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Caughey, Jill --- "A Tangible Distinction? - Intangibles and the Public Benefit Trust in the Commerce Act 1986" [2006] UOtaLawTD 2

Last Updated: 15 September 2023

A T A N G I B L E D I S T I N C T I 0 N?

Intangibles and the Public Benefit Test in the Commerce Act 1986

Jill Caughey

A dissertation submitted in partial fulfilment of the degree of Bachelor of Laws (Honours) at the University of Otago, Dunedin

October 2005

Acknowledgements

To my supervisor, Rex Ahdar, thanks for your comments and encouraging me to develop my own ideas. I would also like to acknowledge Michael Pickford at the Commerce Commission and Grant David at Chapman Tripp, who were so eager to help in any way they could. Thanks to Niven Winchester in the economics department for answering my questions about general equilibrium models. Si, thanks for your comments, humour and the illustration of how not to do a dissertation. Special thanks to Nicki for volunteering to proofread this paper - I hope it hasn't put you off competition law! Finally, a huge thank you to my family, for all their support and encouragement throughout my education, and my friends for making my time in Dunedin such a fantastic and memorable experience.

Table of Contents

List of Figures and Tables

Table of Cases

Commerce Commission Decisions

Amcor - NZ Forest Products Ltd, Re (1987) 1 NZBLC (Com) 104,233

Ansett (see Air New Zealand Ltd/Ansett Holdings Ltd)

Air New Zealand Ltd/Ansett Holdings Ltd Commerce Commission Decision No 278, 3 April 1996 (Ansett)

Air New Zealand Ltd/Qantas Airways Ltd Commerce Commission Decision No 511, 23 October 2003 (Qantas)

Brierley Investments Ltd/The Petroleum Corporation of New Zealand Ltd Commerce Commission Decision No 215, 22 March 1988

Carter Holt Harvey Ltd/The Crown Commerce Commission Decision No 228, 5 April 1989

Closure of Whakatu and Advanced Works, Re (1987) 2 TCLR 215; (1987) 1 NZBLC

(Com) 104,200 (Whakatu)

Consortium of Meat Processing Companies Commerce Commission Decision No 273, 2 February 1995

Elders Resources NZFP Ltd/The Crown Commerce Commission Decision No 227, 21 March 1989

Electricity Corporation of New Zealand Ltd/Contact Energy Ltd Commerce Commission Decision No 277, 30 January 1996

Electricity Governance Board Ltd Commerce Commission Decision No 473, 30 September 2002

Enerco New Zealand Ltd/Progas Systems Ltd Commerce Commission Decision No 272, 22 December 1993

Fisher & Paykel Ltd (No 2), Re (1989) 2 NZBLC (Com) 104,377

Fletcher Challenge Ltd - New Zealand Forest Products Ltd, Re (1988) 1 NZBLC (Com) 104,283

Forest Products (see New Zealand Forest Products Ltd - UEB Industries Ltd, Re) Goodman Fielder Ltd - Wattie Industries Ltd, Re (1987) 1 NZBLC (Com) 104,108 Grape Growers (see The New Zealand Grape Growers Council Inc, Re)

Hoyts Corporation Holdings Operations (New Zealand) Ltd/Pacer Kerridge Corporation Ltd Commerce Commission Decision No 265, 24 May 1991

Life Underwriters Association of New Zealand Inc Commerce Commission Decision No 223, 15 December 1988

Kiwi Co-operative Dairies Ltd/Moa-Nui Co-operative Dairies Ltd Commerce Commission Decision No 267, 9 April 1992

Kiwifruit (see New Zealand Kiwifruit Exporters Association (Inc) - New Zealand Kiwifruit Coolstores Association (Inc), Re)

Midland Health (see Midland Regional Health Authority/Health Waikato Ltd)

Midland Regional Health Authority/Health Waikato Ltd Commerce Commission Decision No 275, 1 August 1995 (Midland Health)

Natural Gas 1 (see Natural Gas Corporation of New Zealand Ltd/Wanganui District Council)

Natural Gas 2 (see Natural Gas Corporation of New Zealand Ltd/Enerco New Zealand Ltd)

Natural Gas Corporation of New Zealand Ltd/Wanganui District Council Commerce Commission Decision No 269, 29 October 1992 (Natural Gas 1)

Natural Gas Corporation of New Zealand Ltd/Enerco New Zealand Ltd Commerce Commission Decision No 270, 22 November 1993 (Natural Gas 2)

Natural Gas Waikato Ltd/Hamilton City Council Commerce Commission Decision No 217, 24 May 1988

Newcall Communications Ltd/TeamTalk Ltd Commerce Commission Decision No 356, 17 May 1999

New Zealand Forest Products Ltd - UEB Industries Ltd, Re (1987) 1 NZBLC (Com) 104,159 (Forest Products)

New Zealand Kiwifruit Exporters Association (Inc) - New Zealand Kiwifruit Coolstores Association (Inc), Re (1989) 2 NZBLC (Com) 104,485 (Kiwifruit)

New Zealand Rugby Football Union Inc Commerce Commission Decision No 281, 17 December 1996 (NZRFU 1)

New Zealand Rugby Football Union Inc Commerce Commission Decision No 580, 2 June 2006 (NZRFU 2)

New Zealand Stock Exchange Commerce Commission Decision No 231, 10 May 1989 (NZSE 1)

New Zealand Stock Exchange Commerce Commission Decision No 232, 10 May 1989 (NZSE 2)

New Zealand Vegetable Growers Federation Inc Commerce Commission Decision No 206, 31 July 1987 (Vegetable Growers)

NZ Dairy 1 (see The New Zealand Co-operative Dairy Company Ltd/Auckland Co- operative Milk Producers Ltd)

NZ Dairy 2 (see The New Zealand Co-operative Dairy Company Ltd - Waikato Valley Co-operative Dairies Ltd, Re)

NZRFU 1 (see New Zealand Rugby Football Union Inc Commerce Commission Decision No 281)

NZRFU 2 (see New Zealand Rugby Football Union Inc Commerce Commission Decision No 580)

NZSE 1 (see New Zealand Stock Exchange Commerce Commission Decision No 231)

NZSE 2 (see New Zealand Stock Exchange Commerce Commission Decision No 232)

Omv New Zealand Ltd/Shell Exploration New Zealand Ltd Commerce Commission Decision No 505, 1 September 2003

Petroleum Corporation of New Zealand Ltd Commerce Commission Decision No 233, 16 June 1989

Powerco Ltd/Egmont Electricity Ltd Commerce Commission Decision No 302, 21 July 1997

Qantas (see Air New Zealand Ltd/Qantas Airways Ltd)

Ravensdown Corporation Ltd/SouthFert Co-operative Ltd Commerce Commission Decision No 279, 21 June 1996

Ruapehu Alpine Lifts Ltd/Turoa Ski Resorts Ltd (in receivership) Commerce Commission Decision No 410, 14 November 2000

SFE 1 (see Sydney Futures Exchange Ltd/Sydney Futures Exchange Clearing House Pty Ltd Commerce Commission Decision No 271)

SFE 2 (see Sydney Futures Exchange Ltd/Sydney Futures Exchange Clearing House Pty Ltd Commerce Commission Decision No 274)

South Pacific Tyres (New Zealand) Ltd/Frank George Allen Commerce Commission Decision No 247, 3 May 1990

Speedway Control Board of New Zealand (Inc), Re (1990) 2 NZBLC (Com) 104,485

Sydney Futures Exchange Ltd/Sydney Futures Exchange Clearing House Pty Ltd

Commerce Commission Decision No 271, 21 December 1993 (SFE 1)

Sydney Futures Exchange Ltd/Sydney Futures Exchange Clearing House Pty Ltd

Commerce Commission Decision No 274, 31 July 1995 (SFE 2)

Tasman Forestry Ltd/The Crown Commerce Commission Decision No 224, 24 February 1989

TeamTalk Ltd/Telecom New Zealand Ltd Commerce Commission Decision No 393, 15 May 2000

Telecom Corporation of New Zealand Ltd/The Crown Commerce Commission Decision No 254, 17 October 1990

The New Zealand Co-operative Dairy Company Ltd/Auckland Co-operative Milk Producers Ltd Commerce Commission Decision No 216, 26 April 1988 (NZ Dairy 1)

The New Zealand Co-operative Dairy Company Ltd - Waikato Valley Co-operative Dairies Ltd, Re (1991) 2 NZBLC (Com) 104,592 (NZ Dairy 2)

The New Zealand Grape Growers Council Inc, Re (1991) 2 NZBLC (Com) 104,573 (Grape Growers)

Transpower New Zealand Ltd Commerce Commission Decision No 369, 13 August 1999

Vegetable Growers (see New Zealand Vegetable Growers Federation Inc) Whakatu (see Closure of Whakatu and Advanced Works, Re)

High Court and Court of Appeal Decisions

Air New Zealand v Commerce Commission (No 6) [2004] NZHC 1010; (2004) 11 TCLR 347 (Qantas (HC))

Fisher & Paykel Ltd v Commerce Commission [1990] NZHC 307; [1990] 2 NZLR 731 (Fisher & Paykel (HC))

New Zealand Co-operative Dairy Co Ltd v Commerce Commission [1992] 1 NZLR 601 (NZ Dairy 2 (HC))

NZ Dairy 2 (HC) (see New Zealand Co-operative Dairy Co Ltd v Commerce Commission)

Qantas (HC) (see Air New Zealand v Commerce Commission (No 6))

Ravensdown Corporation Ltd v Commerce Commission unreported, High Court Wellington, AP168/96, 16 December 1996, Panckhurst J and Professor R G Lattimore

Rugby Union Players’ Association Inc v Commerce Commission (No 2) [1997] 3 NZLR 301 (Rugby Union (HC))

Telecom Corporation of New Zealand Ltd v Commerce Commission (1991) 4 TCLR 473 (Telecom (HC))

Telecom Corporation of New Zealand Ltd v Commerce Commission [1992] NZCA 595; [1992] 3 NZLR 429 (Telecom (CA))

The New Zealand Vegetable Growers Federation (Inc) v The Commerce Commission (No 3) [1988] NZHC 437; (1988) 2 TCLR 582

Australian Decisions

Queensland Co-operative Milling Association Ltd, Defiance Holdings Ltd (Proposed Merger with Barnes Milling Ltd), Re; Defiance Holdings Ltd, Re (1976) 25 FLR 169; 8 ALR 481; ATPR 40-012

Introduction

The Commerce Act 1986 (the “Act”) is the primary piece of legislation governing competition law in New Zealand. Its objective is to “promote competition in markets for the long-term benefit of consumers in New Zealand”. To meet this end it seeks to constrain the accumulation of market power and prevent the abuse of monopoly power, and thereby plays an important role in regulating commercial trade practices and business acquisitions in New Zealand.

