Monday, December 11, 2023

Building supplies sector report handed down

The Commerce Commission’s final report from a year-long market study into residential building supplies has set out nine recommendations to improve competition and produce better long-term outcomes for New Zealand homeowners and those involved in the industry.

Commission Chair, John Small says the recommendations aim to provide tangible improvements in competition for key building supplies, without undermining the essential policy objectives of the building regulatory system – focused on promoting safe, healthy and durable homes.

“Ensuring the building regulatory system continues to deliver quality housing to New Zealanders is critical, and must remain a core objective,” Dr Small says.

“However, we can’t ignore the fact that changes are needed to enhance the building regulatory system for the benefit of all New Zealanders. 

“We have heard compelling evidence that competition should take a more prominent position in the regulatory system and its decision-making. 

“We are recommending that competition should be included as an additional express objective of the building regulatory system, which will contribute to and complement the existing system objectives of safety, health and durability,” Dr Small said.

Associate Commissioner, Anna Rawlings, who presented the Draft Report in August and ended her term as Commission Chair on 5 December 2022, says the consultation with industry stakeholders and other interested parties and testing of the preliminary findings have given further confidence in the findings and recommendations, and greater clarity about the importance of scale.

“Following the Draft Report, we have reviewed all submissions along with preliminary recommendations, and remain of the view that competition for the supply of key building supplies is not working as well as it could be,” she said.

“It needs to be easier for new building products and new methods to be introduced into New Zealand, and for competing suppliers to be able to expand their businesses – that is the essence of competition.”

The Commission has identified two main factors making it difficult for competing products to be introduced and expand:

  • The building regulatory system continues to incentivise designers, builders and building consent authorities (BCAs) to favour familiar building products over new or competing products;
  • Quantity-forcing rebates paid by established suppliers to merchants appear, under certain conditions, to be reinforcing regulatory factors impacting entry and expansion, making it difficult for new or competing products to access distribution channels and increase sales.

“This market study shows that familiar products have become embedded in home-building practice in New Zealand – and the building regulatory system should include competition as an express objective.” 

Dr Small says in some circumstances, some types of rebates paid by established suppliers to merchants appear to be reinforcing difficulties faced by competing products and suppliers.

“The solution lies in improving conditions for entry and expansion which, in turn, will improve competition for key building supplies,” he said.

As in previous market studies into the fuel and the groceries sectors, Dr Small says the Commission identified land covenants and exclusive leases that benefit merchants, which will be the focus of further work using the Commission’s compliance and enforcement functions and powers.

Added focus on OSM and Māori perspectives

Having considered public comments on the Draft Report, the Commission has adjusted recommendations relating to improved decision-making, including to introduce a new recommendation to support offsite manufacturing (OSM).

“Offsite manufacturing can add a range of benefits for construction and has the potential to increase competition for key building supplies, but many offsite manufacturers currently face demand uncertainty and lack scale,” said Dr Small.

During the study, Dr Small says the Commission heard from Māori about their perspectives on the residential building supplies industry as participants in the building system, as purchasers and suppliers of key building supplies, and as builders and major developers. 

“This has helped us to better understand Māori perspectives, concerns and aspirations regarding the industry.”

“These engagements are important to give proper effect to obligations under the Treaty of Waitangi and to ensure that Māori needs, and priorities are properly heard, understood and addressed to support them to achieve their aspirations within the sector. 

“We expect that supporting Māori in this way will also support improved competition more broadly.”

He said this was another area of change from the draft recommendations, from better reflecting a Māori perspective in the building regulatory system to better serving the needs of Māori through the system.

Recommendations to enhance competition

The recommendations of the Final Report from the market study into Residential Building Supplies aim to provide tangible improvements in competition for key building supplies, without undermining the current essential policy objectives of the building regulatory system. 

They are discussed in three inter-dependent groups designed to: enhance the regulatory system; support sound decision-making; and address strategic business conduct.

Enhancing the regulatory system:
1. Introduce competition as an objective to be promoted in the building regulatory system
2. Better serve Māori through the building regulatory system
3. Create more clear compliance pathways for a broader range of key building supplies
4. Explore ways to remove impediments to product substitution and variations

Supporting sound decision-making:
5. Establish a national system to share information about building products and consenting
6. Establish an education and mentoring function to facilitate a better co‑ordinated and enhanced approach by BCAs to consenting and product approval processes
7. Develop and implement an all-of-government strategy to coordinate and boost OSM

Addressing strategic business conduct:
8. Promote compliance with the Commerce Act, including by discouraging the use of quantity-forcing supplier-to-merchant rebates that may harm competition
9. Consider the economy-wide use of land covenants, exclusive leases and contractual provisions with similar effect.

Commerce and Consumer Affairs Minister, David Clark said the Government welcomed the findings and would consider the recommendations to understand what changes are necessary to help increase competition, and ultimately bring down costs for consumers.

“In the coming weeks and months, we will talk to stakeholders, with a Government response expected in March 2023. In the meantime, important work already happening, will continue,” Dr Clark said.

Building and Construction Minister, Megan Woods said the recommendations dovetail into MBIE’s current review of the consent system.

“System changes take time because they are important to get right, we continually look for opportunities to improve the way the current building consent system works while more significant reforms are developed,” said Minister Woods.

“Today, the Ministry of Business, Innovation and Employment (MBIE) released updated guidance on the building consent process and a new standardised checklist for residential building consent applications. This will help lift the quality and consistency of building consent applications. 

“Recommendations in the report align with moves we made to help resolve the national plasterboard shortage. The Commerce Commission notes this success, saying that MBIE initiatives and the Ministerial Plasterboard Taskforce illustrate what can be done to improve greater competition.  The recently announced Critical Materials Taskforce springboards off that work to prevent further acute building supply shortages.

“But we know there is still more to be done to ensure consumers get a better deal and builders have the materials they need to do their jobs,” she said.

The report is available on the Commerce Commission’s website.

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