The New Zealand construction sector has faced substantial cost pressure in recent times, particularly since the outbreak of COVID-19. In February 2022, the NZ Infrastructure Commission, Te Waihanga, reported that the construction industry was experiencing rapid cost inflation not seen since the Global Financial Crisis. Increasingly, we are seeing clients facing significant cost uncertainty.
In this context, it is timely that on 4 August 2022 the Commerce Commission has released its 'Residential building supplies market study' draft report into competition for residential building supplies in New Zealand (the Report). This article provides a brief overview of the scope of the Commerce Commission’s investigations and the key findings of the Report.
Scope of the Report
Following a year-long study, the Report considers factors that may affect competition for the supply or acquisition of key building supplies and sets out the Commission’s preliminary findings that competition for residential building supplies can be improved within the industry and provides recommendations to achieve this.
The Commission’s market study focuses on the factors affecting competition for the major components of residential buildings: the foundation, flooring, roof, walls (structural and non-structural, interior and exterior) and insulation. Products falling within this category include concrete, steel and sheet metal roofing, timber and steel framing, weatherboard and other forms of cladding, window/door framing and glazing, glass wool, polyester and polystyrene insulation and plasterboard.
The study looked into the following aspects of the building supply industry:
- the industry structure;
- the nature of competition within the building supply market; and
- barriers to the entry or expansion of new building supplies, including green or prefabricated products.
The Report found that “competition for the supply and acquisition of key building supplies is not working as well as it could if it was easier for building products to be introduced and for competing suppliers to expand their businesses”.
The Report identified aspects within the industry that can be improved, including:
- Conditions for entry and expansion of products into the market are limiting competition. This was found to impact competition for the supply and acquisition of building supplies as well as the expansion of new products (including green and prefabricated products). The Report identifies two key factors inhibiting entry and expansion:
- The regulatory system incentivises industry participants (architects, engineers, builders and building consent authorities) to favour established products. Tried and tested products were preferred because they are more likely to receive consent than newer products thereby avoiding potential delays and additional expense.
- Rebate structures incentivise supply merchants to stock larger quantities of products from a single supplier. This disincentivises merchants from purchasing products from smaller, competing suppliers. This was primarily found to impact the market for plasterboard; and
- Scale, particularly the need to invest in large scale manufacturing plant and equipment, acts as a barrier for new businesses to enter into the offsite manufacturing market. This is exacerbated by New Zealand’s relatively small market size and the lack of a foreseeable demand pipeline.
The Report identified a range of responses and recommendations which aim to improve competition within the building supply industry. These include:
Enhance the regulatory system
Making changes to the regulatory system to promote competition by incentivising participants to use competing, or adopt new, products. Key aspects of this recommendation include:
- establishing additional compliance pathways for a broader range of key building supplies. For example, developing more Acceptable Solutions and Verification Methods would enable international bodies to certify products as compliant with the New Zealand Building Code;
- engaging with Māori to reflect Māori perspectives and aspirations in the building regulatory system;
- exploring ways to remove impediments to product substitution and variations (e.g. by reducing specification by brand); and
- investigating whether the barriers to certification and appraisal can be reduced.
Support sound decision-making
The market should be provided with consistent and centralised information to enable the adoption of alternative products. This could be achieved through establishing a national key building products register and/or a Building Consent Authority centre of excellence to facilitate a better co-ordinated approach to the consenting and approval processes.
Address strategic business conduct
The third recommendation is to address business practices within the industry, including supplier–merchant rebate structures, and the use of restrictive land covenants and exclusive lease arrangements which benefit major merchants and may prevent potential rivals from opening competing stores.
It is anticipated that the Commerce Commission will publish its final report on or before 6 December 2022.
If you have any questions in relation to the Report or would like to discuss any of the above matters further, please contact one of our experts.
This article was co-authored by Ben Stewart (Solicitor) and Oscar Read (Intern) in our Construction and Infrastructure team.
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