The scheme of the Commerce Act Ł986

Parts II and III of the Act prohibit certain activities on the grounds that they are anti- competitive. If these provisions are breached the person(s) involved are liable to pecuniary penalty. Under Part V of the Act, parties to a business acquisition or trade practice that would potentially breach the Act may apply to the Commission for an authorisation. An authorisation provides them with impunity from attack for being in breach of the Act.

For an authorisation to be granted in respect of anti-competitive arrangements and covenants, the benefit to the public must outweigh the detriment from the lessening

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in competition. Although the tests for the authorisation of boycotts, resale price maintenance and business acquisitions are worded slightly differently, requiring “such a benefit to the public” that they should be permitted, they have also been interpreted as requiring a balancing of public benefits against any public detriments flowing from the practice.

The benefits and detriments likely to arise from the practice or acquisition are determined by comparing two hypothetical situations; that which would arise with the merger (the factual) and that which would arise without the merger (the counterfactual). Whilst detriments are restricted to those arising in the relevant market, the Commerce Commission (the “Commission”) and courts have taken a much broader view as to what constitutes a relevant benefit. A “public benefit” has been described as “any gain to the public of New Zealand”, and the Commission and courts have indicated that there is no limitation as to the nature of the public benefit which can be claimed. However, for the public benefit to be accepted the applicant must provide proof of its existence and extent, and establish that there is a causal nexus between the benefit and the relevant conduct or merger. Because the Commission is only concerned with net benefits, any corresponding detriment must be deducted from the public benefit claim.

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The objective of this dissertation

In the last 10 years the Commission has begun to refer to a certain class of benefits as intangible. This dissertation aims to evaluate the treatment of these so-called intangible benefits, with a particular emphasis on considering whether they are ever given significant weight in the public benefit analysis. It canvasses all the authorisation decisions since the introduction of the Commerce Act in 1986, of which there have been 45 Commission decisions, 7 High Court decisions and 1 Court of Appeal decision.

Chapter One attempts to define what an intangible benefit is and sets out the approach to be utilised in Chapter Two to evaluate the treatment of intangible benefits. Chapter Three analyses whether intangibles can be treated differently from tangible benefits under the law as it now stands, and whether they should be considered as a matter of policy. Chapter Four presents three alternative methods of quantifying intangibles and considers the feasibility of using each of these methods. Finally, it is concluded that when assessing the weight to be given to a benefit, the Commission should no longer focus upon whether the benefit is tangible or intangible. It provides little or no assistance, and unnecessarily complicates the analysis.

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C H AP T E R 0 N E

Defining “Intangible Benefit”

Ł.Ł History of usage

The term “intangible benefit” has only come to be used by the Commerce Commission in recent years. Although it has only been used by the Commission in eight of the forty-five authorisation decisions since the enactment of the Act in 1986, it has been used in five of the last six decisions.

The first hint of a distinction between tangible and intangible benefits came in 1987 in Amcor where the Commission used the term “tangible public benefits” to describe certain benefits. However, the word “intangible” was not mentioned in a decision until 1991 in NZ Dairy 2, and even then it was the applicant, rather than the Commission, who used it. It was not until the Commission's decision in 1995 in Consortium that the Commission itself used the term “intangible”. Since Consortium, nine of the fifteen Commission decisions have drawn some sort of distinction between tangible and intangible benefits. Only one of the three High Court decisions delivered in this period used the term “intangible”.

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Ł.2 Possible definitions

Ł.2.Ł AN ABSTRACT BENEFIT

The traditional notion of an intangible benefit is something that is “unable to be touched”. In the context of the public benefit test that would render all benefits intangibles, and so would not provide any distinction between benefits.

Ł.2.2 A BENEFIT THAT IS DIFFICULT TO QUANTIFY

An intangible benefit may be “something that cannot be precisely measured or assessed” in a particular unit of measurement. An inability to quantify benefits in a common unit of measurement makes it difficult to weigh benefits and detriments. Whilst the obvious unit of measurement for benefits is money, this is not the only unit of measurement. Benefits could be measured in other units, such as human utility or the percentage increase in productivity.

Because the public benefit test involves looking into the future and judging the level of benefit that would arise if an anti-competitive practice or acquisition was allowed to proceed, no benefit is capable of precise measurement or assessment. However, some benefits are easier to measure than others. It is this ease of measurement concept that provides the foundation for this definition of intangible benefits. The task of classifying benefits as tangibles and intangibles involves constructing a notional line of ease of quantification and placing the various benefits on the line. The final designation of a benefit as tangible or intangible depends upon where it lies in relation to a certain point separating tangibles from intangibles; if it is to the left of that point it is tangible and if it is to the right it is intangible. Figure 1 on the next page illustrates the classification process. Whilst it is easy to classify benefits at either end of the scale as tangible or intangible, the distinction is not so clear for benefits that lie in the middle of the scale.

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An illustration of the implicit classification of public benefits as tangibles or intangibles using an ease of quantification test.

intangible

benefits

tangible

benefits
the dividing line between

tangibles and intangibles

... where does it lie?

relatively difficult

to quantify

relatively easy

to quantify
FIG UR E 1 : The spectrum of tangibility

A definition based upon a benefit's ease of quantification can be applied in the individual case or more generally. A case-by-case application involves considering whether that particular benefit is easily quantified in that particular case. A more general application entails examining whether the benefit can usually be easily quantified. For example, a certain health benefit may be easily quantifiable in a particular case. Hence it would be tangible on an individual application, but intangible on a more general application because health benefits are usually difficult to quantify.

Ł.2.3 A NON-MARKET BENEFIT

The classification of benefits as tangible or intangible could depend upon whether they arise in a market. Intangible benefits would be those benefits that do not accrue in a market setting. For example, there is no market in which improvements in environmental quality and increases in pride and spirit can be bought and sold. By contrast, cost savings, improvements in product quality and tourism benefits all arise in markets and so would be classified as tangible benefits.

Ł.2.4 AN INDIRECT BENEFIT

The concept of tangibility could be defined by reference to the persons to whom the benefits accrue. A tangible benefit would be one accruing to the parties immediately affected by the proposed acquisition or anti-competitive practice, and an intangible benefit would be a benefit accruing to persons beyond the immediate parties. The immediate parties would normally be the producer(s) applying for authorisation and the consumers of the product or service.

In the context of an airline merger the tangible benefits would be those accruing to the two airlines proposing to merge and the airlines' passengers. The intangible benefits would be those that benefited people outside this group; for example noise reductions and environmental spin-offs from a reduction in the number of flights.

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Ł.2.5 A NON-EFFICIENCY BENEFIT

Finally, intangible benefits could be non-efficiency benefits. Efficiency is traditionally defined in competition law as incorporating allocative, productive and dynamic efficiency. Thus an increase in the cost-effectiveness of production, an increased incentive for efficient investment in research and development and the production of a more socially optimal level of output, would amount to tangible benefits. All other benefits would be intangible.

The inclusion of allocative efficiency within the definition of efficiency means that almost all benefits would be classified as tangible benefits. An environmental benefit would be a tangible benefit if it internalised or alleviated a negative externality, because to the extent that it does this, society's resources are better allocated. The types of benefits that would be intangible in nature include those that increase pride and harmony in a society and those that improve a society's relations with another society.

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Ł.3 Approach of the Commerce Commission

Ł.3.Ł GENERAL APPROACH

The Commission has adopted the definition in Section 1.2.2, equating the ease of measurement in monetary units with tangibility. This view was endorsed by the High Court in Rugby Union (HC). Hence an intangible benefit is one which is relatively difficult to quantify in monetary terms.

Such a definition is consistent with the history of usage of the term “intangible”. The commencement of its use coincided with the publication of the Guidelines to the Analysis of Public Benefits and Detriments in the Context of the Commerce Act (“1994 Guidelines”) by the Commission, which described a tangible benefit as one that can be quantified in monetary units. This gives an indication of what the Commission meant when it used the term “intangible benefit” in the decisions that followed.

A definition based on quantifiability, is also in harmony with the Commission's more quantitative approach to the evaluation of public benefits since the Court of Appeal's decision in Telecom (CA). The Commission's decision in Ansett was the first time it extensively evaluated benefits and detriments in monetary terms and it was also one of the first times that the Commission drew a distinction between benefits based on their degree of tangibility. This implies that there may be a link between the Commission's notion of tangibility and the quantification of benefits.

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Defining intangibility by reference to ease of quantification is also consistent with the current Guidelines to the Analysis of Public Benefits and Detriments (the “Guidelines”), which state that an intangible benefit “typically” cannot be readily measured in monetary terms. Although the Guidelines are not law and do not bind the Commission, the Commission usually refers to the Guidelines as setting out the principles used by the Commission in evaluating benefits, when applying the public benefit test. However, because the Commerce Act was amended in 2001 and the Guidelines have not been revised, their present status is uncertain. None of the changes directly impact upon the tangible and intangible benefit distinction, suggesting that the term “intangible benefit” still retains the same meaning as it bore in 1997. In any event, the Commission has indicated in its two most recent decisions that the economic principles used in assessing benefits and detriments remain unchanged.

It is not entirely clear whether when the Commission and courts refer to a benefit as being intangible, they are referring to it being difficult to quantify in the individual

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case or it being generally difficult to quantify. The Guidelines seem to support a global approach to the classification of a benefit as an intangible. Guideline Four of the Guidelines describes an intangible benefit as a benefit “which typically cannot readily be measured in monetary terms”. This implies that even if a particular benefit can be readily measured in monetary terms in a given case, it will still be described as an intangible if it is usually difficult to measure in monetary terms. The global classification of intangibles will be adopted in the rest of this dissertation, because otherwise the analysis tends to collapse into a comparison of quantified and unquantified benefits.

Ł.3.2 BENEFITS THAT HAVE BEEN DESCRIBED AS INTANGIBLE BENEFITS

In their decisions the Commission and High Court have classified 12 benefits as intangible benefits:

• increased tourism
• potentially improved sponsorship
• the development and transfer of expertise between two ski fields
• increasing demand for skiing in another region
• providing an alternative to cellular for New Zealand businesses
• improved service for customers
• greater enjoyment for customers
• spectator and viewer enjoyment
• avoidance of community disharmony

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• greater exposure of New Zealand internationally, assisting New Zealand's trade and standing in the world
• preservation of Air New Zealand as the national ‘flag carrier'

The Guidelines describe two further benefits as intangibles:

• mental and physical health improvements
• environmental improvements, including reducing air, water, noise and visual pollution, and preserving endangered species

Ł.3.3 BENEFITS THAT HAVE BEEN DESCRIBED AS TANGIBLE BENEFITS

By contrast, it is useful to consider any benefits that the Commission has classified as being of a tangible nature. In Ansett it clearly made reference to two benefits as being tangible benefits:

• cost savings
• net revenue gains

Whilst the Commission described certain benefits as being tangible in its decision in Amcor in 1987, it is uncertain whether it was using the term in the same sense as it has been used more recently. The context suggests that the Commission may have been using tangible as a synonym for real or significant.

