventing competition from working well, as well as considering how things might be improved for the long-term benefit of New Zealand consumers.

Outcomes of the Commission’s work may range from a ‘clean bill of health’ for the sector to recommendations for changes to enhance market performance. The Commission’s recommendations are non-binding, but the Government must respond to any recommendations within a reasonable period.

© Scoop Media