Where the Commission and courts have used the term “intangible benefit” in decisions, they have done so rather loosely. For example, in NZRFU 2 spectator enjoyment was referred to as being of an intangible nature, but no reference was made to the “feel-good” factor accruing to New Zealanders from improved international performances being an intangible benefit. The latter is almost

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certainly more intangible than the former. This looseness in expression means that it cannot automatically be inferred that all benefits in these decisions that are not described as intangible benefits are tangible benefits. However, in TeamTalk and Ruapehu the Commission discussed the various intangible benefits under a heading “intangible benefits”. In such circumstances it can sensibly be inferred that the Commission must have considered the other benefits to be tangible benefits. These benefits included:

• cost savings
• net revenue gains
• tourism benefits

The Guidelines support the classification of cost savings and net revenue increases as tangibles.

Ł.3.4 CONSISTENCY OF THE COMMISSION'S APPROACH

The limited number of decisions describing benefits as intangibles, the irregular use of the term by the Commission and the lack of description of other benefits as tangibles, make it difficult to analyse whether the Commission has been consistent in its classification of benefits as intangibles. The best that can be hoped for is a critique of the Commission's categorisation decisions based on what little we can glean from the decisions, the basic principles set out in the Guidelines and a dash of common sense.

The classification of tourism as an intangible benefit in Rugby Union (HC) is at odds with the implicit classification of it as a tangible benefit in the Ruapehu decision.

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Closer examination of Rugby Union (HC) suggests that the High Court may have been using the term “intangible” loosely. After describing a number of benefits, including increased tourism as intangible, the Court appeared to partially contradict itself in the following sentence by stating that “some” of the benefits just mentioned could properly be described as intangibles. Therefore it is not certain that the High Court meant to describe tourism as an intangible benefit.

Interestingly, in the Ruapehu decision the Commission described the development and transfer of expertise between two ski-fields as an intangible benefit. This is inconsistent with the Guidelines’ classification of benefits deriving from economies of scale and scope, and cost reductions due to greater specialisation of production, as tangibles. The Commission may have been using the word “intangible” as a synonym for unquantified benefits.

These inconsistencies demonstrate the difficulty of ascertaining the features that make a particular benefit an intangible one. This issue is explored further in the next section.

Ł.4 The common features of intangible benefits

As discussed in Section 1.2.2, an ease of quantification definition gives rise to difficulties classifying benefits as tangible or intangible. This problem is particularly acute for benefits lying in the middle of the “spectrum of intangibility”. The Commission has not developed any test or indicators to assist in this classification process. This section aims to analyse the features of intangible benefits in search of developing a workable framework within which to evaluate their treatment.

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Dr Michael Pickford, the Chief Economist of the Commerce Commission, suggests that intangible benefits usually share two characteristic features which mean that quantification is generally not a realistic possibility. The first is that are difficult to describe precisely. He may be alluding to the fact that these benefits often arise indirectly through a number of channels, making their existence doubtful and their nature difficult to characterise. For this reason, claims of intangible benefits are often quite speculative. Because it is difficult to prove their existence, let alone their extent, quantification is problematic.

The second feature that Pickford suggests intangible benefits usually share is that there is no obvious economic framework through which their value can be assessed. This makes sense. Because intangibles are benefits that are difficult to quantify, it is likely that there will be no obvious economic model in which to assess their value. In considering whether such a framework exists, it is useful to examine the unit of measurement that the benefit is ordinarily measured in. As a rough guideline, if the natural unit to measure the benefit in is in dollar terms it is a tangible benefit, and if it is something else it is an intangible benefit. Applying this rule, cost savings are tangible benefits because their natural unit of measurement is in dollars, and health benefits are intangible benefits because their natural unit of measurement is improvements in mortality and morbidity rates.

Another useful consideration is whether the benefit is a productive efficiency gain. The examples of tangible benefits in the Guidelines are all productive efficiency gains that result in cost savings or net revenue gains. It is generally much easier for person(s) to quantify cost savings or net revenue gains, than to quantify the more amorphous and far reaching allocative and dynamic efficiency gains. Hence productive efficiency gains tend to be tangible benefits, and non-productive efficiency gains tend to be intangible benefits.

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Ł.5 The approach utilised in this dissertation: a spectrum of tangibility

There will be some benefits for which it is not possible to predict whether the Commission would classify them as tangible or intangible. In the end this does not matter. The treatment of intangible benefits can be evaluated by constructing a “spectrum of tangibility”; with very tangible benefits at one end, very intangible benefits at the other end and intermediate benefits in the middle. Such a spectrum is consistent with how the Commission views the quantification of detriments. In the Guidelines, the Commission recognises that quantifiability is a continuum and not all detriments are equally capable of quantification. This same reasoning can be applied to benefits. By considering how the Commission treats benefits of varying levels of tangibility, we can gain an insight into how the Commission treats the so-called intangible benefits and also see whether the treatment of intangibles of varying levels of tangibility differs.

There is no easy way to place benefits on the spectrum of tangibility. It essentially involves a value judgment. It is proposed that the benefits, other than the classic tangible benefits, such as cost savings and net revenue increases, can be grouped into four main categories to help reduce the complexity of the value judgments that need to be made. These are set out on the next page in Table 1, and their scope and characteristics are discussed in more detail below.

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TABLE Ł: Categories of benefits

Ł.5.Ł CATEGORY Ł: VAGUE CLAIMS WITH FAR REACHING CONSEQUENCES

This category represents the benefits that are the least easily quantified. The common feature that underpins them is that they are all benefits that affect a large group of people but only very marginally. Hence, they usually arise very indirectly and it is virtually impossible to devise an economic model that assesses their impact with any accuracy. There are two sub-categories within this category: the “feel-good” benefits, and benefits promoting New Zealand's general interests at an international level. The latter benefits may be slightly more tangible than the former.

Because of the amorphous nature of this category, it is illustrative to provide a list of the benefits that have been raised in decisions that would fall within each of the sub-categories. The “feel-good” benefit sub-category incorporates:

• a “feel-good” factor for New Zealanders
• preservation of Air New Zealand as the national ‘flag carrier'
• avoidance of community disharmony

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• community well-being

The benefits falling within the second sub-category, as promoting New Zealand's general interests at an international level, include:

• improved diplomatic relations between New Zealand and Australia
• benefits under the Closer Economic Relations agreement
• reduced risk to national security

Ł.5.2 CATEGORY 2: EXTERNALITY ARGUMENTS

These benefits also accrue to the broader community. Benefits within this category tend to partially or fully internalise negative externalities. Although these benefits are generally easier to quantify than the preceding category, quantification is still problematic because they represent improvements in social rather than economic outcomes. There are three basic sub-categories: environmental benefits, health benefits and social benefits. Whilst none of these benefits have been described as intangibles in the decisions, the first two sub-categories are described as intangible benefits in the Guidelines.

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Ł.5.3 CATEGORY 3: QUALITY IMPROVEMENTS

These benefits are more tangible in nature. Unlike the former categories, they arise in a market and generally accrue to the immediate parties in the market(s) concerned, making it easier to demonstrate the benefit's existence. However, because they each concern a quality improvement, their natural unit of measurement is not in dollar terms and so it is difficult to find a framework within which to accurately assess their value. There are three sub-categories: increased quality and choice for consumers, improved information in the marketplace and improvements in bargaining relationships. The Commission and High Court have described benefits falling within the first sub-category as intangibles in six of the eight decisions that label benefits as intangible.

Ł.5.4 CATEGORY 4: IMPROVING NEW ZEALAND'S EXPORT PERFORMANCE

These benefits are the most tangible of the four categories. They all relate to improvements in New Zealand's export performance. There are three sub- categories: tourism benefits, enhanced export opportunities and improvements in international competitiveness. There is much overlap between

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enhanced export opportunities and improvements in international competitiveness. Nevertheless, because the latter sub-category seems less tangible, the benefit has been divided into two sub-categories in order to evaluate whether the framing of the benefit makes a difference to the Commission's treatment of it.

It is unclear whether the Commission sees these benefits as tangible or intangible benefits. There is authority suggesting that tourism is an intangible benefit and authority suggesting it is a tangible benefit. Unlike the other three categories, the natural unit of measurement of Category 4 benefits is in monetary terms, suggesting that they are more likely to be tangible benefits.

Ł.5.5 OTHER BENEFITS

There are a number of benefits that could potentially be described as intangibles, but that do not fit neatly into any of the categories above. They include:

• benefits to other transport users from changes in traffic patterns
• improved governance
• an ability to practice for the competitive market

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• prevention of free-riding by competitors
• promoting a government policy
• avoided social cost of public funds
• the separation of the trading and regulatory functions of the Ministry of Energy
• advantage of industry self-regulation over government regulation

This dissertation will not consider the treatment of this residual category of benefits. Their infrequent occurrence and the difficulty of placing them on the spectrum of tangibility, mean that further analysis is of little assistance to determining how intangible benefits are treated.

Ł.5.6 THE SPECTRUM OF TANGIBILITY

Figure 2 on the next page sets out the spectrum of tangibility which was first introduced in Section 1.2.2. The categories of benefits introduced above have been placed upon it. As discussed, there is no definitive test for determining the degree of tangibility of a particular benefit, and so the placement of such categories is essentially a value judgment. This spectrum will be used in Chapter Two to analyse the Commission and courts' treatment of intangible benefits.

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C H AP T E R T W 0

The Treatment of Intangible Benefits

As discussed in the Introduction, the Commission and courts have taken a very broad approach to what amounts to a “public benefit”. Accordingly, all gains to the public of New Zealand, irrespective of their degree of tangibility, are “public benefits” and so must be assessed. The fact that a benefit cannot be readily expressed in monetary terms is no reason to exclude it from the balancing process. The Act provides no guidance as to how tangible and intangible benefits should be weighed; this is left to the Commission and courts.

The Commission and courts have emphasised the need for quantification of benefits and detriments where possible. Shelley Duggan suggests that this means that “intangible and social benefits will be considered irrelevant, or alternatively, will be given little weight in terms of the balancing exercise”. Even the Chief Economist of the Commerce Commission, Dr Michael Pickford, seems to agree, at least for the most part, with this view. Although Pickford recognises that intangible benefits must be included in the assessment, he suggests that “it is probably fair to say that, in the absence of quantification, the Commission will need some fairly convincing evidence that they will eventuate before much weight is given to them”. Nevertheless, unlike Duggan, Pickford does not entirely exclude the possibility that intangible benefits could be of real weight in a particular instance. He simply suggests that it will be a rare case where the applicant can discharge their burden of proving that the benefit will arise as a result of the practice, will not occur under the counterfactual and is of real magnitude.

This Chapter aims to evaluate the weight that the Commission and courts give to intangible benefits, to contrast the treatment of quantified intangibles and

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unquantified intangibles and to consider whether the treatment of intangibles has changed over time.

2. Ł Quantified intangibles

The Commission has quantified a number of benefits of an intangible nature in monetary terms, including: social benefits, increased quality and choice for consumers, better quality decision making and tourism benefits. The decisions indicate that the Commission takes a conservative approach to the quantification of intangible benefits. Because the economic models that are used to quantitatively evaluate intangible public benefit claims usually depend upon a series of simplifying assumptions, the calculations are often discounted to make due allowance for the difficulty of quantification. For example, in Qantas the Commission and High Court suggested that the value the Commission arrived at for the potential scheduling benefits was the upper limit. By contrast, the Commission had no such reservations in respect of the most tangible benefit, cost savings. Therefore, rather than using their best estimate of the intangible benefit that will arise, the Commission usually takes a more conservative figure as representing the value of the benefit. This more conservative approach means that, ceteris paribus, less weighting will usually be accorded to quantified intangible benefits than quantified tangible benefits.

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Once quantified, quantified intangibles and quantified tangibles are weighed and balanced in the same manner. This makes sense; logically a dollar's worth of quantified intangibles should have the same weighting as a dollar's worth of quantified tangibles. If that were not the case the quantification exercise would be futile.

2.2 Unquantified intangibles

If intangible benefits are not quantified, the Commission is required to weigh quantified (and possibly some unquantified) detriments against quantified and unquantified benefits. It must compare dollars and non-dollars. As such, it must undertake a qualitative assessment of the benefits and detriments. This section analyses whether, and the extent to which, unquantified intangibles have been given weight.

2.2.Ł CATEGORY Ł: VAGUE CLAIMS WITH FAR REACHING CONSEQUENCES

As discussed in Section 1.5.1, these are the least tangible of all the benefits. This means that any bias the Commission might have against intangible benefits is more likely to be evident in its discussion of this category of benefits.

Category ŁA: “Feel-good” factors

In its decisions, the Commission has shown a reluctance to place any weight upon “feel-good” factors. In NZRFU 2, the Commission indicated that it was disinclined to place any weight upon a claimed benefit of increased “feel-good” for New Zealanders as a result of better international performances by New Zealand squads, because of the tenuous nature of the benefit and the weak and indirect link between the proposal and the benefit. In NZ Dairy 2, Kiwi, Kiwifruit and Midland Health, evidential problems meant that the Commission placed little or no weight

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upon the avoidance of community and industry disharmony and the promotion of community well-being.

The preservation of Air New Zealand as New Zealand's national flag carrier has been claimed as a benefit on two occasions. In Ansett the Commission seemed to place no weight upon it, but in Qantas the Commission and High Court indicated that a value should be attached to it. However, no explicit indication was given in Qantas of the weighting that should be ascribed to it. The Commission appeared to only have regard to the quantified benefits in its final analysis. Whilst the High Court indicated that the benefit was being considered, the magnitude of the quantified detriments makes it difficult to gauge what weight was placed upon it. The fact that the benefit was grouped with other benefits of a speculative nature under a general heading at the end of the benefit section, may suggest that the High Court did not consider that it was of particular importance.

Category ŁB: Assisting New Zealand's general interests at an international level

Category 1B benefits have never been accorded any real weight. In Ansett, whilst the Commission acknowledged that an improvement in diplomatic relations between New Zealand and Australia was a benefit of some significance, there was insufficient evidence of its extent to determine what weight should be accorded to it. Thus the Commission seemed to assign little or no weight to it. Benefits

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under the Australia New Zealand Closer Economic Relations (CER) Trade Agreement have also been given little or no weight, on the basis that they have already been assessed under some of the other heads, such as efficiency improvements.

In Qantas, the Commission identified reduced risk to national security as a public benefit. However, there was no further discussion regarding its significance and extent. The Commission has made it clear that for a benefit to be given weight, the applicant must provide evidence of its existence and extent. The lack of discussion in Qantas regarding the extent of any national security benefit, suggests that it was accorded very minimal or no weight. Nevertheless, the fact that the Commission raised the benefit, suggests that the Commission may consider that national security benefits could be of real significance in some instances. On appeal, the High Court made no reference to the national security benefit, suggesting that it did not consider it to be of any importance.

Conclusion on the weight attached to Category Ł benefits

Whilst the Commission and courts appear willing to accord some weight to the benefits within this category, in no case have they been given more than a minimal weighting. However, it is not the lack of tangibility but the lack of causal nexus or the minimal extent of the claimed benefit that is cited as the reason for this low weighting. The onus is on the applicant to provide evidence of the causal nexus between the practice and the benefit, and the extent of the benefit. If insufficient evidence is provided to discharge this onus, no weight can be given to the benefit. This means that it is not possible to positively conclude that the lack of weight accorded to this category of benefits is solely because of their intangibility.

Interestingly, it is probably the very features that make these benefits so intangible that makes it so difficult to provide evidence of the causal nexus and the extent of the benefit. Category 1 benefits often arise quite indirectly, flowing through a

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number of channels, meaning that their existence and nature is controversial. This makes the demonstration of a casual nexus problematic. Because they arise outside of markets and affect a large group of people but only marginally, there is no obvious economic framework in which to assess their value. This makes it difficult to provide evidence of their extent.

There is an alternative explanation for the low weighting attached to Category 1 benefits. Unlike the benefits in the other categories, Category 1 benefits are not efficiency gains. The Commission has stated on a number of occasions that greater weight is to be given to efficiency claims than other claims. This is presumably a reflection of section 3A of the Act, which compels the Commission to have regard to any efficiencies that may result from the conduct which is sought to be authorised. The Commission appears to have read this as requiring greater weight to be placed upon efficiency than non-efficiency benefits. Such an interpretation would justify a lower weighting for Category 1 benefits.

• 2.2.2 CATEGORY 2: EXTERNALITY ARGUMENTS

As discussed in Section 1.5.2, these benefits usually accrue to the broader community. The 1991 and 1992 Reviews of the Commerce Act remark that wider social benefit claims are generally accorded a low weighting, and are never a significant element in the decisions. Dr Michael Pickford's writings support this view. Writing in 1989, he opined that the decisions tend to emphasise the

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economic, rather than the broader social effects. Later in 1993, he noted that benefits of a social nature had not been decisive in any case. To the extent that Category 1 benefits are wider social benefits, these comments are also applicable to those benefits.

Category 2A: Environmental benefits

A reduction in adverse environmental effects has been claimed on three occasions. In Ravensdown the Commission held that there were possibly some environmental public benefits, but felt that there was insufficient information available to allow a firm conclusion to be drawn. In the final analysis, it stated that the value of the public benefits was equivalent to the quantified benefits, plus some items which were difficult to identify or quantify. Commissioner Taylor indicated that quantified detriments and benefits were fairly similar, with quantified detriments being slightly higher in magnitude. Yet, even after taking into account the environmental benefits, he was not satisfied that the detriments were outweighed by the public benefits. The fact that there were also significant unquantified detriments complicates the analysis, and so the actual significance attached to the environmental benefits cannot be accurately gauged. However, the Commission's indication that it had insufficient information to evaluate their extent, tends to suggest that little weight was attached to them.

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In Omv the Commission did not consider that a case had been made for significant weight to be attached to environmental benefits. This essentially seemed to be a problem of proving that the benefit would actually eventuate.

It was the Commission, rather than the applicant that raised the possibility of environmental benefits in Qantas. The Commission considered that these effects were likely to be relatively minor. However, the fact that the Commission raised them may suggest that it considers that they could be of real significance in some instances.

Category 2B: Health benefits

In Midland Health, the Commission accepted that there might be some benefits in the short term to the mental health of patients from the anti-competitive arrangement that the applicants sought to be authorised. However, in its final analysis the Commission indicated that it did not consider that the nexus between the benefits and the arrangement had been sufficiently demonstrated. This suggests that very little or no weight was accorded to the benefit to patients' mental health.

Improved safety has been claimed as a benefit in four decisions. Whilst the Commission accepted that there was a public benefit arising from improved safety in both Fletcher and Qantas, it did not discuss the weight to be accorded to it. This may suggest that the Commission did not consider the benefit to be significant in either of these cases. However, the fact that it was the Commission that raised

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the possibility of public safety benefits in Qantas may indicate that it considers that they could be of real significance in some cases.

A claim of improved safety was not accepted in Natural Gas Waikato on the grounds that no problems with existing safety procedures had been suggested, and hence no benefit would arise under the factual. Nor was it accepted in Speedway, on the basis that the benefit would arise with or without the presence of the anti- competitive agreement.

Category 2C: Social benefits

These benefits have not been given any real weight in the decisions. Whilst the Commission in Consortium remarked that it fully appreciated that closures of freezing works would cause substantial distress, it was not convinced that the social benefits accruing to some as a result of the agreement to close one freezing works, would outweigh the social costs to others from the agreement. Accordingly, the Commission saw no social benefits accruing from the proposal. Nor did the Commission in Tasman accept that a reduction in the volume logged would have adverse consequences for the township of Murupara. The increased stability of rural communities was said to have no more than a minor beneficial impact in Grape Growers.

Although the stabilisation of employment was accepted as a public benefit in Fletcher, the Commission did not discuss the weight to be accorded to it, suggesting minimal or no weight was given to it. The enhancement of job security was considered in Whakatu and Amcor. It was not accepted on the facts in Whakatu, and although it was accepted in Amcor, there was no discussion regarding the weight to be attached to it.

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Very little weight has been attached to benefits falling within this category. As for Category 1, this low weighting may be explained by the difficulty facing the applicant of proving a causal nexus between the benefit and the practice, and proving the extent of the benefit. Just as with the Category 1 benefits, arguably it is the very features that make these benefits intangible, that make it so difficult to provide affirmative evidence of the causal link and the extent of the benefit.

• 2.2.3 CATEGORY 3: QUALITY IMPROVEMENTS

Category 3A: Increased quality and choice for consumers

This benefit has been claimed in a large number of cases and it has been given significant weighting in at least one case. In a number of other cases this benefit has been accepted but the weight to be prescribed to it has not been discussed, perhaps suggesting that minimal weight was attached to it. Nevertheless, the Commission seems more inclined to give benefits in this category weight than those in the first two categories.

In Qantas, the High Court accepted that the appellants had demonstrated that substantial online benefits would accrue from the proposed alliance and stated that although they could not be safely expressed in monetary terms, they should be given considerable weight in the final analysis. The fact that the High Court dealt with these benefits in a separate section to the other unquantified benefits, confirmed how important it considered them to be.

In Transpower, the Commission indicated that it considered improved security of supply to be a real benefit, despite the fact that it was described rather than quantified. It referred to the extremely large cost of a total system collapse and

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stated that any reduction in the likelihood of this occurring was a public benefit. However, in that case the absence of detriments meant that any magnitude of benefit would be sufficient to make out a case for authorisation.

There are four decisions dealing with stock exchange regulations in which benefits including better quality clearing services, ensuring integrity in the market and increasing confidence in the market have been accepted. In each of these decisions, these benefits were found to outweigh the detriments arising from the lessening of competition. However, the detriments in each of these cases were not large, and so it is difficult to gauge whether the benefits were really accorded significant weight.

Once again, in some cases this sub-category of benefits has been given little or no weighting because of the difficulties of proving a causal nexus between the proposed activity and the benefit. However, this seems to be much less of a problem than with the previous two categories of benefits. This probably stems from the fact that this benefit usually accrues to individuals in the immediate market, and so the benefit does not tend to flow through as many channels, making the proof of a causal nexus much easier.

In TeamTalk and Ruapehu benefits within this sub-category were given little weight because the Commission felt that they had already been accounted for in the consideration of other benefits. In Ruapehu, greater enjoyment as a consequence of an improved skiing experience was held to manifest itself in increased skier days. The valuation of skier days incorporated both the benefit

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accruing to producers in terms of increased profits, and that accruing to consumers in the form of greater enjoyment. In TeamTalk, the Commission seemed to suggest that increased choice for consumers was reflected in the additional profit TeamTalk would receive. Whilst this is true to some extent, the Commission may have erred in part. Only some of the increased satisfaction accruing to consumers from greater choice will be reflected in the price they pay for the services they purchase. The market price for a good or service is often less than the maximum amount which some consumers

would be willing to pay. This difference represents what is known in conventional economic terms as a “consumer surplus”. Consumer surplus is the utility that accrues to consumers beyond what they have paid for. The diagram above illustrates the area of consumer surplus. Contrary to the view taken in TeamTalk, this represents a benefit to the public that should be considered when the public benefit test is applied.

By contrast, it is useful to consider the loss of product quality or consumer choice on the detriment side. The same difficulties of quantification logically must arise. The very nature of anti-competitive practices and acquisitions mean that in virtually all decisions the loss of consumer choice will be a relevant detriment. A reduction in consumer choice reflects a loss of allocative efficiency. A loss of allocative

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efficiency has two effects: a loss of consumer choice and an increase in price. This makes it difficult to determine the extent of detriment attributable to the loss of consumer choice. Hence it is more informative to look at losses of product quality. This detriment is often raised in decisions. A loss of quality was held to be a detriment of significant magnitude in Hoyts, Ansett and Ravensdown. By parity of reasoning, an increase in product or service quality should be able to be accorded significant weighting if the facts warrant it.

Category 3B: Improved information in the marketplace

This benefit arose in Life Underwriters and Electricity Corporation. It was also raised in Grape Growers but rejected on the facts. The focus of the applicant's submissions in Life Underwriters centred around an improvement in the ability of consumers to make informed decisions based on accurate information. Whilst a revised code was authorised subject to conditions, the detriments in that case were not particularly significant. In Electricity Corporation the Commission made it clear that it had given some weight to having better informed market participants, but did not indicate how significant the benefit was, except to say that the sum of all the benefits were significant, even though they had not been quantified.

Category 3C: Improvements in bargaining relationships

Greater equality of negotiating power has been raised as a benefit in four cases. The basic philosophy seems to be that if there is already a reasonable parity of bargaining power, there will be no public benefit from increasing the weaker party's

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negotiating position. It was for this reason that the benefit was rejected in

Kiwifruit and Grape Growers.

Two types of benefits were claimed under this head in Enerco. The applicant, Enerco, suggested that stronger negotiating power would enable it to negotiate a lower price for gas. The Commission held that this was only a benefit to the extent that lower wholesale prices would be passed on to customers. Enerco also suggested that it would be able to use its strengthened negotiating power to secure access to other retail gas markets and to compete in them and act as an industry watchdog. The Commission felt that at most, only a small public benefit could be attributed to this.

In NZRFU 2, the Commission accepted that greater leverage for the NZRFU in its negotiations over international television rights, sponsorship and revenue sharing arrangements was a public benefit, but only to the extent that those revenue flows were derived from foreign sources. Because the nexus between improved international performances and the introduction of the arrangements was weak, the resulting benefits were classified as relatively minor.

In Brierley, the applicant claimed bargaining difficulties would arise under the counterfactual. Whilst the Commission acknowledged the possibility could not be precluded, they felt that the likelihood was very low and so consequently gave little weight to it.

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The Commission and courts have shown a greater willingness to place weight on benefits within this category, than the previous two categories. Difficulties of proving a causal nexus are much less prevalent. It seems that Category 3 benefits are of a different order than Category 1 and 2 benefits.

• 2.2.4 CATEGORY 4: IMPROVING NEW ZEALAND'S EXPORT PERFORMANCE Category 4A: Tourism benefits

Tourism benefits have been raised, but not quantified in three decisions. In each of these decisions, little weight was accorded to them, because of difficulty proving a causal nexus between the proposed activity and increased tourism.

Category 4B: Enhanced export opportunities

These benefits have had a real influence in a number of decisions. In Amcor the main benefit arising from the proposal was to allow access to the Australian market. The development and maintenance of a unified marketing effort, so as to facilitate the flow of fruit overseas was given significant weight in Kiwifruit, and appeared to be the key factor for the Commission in authorising the agreement.

As for the other categories, in some decisions little or no weight has been given to these benefits because of difficulties proving a causal nexus between the proposed activity and the enhanced export opportunity.

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Category 4C: Improvements in international competitiveness

This benefit may tend to be claimed when it is difficult to prove that there is an enhancement in export opportunities, making it more speculative in nature. If this is the case, it is likely that this sub-category of benefits will be given less weight than the former sub-category.

In NZ Dairy 2 the Commission declined to take the claimed improvement in international competitiveness into account, on the grounds that it had already been accounted for under the payout enhancement benefit. To consider it would therefore amount to double counting. The High Court disagreed, holding that an improvement in international competitiveness was a substantial public benefit. Although it could not be measured in monetary terms because that would risk double counting, it indicated that it should still be identified and given weight. The High Court overturned the Commission's decision to decline authorisation, holding that the benefits substantially outweighed the detriments. The increased weighting given to international competitiveness benefits was one reason for this change. In the later case of Kiwi, the Commission accepted the view of the High Court that such benefits should be given weight. Nevertheless, difficulty proving the causal nexus between the benefit and the acquisition suggests that the weight accorded to it was only limited.

Whakatu and Consortium concerned agreements to close meatworks. Without such agreements to significantly reduce capacity, it was said that meat producers and processors would not be in a state to strengthen their position in international markets. This argument was particularly convincing to the Commission in both

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cases. In Consortium, the public benefit attributed to the improvement in international competitiveness was of greater magnitude than that attributed to the productive efficiency gain. However, in both cases the competitive detriments were limited, making it difficult to gauge the significance of the international competitiveness benefit.

An improvement in international competitiveness was raised by the applicant in Carter Holt, but not discussed by the Commission. Whilst improvements in international competitiveness were accepted in Fletcher Challenge and Qantas (HC), there was no discussion of the weight to be attached to them. This lack of discussion suggests that no, or very little, weight was accorded to the international competitiveness benefit in these decisions.

Lack of evidence of the extent of the international competitiveness benefit was the reason it was not accepted in Forest Products, Amcor and Tasman. As discussed above, proving an enhancement in international competitiveness is probably more difficult than proving an enhancement in exports, because the former is more amorphous than the latter.

Conclusion on the weight attached to Category 4 benefits

The Commission has certainly shown itself willing to place real weight on benefits within this category. They have been identified as constituting the main benefit in four decisions, and being substantial in another decision. On occasions where little weight has been placed on them, reasons other than their degree of tangibility are to blame. In particular, the claims are often quite indirectly related to the proposed activities. Where there is a large number of channels through which the activity's consequences must flow before the benefit arises, it is difficult to

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demonstrate the causal nexus. Unlike the first two categories of benefits, this indirect nature is not characteristic of all benefits within this category. It is possible that the link between the benefit and the activity can be reasonably direct. Hence it is not the degree of tangibility of these benefits that causes the problem of proving the causal nexus.

Interestingly, the Commission appears to place more weight on enhanced export opportunities than improvements in international competitiveness. This is largely because of evidential issues. International competitiveness is a much more amorphous concept than export enhancement, and will often be claimed if it is not possible to prove the latter benefit.

• 2.2.5 CONCLUSION

An examination of the decisions reveals that the Commission and courts are reluctant to attach more than a negligible weighting to benefits within Categories 1 and 2. They show much greater willingness to place real weight on benefits in Categories 3 and 4. Because the former categories are less tangible than the latter, this prima facie suggests that intangible benefits have less influence on the authorisation decision.

However, as discussed above, there may be alternative explanations for this lower weighting given to intangibles; namely difficulties of proving a causal nexus between the activity seeking to be authorised and the benefit, and difficulties in proving the extent of the benefit. Interestingly, it is these very features that characterise benefits as intangibles. As discussed in Section 1.4, the Chief Economist of the Commerce Commission, Dr Michael Pickford, notes that intangibles usually share two common features; they are difficult to describe precisely and there is no obvious framework in which to assess their value. The former makes it problematic to prove a causal nexus between the benefit and the activity seeking to

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be authorised, and the latter makes it difficult to prove the extent of their value. Because it is the intangibility that lies at the heart of the problem of proof, it is the intangibility that causes intangible benefits to be given less weight. Hence, it can be concluded that the reason the Commission accords a lower weighting to intangible benefits is because of their inherent difficulty of quantification.

2.3 Contrasting the treatment of quantified intangibles and unquantified intangibles

The Commission and courts have stressed the desirability of quantifying benefits where possible. This could mean that benefits that are not quantified are not given as much weight in the public benefit analysis. Dr Michael Pickford acknowledges this possibility, stating that “it is probably fair to say that, in the absence of quantification, the Commission will need some fairly convincing evidence that they will eventuate before much weight is given to them”. The High Court decision in Qantas (HC) refutes the idea that a benefit could be given less weight simply because it has not been quantified. However, the High Court's position is not necessarily at odds with Pickford's; Pickford leaves open the possibility that unquantified intangible benefits may be accorded real weight, and the High Court says nothing to cast doubt upon the heavy burden of proof that the applicant bears in relation to intangible benefits.

A good illustration of the possibility that unquantified intangibles may not be treated as favourably as quantified intangibles, is provided by the Powerco decision. No more than a minimal weighting has ever been accorded to unquantified Category 2 intangible benefits. However, in Powerco, the Commission took a more quantitative approach to the social detriments arising from redundancies. Although

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the Commission was concerned with a detriment, rather than a benefit, the same methodology could be applied to social benefits. Whilst the Commission recognised that it was not possible to quantify these detriments with any accuracy, “merely for the purpose of demonstrating the impact they may have on the public benefit assessment”, it came up with a ball-park figure of $500,000 for the detriments. This figure was then weighed against the other quantified benefits and detriments. It represented ten times the value of the other detriments and about 11 to 18 percent of the value of the benefits. Hence, it was a factor that could potentially influence the final outcome. This more favourable treatment of quantified intangibles provides a strong incentive to applicants to attempt to quantify intangible benefits. The possibility of quantification is discussed in more detail in Chapter Four.

2.4 The treatment of intangibles over time

In the 1991 Review of the Commerce Act, the review team noted that because the authorisation test enables an analysis of all benefits and detriments which are of value to the community, it can accommodate changes in community values. The objective of this section is to consider whether the treatment of intangibles has changed over time.

2.4.Ł CATEGORY ŁA: “FEEL-GOOD” BENEFITS

In both Ansett and Qantas, the preservation of Air New Zealand as New Zealand's national flag carrier was claimed as a public benefit. When Ansett was decided in 1996, the Commission seemed to place no weight upon it, but in 2003 when the Qantas decision was delivered, the Commission stated that it had a “non- quantifiable symbolic value”. On appeal, the High Court in Qantas agreed that a

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value should be attached to this benefit. As discussed in Section 2.2.1, it is difficult to gauge with certainty what weight the Commission and High Court attached to it. It may well be that it was given very little weight. Nevertheless, in very similar circumstances, the Commission and High Court were prepared to give a benefit which had not accorded any value seven years earlier, at least some weight.

The precise cause of the Commission's change in approach is not clear. It may be the result of an increased emphasis on fostering New Zealanders' sense of identity. In fact, promoting New Zealanders' identity is one of the current Labour-Progressive Coalition Government's three goals. Arguably, government policy often reflects what is of value to society, and to the extent that it does this, it should be incorporated into the public benefit test.

• 2.4.2 CATEGORY 2A: ENVIRONMENTAL BENEFITS

As discussed in Section 2.2.2, in the three decisions that have discussed environmental benefits, it does not seem that they have ever been assigned any real weight. However, as stated in Section 2.2.2, there may be alternative explanations for this low weighting. Interestingly, in Qantas in 2003, it was the Commission, rather than the applicant, who raised the possibility of environmental benefits. The Commission did not raise the benefit in similar circumstances in Ansett, which was decided in 1996. Nor has it raised them in any other case. Arguably the reduction in road usage and the more efficient use of synfuels which were accepted in Fletcher Challenge and Petroleum Corporation, would have

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positive effects on the environment. As such, they are similar in character to the reduction in flight numbers in Qantas. However, it was only in their more recent decision in Qantas that the Commission raised the benefit.

The fact that the Commission was prepared to raise the possibility of environmental benefits in Qantas in circumstances where it had not done so before, may be an indication to future applicants that it is now willing to place real weight on environmental outcomes. This could be reflective of society's increased emphasis on environmental quality. Alternatively, it may simply be a signal that the Commission wants all public benefits brought to their attention. Dr Alan Bollard, a former Commission Chairman seems to support the prior view. Writing in 1993 he predicted that there would be a growing emphasis on social impact analysis.

• 2.4.3 CATEGORIES 4A AND 4B: ENHANCED EXPORT OPPORTUNITIES AND IMPROVEMENTS IN INTERNATIONAL COMPETITIVENESS

Although there does not appear to be any discernible trend in the treatment of this category of benefits, the current Labour-Progressive Coalition Government's objective of “economic transformation” may assist to predict a future trend. To realise this policy the Government has an objective of growing globally competitive firms. Hence, an enhancement of export opportunities or an improvement in international competitiveness would help achieve the Government's current economic policy. This implies that we should see an increase in the weight accorded to these benefits. However, this assumes that the Government's economic policy has never previously focused upon growing globally competitive firms. This is dubious. In 1995 for example, the National Government had an objective of developing a more “open, internationally competitive enterprise economy”.

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• 2.4.4 CONCLUSION

Given the limited discussion of intangibles in the decisions, especially those of the most intangible nature, it is difficult to positively state that intangibles have been accorded more weight in more recent decisions. However, the Commission and High Court decisions in Qantas, suggest that this could be the case. If it is, there is now an increased incentive for applicants to claim that intangible benefits will eventuate.

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C H AP T E R T H R EE

Legal and Policy Perspectives on the Treatment of Intangible Benefits

This Chapter seeks to evaluate whether intangible benefits can be treated differently from tangible benefits under the law as it now stands, and whether they should be considered as a matter of policy.

3. Ł The legality of treating intangible benefits differently

3.Ł.Ł DISREGARDING INTANGIBLE BENEFITS

Although there is no specific direction in the Act that intangible benefits must be taken into account, three factors suggest that they should be. First, in not providing a definition of “public benefit”, Parliament showed its preference for a broad public benefit test, incorporating all benefits, irrespective of their degree of tangibility. Had it wished to do so, it could easily have restricted public benefits to tangible benefits.

Second, the words “public benefit” were taken from the Australian Trade Practices Act 1974, where they had long been given a wide meaning. This shows an intention on the part of the New Zealand Parliament that public benefit be given a wide conception, so as to incorporate intangible considerations, as well as more tangible benefits.

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Finally, the legislature chose the broader goal of effective competition, rather than efficiency, as the objective of the Act. If intangible benefits were to be disregarded, only efficiency factors would be considered as part of the public benefit analysis. Parliament deliberately chose a broad objective for the Act, going beyond simply considering efficiency claims, and so there is a strong argument that “public benefit” should be given a commensurately wide interpretation. Excluding intangible benefits means that non-efficiency benefits would be given no consideration, which seems to be at odds with the chosen objective of the Act.

3. Ł.2 ACCORDING INTANGIBLE BENEFITS A LOWER WEIGHTING

As discussed in Chapter Two, intangible benefits seem to be accorded less weight than tangible benefits. Whilst there is no indication in the Act that intangible benefits must be given the same weighting as tangible benefits, there is also no suggestion that less weight may be given to intangible benefits. There is no obvious explanation why benefits such as cost savings should be worth inherently more than environmental or health benefits. In the absence of either of the justifications set out below applying, there does not appear to be a legitimate reason for according intangible benefits less weight.

Issues of proof

As discussed in Section 2.2, the lower weighting attached to intangible benefits is often due to problems of proof, especially in relation to the causal nexus and the extent of the benefit. Where this is the case, the Commission and courts are

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entirely justified in placing less weight on intangible benefits because the applicant bears the burden of proving these matters.

The scheme of the Act

The lesser weighting given to intangibles, may be partially justified by the scheme of the Act. Section 3A of the Act was inserted in 1990 and requires the Commission to have regard to any efficiencies that will, or will be likely to result, from the conduct seeking to be authorised. It is the only direct assistance that the Act gives in relation to the application of the public benefit test. Although the Commission and courts appear to have assumed that section 3A places the focus on efficiency benefits, it is not entirely clear that this is the effect or intention of the provision.

Taken literally, section 3A is simply a reminder to the Commission and courts that they must consider efficiency benefits. At the very most, it places a positive obligation upon the Commission to consider efficiencies. The High Court in Telecom (HC) seemed to recognise this, noting that efficiencies were neither the only, nor the most important consideration. In the 1992 Review of the Commerce Act the review team acknowledged that section 3A did not clearly establish efficiencies as the principal benefit. It was for that reason that the majority of the review team recommended the amendment of section 3A to state that efficiencies were the principal consideration in the authorisation process. However, this recommendation was never implemented. Arguably this means that,

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ceteris paribus, efficiency benefits should be given no greater weight than non- efficiency benefits.

Even if section 3A could be said to justify greater weight being placed on efficiency benefits, this only provides a justification for lesser weight being placed upon intangible benefits within Category 1. The other categories all represent efficiency gains. Hence this justification can only provide a partial explanation, if any explanation, for the lower weighting accorded to intangible benefits.

3.2 Disregarding intangible benefits as a matter of policy

A potential advantage of restricting the notion of “public benefit” to tangible benefits is that it limits the ambit of the investigation, reducing the time and cost involved in making a decision. Because intangible benefits do not appear to have affected the outcome of cases to date, disregarding them will only make a difference in extremely rare cases (if ever). However, this argument ignores the definitional issue that such a change will create. Currently it is not necessary for applicants to characterise benefits as tangible or intangible; they can simply list all the benefits that they claim will arise as a result of the activity that is sought to be authorised. If public benefits were to be restricted to tangible benefits, the definitional issue discussed in Chapter One would arise. Arguments would be made about whether a particular benefit was a tangible or intangible benefit. This would increase the cost and time involved in the decision making process, and at least partially, if not wholly, offset the time and cost savings that would arise from not

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having to evaluate the weighting to be given to intangible benefits. Furthermore, inconsistencies could arise between cases. A particular benefit may be treated as a tangible benefit in one case and so be considered as part of the public benefit test, but be treated as an intangible benefit in another case and so not be considered. This would increase uncertainty in the authorisation area.

Moreover, there does not appear to be any sensible policy reason for excluding intangible benefits from the public benefit test. Environmental and health benefits are valuable, particularly in today's society. The current Government's objective of promoting New Zealand's identity suggests that even the most intangible benefits, those falling within Category 1, have at least some value in today's society.

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C H AP T E R F 0 U R

Quantification of Intangible Benefits

As concluded in Section 2.3, because quantified intangibles may be given more weight than their unquantified counterparts, there is an incentive for applicants to attempt to quantify intangible benefits. This Chapter seeks to examine the desirability and feasibility of quantifying intangible benefits.

4. Ł The desirability of quantifying intangible benefits

In the only authorisation decision ever to reach the Court of Appeal, Richardson J stressed the desirability of quantifying benefits and detriments, where and to the extent that it is feasible. He noted the “responsibility on a regulatory body to attempt so far as possible to quantify detriments and benefits rather than rely on a purely intuitive judgment”. In its last eight decisions, the Commission has remarked that it is mindful of this responsibility. This section seeks to evaluate the desirability of such a “responsibility”, with reference to intangible benefits.

4.Ł.Ł THE ADVANTAGES OF QUANTIFYING INTANGIBLE BENEFITS

The quantification of benefits and detriments is a process designed to inform the Commission of the possible magnitudes of the various elements, and thereby assist it in the application of its judgment. Because all the benefits and detriments are in a common unit of measurement, it is much easier to apply the public benefit test; the quantified benefits simply need to be weighed against the quantified detriments to give an estimate of the net benefit or detriment arising from the activity that is sought to be authorised. Quantification provides a more objective framework within

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which to establish the weights to be given to the various benefits and detriments claimed, and so results in a more transparent decision making process.

The Commission in NZRFU 2 suggested that the problem with relying solely on qualitative arguments is that reasonable arguments can be put forward by different parties that come to different conclusions about the desirability of a course of action. However, the same can be said of quantitative arguments; different groups will arrive at different valuations for intangible benefits, owing to the different assumptions that they make. For example, in Qantas the applicants submitted that travellers would receive a 100 percent convenience gain from improved aircraft schedules, resulting in a benefit of $2 million annually from year three onwards. The Commission was sceptical of the 100 percent gain, questioning whether people completely waste their time and suggesting that they find other less optimal ways to use it. In the end, the Commission held that travellers would only achieve a 20 percent convenience gain, and so the benefit would amount to $476,000. This only represents 23.8 percent of the value claimed by Qantas and Air New Zealand.

4.Ł.2 THE PROBLEMS ASSOCIATED WITH QUANTIFYING INTANGIBLE BENEFITS

There are two basic issues associated with the quantification of intangible benefits which may make their quantification impractical: reliability and cost.

Reliability issues

The very nature of intangible benefits means that they are inherently difficult to quantify. Hence, when they are quantified a number of simplifying and often unrealistic assumptions must be made, making the reliability of the calculations

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doubtful. If it is not possible to quantify benefits with any degree of accuracy, their inclusion in the quantitative analysis may be more misleading than helpful. It may detract from the quality of the decision, and result in some practices being authorised when they should not be and some not being authorised when they should be.

The number of assumptions that need to be made in quantifying intangible benefits gives Commissioners greater scope to endorse or reject techniques depending on their economic inclination. Where this occurs a biased outcome is produced, which may not accurately reflect the value of the benefit. It also reduces the degree of consistency between cases. It is important to note that this same bias could exist in the weight given to unquantified intangible benefits. However, the bias will be more evident in the case of quantified intangibles because the decision making process is more transparent. This transparency may actually serve to reduce the bias, and so quantification may actually reduce the scope for Commissioners to impose their own biases upon decisions.

There are a number of ways to minimise this reliability concern. Wider ranges of values for benefits can be used to reduce the potential margin for error. The weight given to the benefit can be reduced to ensure that it does not improperly cause the activity to be authorised. Finally, the inclusion of a qualitative evaluation of the benefit can either confirm or refute the quantitative assessment.

Cost issues

The legal and economic fees incurred by parties seeking authorisation are considerable. If intangible benefits were to be quantified on a regular basis, the

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expense would increase even further, because the methodologies used to quantify intangible benefits tend to be resource intensive.

The Commission relies heavily upon applicants to provide evidence of the extent of the public benefits. Applicants have no incentive to quantify benefits if the cost of quantification is greater than the benefit arising from the increased likelihood that the activity will be authorised.

Furthermore, there is no point in the Commission insisting upon quantification if the cost of quantification would outweigh the benefit to society from the improvement in decision making. That this might occur was recognised by the Commission in Newcall. In relation to the quantification of benefits, Professor Ergas on behalf of Telecom wondered whether the cost of their quantification would be such that they would “greatly swamp any benefits that it might provide you with in terms of improved decision-making”. The Commission acknowledged that in that instance it would have been very difficult and costly to undertake quantification with any precision.

4.Ł.3 CONCLUSION

Whilst the quantification of intangible benefits is of significant assistance to the Commission if it is accurate, the nature of intangible benefits may mean that quantification is too unreliable and costly to render it feasible. Where this is the case, qualitative assessment has an important role to play. The next three sections present three alternative methods of quantifying intangible benefits.

4.2 Quantification with an economic model

It may be possible to utilise an existing economic model or to develop a new one, to quantify the magnitude of a benefit. Such models can be partial equilibrium or general equilibrium. Partial equilibrium models analyse the changes in welfare by

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focusing upon a particular market, whereas general equilibrium models take a much broader approach, looking at the effects on the entire economy.

• 4.2. Ł PARTIAL EQUILIBRIUM ANALYSIS

Partial equilibrium analysis can be used where the intangible benefit arises in a market context. Theoretically, where a market exists, the elasticities of the demand and supply curves can be estimated. The elasticity of the relevant curve can be used in conjunction with the change in price or quantity to give an estimate of the value of the benefit to society, as measured by the change in consumer or producer surplus.

Critique of the approach

Partial equilibrium analysis requires an estimate of the elasticity of demand or supply to be made. This is often not an easy task. However, the elasticity of demand for the particular good or service is almost always estimated to quantify the allocative efficiency detriment. Hence, in the case of quality improvements the elasticity will have already been estimated. For other benefits, such as increased tourism and exports, existing studies may be available to minimise the cost and time involved in calculating the elasticity value.

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The usefulness of partial equilibrium analysis may be reduced by the use of inaccurate elasticity values. Elasticity values are calculated by observing the values of price and quantity in a marketplace on more than one occasion. If the relevant curve, or the other intersecting curve, has shifted during the period of observation or since the elasticity value was calculated, then the elasticity value may be inaccurate. Using the wrong elasticity value will give an incorrect valuation of the public benefit.

4.2.2 GENERAL EQUILIBRIUM ANALYSIS

General equilibrium analysis can be utilised where the relationship between the activity that is sought to be authorised and the benefit is known. In Qantas, the applicants used a computable general equilibrium (CGE) model to estimate the benefits to New Zealand from an increase in tourism. Having arrived at an estimate for the increase in tourist numbers, the applicants estimated how much these additional tourists would spend in New Zealand and used CGE modelling to estimate the effect of that spending on the rest of the economy.

Critique of the approach

In Qantas, the Commission indicated that it preferred partial equilibrium analysis to general equilibrium analysis. Because the assessment of competitive detriments is restricted to the immediate market, partial equilibrium analysis must be used to evaluate their magnitude. If general equilibrium analysis is then used to evaluate some or all of the benefits, the estimation methods do not produce comparable values.

To date, no individual or organisation has developed a general equilibrium model of the New Zealand economy. Given the very high fixed costs associated with

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setting up such a model, developing a general equilibrium model of the New Zealand economy for a competition law case will almost certainly never be viable. Even if such a model was developed by an organisation such as the New Zealand Institute of Economic Research (NZIER), reliability is a concern. General equilibrium modelling relies upon a vast number of assumptions, most of which cannot be determined with any accuracy. In Qantas, Ralph Lattimore suggested that a

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Hence, even a model specifically designed to replicate the features of the New Zealand economy could be “inapt in many subtle ways, with unknowable consequences for the validity of the results”.

There are some global equilibrium models which are designed to be utilised across a number of countries. Even utilising such an existing model is a major undertaking, entailing significant costs. Less than 10 economists in New Zealand would be able to apply a CGE model to estimate the value of a particular benefit. Furthermore, reliability concerns are even more pronounced for this class of models, because they are not specifically designed to replicate the features of the New Zealand economy. For example, in Qantas the three different models considered all produced vastly different results, with one of the models producing a value double that of another model.

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4.3 The “willingness to pay” approach

Because all public benefits must accrue to someone, in principle a valuation can be obtained by ascertaining how much the beneficiaries would be willing to pay for the benefit. There are two ways to arrive at willingness to pay values. A contingent valuation asks beneficiaries the maximum amount that they would be prepared to pay to receive the benefit. An observational valuation observes the behaviour of individuals in markets where the benefit has an influence.

• 4.3. Ł CRITIQUE OF THE APPROACH

In theory, willingness to pay provides an economic framework in which to value intangible benefits. However, in practice it is very difficult to calculate willingness to pay values. It is often difficult to obtain accurate answers from respondents of the maximum amount that they would be prepared to pay for the benefit, because they have difficulty conceptualising and isolating the benefit, or they figure that they can free ride on the payments of others. It is also difficult to arrive at willingness to pay values via market based studies, because there are usually a number of influences on the price of the product or service, aside from the benefit being examined. These influences must be isolated before a value for the benefit can be calculated. The willingness to pay technique and the problems associated with it are discussed further below, in the context of valuing public safety benefits.

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4.3.2 AN APPLIED EXAMPLE: VALUING PUBLIC SAFETY BENEFITS

Public safety is a benefit which has been claimed in four decisions, but as yet, no attempt has been made to quantify it. Whilst it is uncontroversial that an increase in public safety is a benefit, it is not so easy to quantify it. The purpose of this subsection is to use public safety as a case study of whether some of the more intangible benefits can be quantified.

From a purely theoretical perspective, the valuation of public safety seems quite straightforward. The increase in safety, measured in terms of the numbers of deaths and injuries prevented, simply needs to be multiplied by the monetary value of preventing these fatalities and casualties, to give the benefit attributable to public safety. However, in practice the calculation of the values of these two inputs is problematic. Techniques for calculating these values are discussed below.

Techniques for the calculation of the impact of improved safety on the number of casualties and fatalities

A number of studies consider an initiative to improve public safety and convert it into the number of fatalities or injuries avoided. Where a relevant study is available, it can be used to calculate the health outcomes from the activity that is sought to be authorised, in terms of fatalities and injuries avoided.

Where individuals are not injured or killed, but their quality of life is adversely affected, this can be converted into a measure of life years lost using cost utility

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analysis. This technique uses surveys to attempt to capture individuals' utility in different health states. These utilities give a measure of the quality of life enjoyed in each of these states, relative to some benchmark health status, such as perfect health. The increase in individuals' quality of life in the factual can be multiplied by the average life expectancy to give a valuation in terms of life years gained. The measure of life years gained can then be converted into dollars, using the same techniques used to value the benefit of preventing fatalities and casualties.

Techniques for the valuation of the benefit of preventing fatalities and casualties

There are a number of techniques, including the willingness to pay approach, that can be used to calculate the value to society of preventing fatalities and casualties.

The human capital approach

The human capital approach values the benefit from avoiding a death or injury as the production that would be lost if that death or injury was to occur. Because this approach does not capture an individual's aversion to injury, or the pain, grief and suffering of those close to the casualties, it only partially captures the social cost of death or injury. Another problem with the approach is that it means that the lives of children, the elderly, women and minorities are worth less. This seems callous and inappropriate.

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The insurance approach

The benefit of avoiding a death or injury could be measured as the value of the insurance that would be payable if the death or injury was to occur. However, just like the human capital approach, there is nothing to suggest that insurance payments reflect the true costs of the death or injury. Moreover, individuals who have no insurance would unrealistically be assumed to have a zero value of life or avoidance of injury.

The implicit valuation approach

The value of public safety can be inferred from past decisions which impact upon health and safety. For example, the costs and effects of past political decisions, such as fencing swimming pools and placing health warnings on cigarette packets could be examined. The cost can be taken as a benchmark for the value of the deaths and injuries prevented. The problem with this approach is that valuations vary widely, and there is nothing to suggest that those past decisions were correct.

The willingness to pay approach

The basic tenets of this approach are set out above. In terms of public safety, a willingness to pay approach entails determining individuals' willingness to pay for incremental changes in the risk of accidental death and injury, and aggregating them to find society's willingness to pay for improvements in safety. A contingent valuation asks a representative sample of individuals what they would be prepared

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to pay for certain increases in public safety. An observational valuation looks at things that are expected to reveal preferences for safety; for example the rate at which individuals change their tyres, or wage differentials for those in risky jobs. However, for much of this behaviour there are no reliable data, or the data that are available do not reflect individual preferences because government regulations distort individuals' choices. Therefore, in practice willingness to pay for public safety is most easily measured through surveys of stated preferences.

An example of a willingness to pay approach to the evaluation of public safety: valuing the prevention of fatalities and casualties on New Zealand roads

Land Transport New Zealand (“LTNZ”) appears to be the only New Zealand agency which has attempted to put a value on saving a life. A fatality is currently valued at $3,046,700, a serious injury at $304,700, and a minor injury at $12,200. This is based on a survey of New Zealand residents undertaken in 1989 and 1990 by Ted Millar and Jagadish Guria on behalf of what was then the Land Transport Safety Authority (“LTSA”).

Millar and Guria used a contingent valuation methodology to calculate monetary estimates for individuals' willingness to pay to avoid fatalities and casualties. People were asked to state how much they would pay for different goods and services which would reduce their risk of death and injury on the roads. The value of statistical life was then calculated by dividing the average willingness to pay by the reduction in risk. The loss of quality of life due to serious and minor injuries is set at 10 percent and 0.4 percent respectively, of the value of statistical

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life. These valuations of death and injury are updated regularly to reflect changes in individual earnings, on the assumption that willingness to pay will vary with ability to pay.

The richer an economy is, the more its citizens can be expected to be prepared to pay for life and injury saving measures. Values of statistical life for a number of countries, as published in a 1993 Economist article, suggest that the New Zealand value is very much in line with estimates for countries of similar income per capita.

Putting it all together: evaluating public safety benefits

In the road safety context

Fletcher Challenge dealt with a claim of increased road safety from a reduction in road usage. Although the applicant quantified the benefits from reduced road usage, this figure may have pertained to the reduced road maintenance costs. If such a case was to come before the Commission now, the LTSA's estimates for the value of statistical life and avoidance of injury could be multiplied by the number of fatalities and casualties avoided, to determine the safety benefit. There are studies available that would assist in estimating the number of casualties and fatalities avoided as a consequence of a reduction in road usage.

In other contexts

The LTSA's figures could also be used as an approximation of the benefit arising from the prevention of fatalities and casualties in other public safety contexts.

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They have already been used in a number of studies for this purpose. The real difficulty lies in determining the number of fatalities and casualties avoided as a result of the safety improvement. Studies could potentially be of assistance. Where benefits result in improved life quality, rather than avoided fatalities or injuries, cost utility analysis can be utilised to calculate a valuation in terms of life years saved. It is important to note that other economic costs, avoided as a result of the benefit occurring would also need to be included in the analysis.

Critique of the approach

The cost, time and complexity of the Commission or an applicant undertaking a study to value life and the avoidance of injuries would be prohibitive. However, these burdens need not be incurred, because the estimates of the LTSA can be utilised.

Whilst theoretically very sound, the willingness to pay approach has difficulties in application. It is very hard for people to put values on tiny changes in probabilities that are already very small. However, the fact that the value of statistical life revealed by reported speed choice was consistent with that revealed by the willingness to pay questions, suggests that the respondents did understand the risk levels in the willingness to pay questions. A further problem lies in the fact that it is difficult for those who have never been seriously injured to know how much they would like to avoid it.

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The values calculated by the LTSA related to risks where people felt in control. In their report, the LTSA suggested that higher values may be appropriate for risks people feel are outside their control, such as environmental exposures, occupational incidents, and airline and public transport crashes.

A common objection to valuing public safety is that it is morally offensive to reduce human life to dollars and cents. However, it is not as callous as it sounds. Individuals do it implicitly all the time. For example, a driver takes a chance of being killed in a car, but judges the speed and convenience to be worth the risk. Furthermore, whenever the government issues regulations or allocates resources that affect health and safety, it too values our lives.

4.4 The “ball-park figure” technique

The “ball-park figure” approach to valuation involves coming up with a value for the benefit accruing to an individual, and then scaling it up to arrive at an estimate of the total benefit. The distinguishing feature of this technique is that there is no basis for the number adopted as representing the value of the benefit accruing to an individual. No reference is made to surveys or studies; rather the number is seemingly plucked out of the air.

• 4.4. Ł THE CASE LAW

The Commission has taken a ball-park figure approach to the quantification of intangible benefits on two occasions. In Qantas, it was used to value the scheduling benefits to travellers under the proposed alliance between Qantas and Air New Zealand. The Commission assumed that on average, business and leisure travellers would receive a 20 percent gain from scheduling benefits. This was applied to an assumed opportunity cost of $100 per hour for business travellers,

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and $20 per hour for leisure travellers, to arrive at a total benefit of

$476,000, which was rounded off to $500,000. On appeal, the High Court did not criticise the Commission's approach.

In NZRFU 1 and NZRFU 2, the NZRFU suggested that the benefit accruing to television viewers from a more attractive National Provincial Competition (NPC), could be evaluated using the ball-park figure technique. For example, in NZRFU 1 it was suggested that the increased attractiveness of a more even game might be valued at between 50 cents and $10 per person viewing. Even at a figure of only 50 cents, the public benefit would still total $2.5 million per year. The Chairman and Commissioners Auton and Stapleton accepted this general approach. Commissioner Harrison on the other hand, thought that the intangible and subjective nature of the benefit meant that it should not be quantified. The Commission in NZRFU 2 rejected the technique in favour of a more elaborate economic model suggesting that, “[t]he difficulty with this approach is that it is fairly ad hoc; no sound reasoning was provided by the Applicant as to why this was a sensible range for the net benefits that may accrue”.

The ball-park figure technique has also been used to evaluate a Category 2C detriment. As discussed in Section 2.3, in Powerco the Commission, whilst recognising that the social detriment associated with redundancy could not be quantified with any accuracy, came up with a rough figure to demonstrate the impact that it would have on the public benefit assessment. It assumed that on average, the social cost was $10,000 per person made redundant. If forty people were made redundant, the total cost would be $400,000. This figure was then

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rounded off to $500,000 and weighed against the other quantified benefits and detriments. Presumably this same technique could be used to value a social benefit.

4.4.2 CRITIQUE OF THE APPROACH

As the comments of the Commission in NZRFU 2 highlight, the ball-park figure technique has no sound evidential basis and so the values it produces for the benefits may well be inaccurate. NZRFU 2 illustrates that where there is a preferable alternative that has an economic basis for its assumptions, the ball-park figure technique will not be used. Where there is no such alternative, arguably the ball-park technique could be useful to the extent that it focuses the Commission's attention on the magnitude that the benefit could have. However, it is questionable how such an arbitrary valuation can be of much assistance. Whilst the Commission in Ansett recognised the usefulness of quantification, it cautioned against the temptation to accept “spurious quantification[s]”. If numbers are simply plucked out of the air, quantification loses its advantages of objectivity and transparency. Qualitative analysis is preferable to a ball-park figure analysis.

4.5 Conclusion

The quantification of intangible benefits is no easy task. Economic models may be of assistance in a limited number of cases. The costs and the lack of data will be prohibitive in many instances. The willingness to pay approach may provide a relatively accurate and cheap method of quantification where there have been sufficient studies to base the analysis on. Where all else fails, the ball-park figure technique is available. Given the complete lack of basis for its assumptions, its use in place of qualitative analysis is questionable at best.

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Conclusion

Evaluating the treatment of the class of benefits termed “intangible” by the Commission, necessitates classifying benefits as tangible or intangible. This is a difficult task that has been exacerbated by the apparent lack of agreement, even amongst Commissioners, as to the precise meaning of the term “intangible benefit”. Whilst the current Guidelines and the preponderance of decisions suggest that intangibility hinges upon a benefit's ease of quantification, some decisions seem to implicitly equate intangibility with quantification per se. This difference in definition, combined with the difficulty of applying the definitions, leads to inconsistencies in classification. Consequently, it is impossible to say with precision which benefits are tangible and which are intangible. This dissertation overcomes this classification problem by utilising a spectrum of tangibility within which to evaluate the treatment of less tangible and more tangible benefits.

To date, negligible weight has been attached to the most intangible benefits. This treatment is usually justified by evidential problems, which largely stem from the intangibility of the benefit itself. Whilst it is difficult to discern a change in the treatment of intangibles over time, the Commission appears more willing to discuss intangibles than in the past, even raising them itself in one recent decision. There is some indication that more weight is accorded to quantified intangibles, providing an incentive to applicants to quantify intangible claims. However, quantification is a difficult task - issues of cost and reliability rendering it impracticable in many instances.

Under the current law, intangible benefits must be considered in the application of the public benefit test, unless the intangibility means that the applicant cannot satisfy its evidentiary burden of proving the benefit. As a matter of policy, it would

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be inappropriate to exclude intangibles from the balancing process. It would raise a complex definitional problem and exclude some issues that are of real concern to society.

The distinction drawn by the Commission between tangible and intangible benefits does not seem to be a particularly useful one, particularly given the Commission's sporadic and inconsistent use of the term. Because nothing hinges on the distinction, it is of little or no assistance to applicants or the Commission. The key focus for the Commission in determining the weight to be given to intangible benefits seems to be the evidential problems flowing from intangibility, rather than the intangibility per se. Focusing upon whether a given benefit is tangible or intangible unnecessarily complicates the public benefit analysis. It may be best if the Commission recognises this by doing away with the distinction, and instead focusing upon the core requirements for proving a benefit. Because the Commission often draws on the principles set out in the Guidelines in its decisions, an important first step towards abolishing the distinction would be to remove it from the Guidelines.

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