Productivity Commission Report Impacts on Future Food Law Enforcement and Safety

by Joe Lederman and John Gao ?© Lawmedia Pty Ltd, December 2007
Australian Food Lawyers and Consultants

On 12 December 2007, the Productivity Commission released the Draft Report in relation to a Review of Australia?s Consumer Policy Framework. Accompanying the Draft Report and released simultaneously was a Consultancy Report by two academics. We provide the following commentary and analysis. We highlight the substantial risks if the principles of the Draft Report were to be extended into food regulation. This article is written prior to the imminent release of a report from Mr Mark Bethwaite whose team has been undertaking a separate review of ways to streamline food regulation. (This article is an updated version of the original article on this same subject. We shall provide further updating in a future issue of the FoodLegal Bulletin after considering any reports and papers issued by Mr Bethwaite).

On 12 December 2007, the Productivity Commission (an agency of the Australian Federal Treasury) released the Draft Report in its Review of Australia?s Consumer Policy Framework (?“the Draft Report?) accompanied by a separate Consultancy Report by 2 Professors of Law from the Queensland University of Technology (Professor Stephen Corones and Professor Sharon Christensen). The latter provided a comparison of the existing Consumer Protection legislative frameworks around Australia. The Consumer Policy framework refers to the frameworks in each Australian jurisdiction and also refers to the enforcement framework of the Trade Practices Act, the State and Territory Fair Trading Acts and the State and Territory Sale of Goods Acts, including regulatory enforcement bodies such as the Australian Competition and Consumer Commission (the ACCC) and the various State and Territory Fair Trading or Consumer Affairs offices.

The stated aim of the Productivity Commission review is to improve the efficiency and responsiveness of the consumer protection system while reducing inconsistency and duplication as well as the existing regulatory burdens upon businesses.

The draft report is recommending that the ACCC become the central national body in relation to product safety issues. It is unclear under the Draft Report whether or not this would include issues of food safety. The Draft Report suggests that reviews of industry specific regulation ought to be conducted but at the same time seems to support an ACCC view that industry specific regulations ought to ?“complement, rather than duplicate, generic provisions?. This philosophy seems to suggest that food safety issues ought to be handled by the ACCC if overlaps and duplications are to be avoided.

Although it is still not certain whether the above recommendations will also apply to the food industry ? and the Bethwaite Review is awaited in this regard ? the examples provided in the Draft Report have made specific reference to regulatory costs for the food industry in the context of any food safety breach.

The Productivity Commission was commissioned by the then Federal Treasurer Peter Costello in December 2006 and has issued its draft report prior to the final reports for the VCEC Inquiry into Food Regulation in Victoria and the Bethwaite Review of food regulation. The Bethwaite Review was initiated under a recommendation by the Prime Minister?s Regulation Taskforce report ?“Rethinking Regulation? (The Banks Report) released in April 2006 but the Bethwaite Review was announced only in January 2007, after Peter Costello?s Treasury department had initiated the Productivity Commission study. The Bethwaite Review was announced jointly in January 2007 by the then Minister for Agriculture, Fisheries and Forestry Peter McGauran and the then Parliamentary Secretary for Health and Ageing Mr Christopher Pyne. Meanwhile, the Victorian Treasurer (now the Victorian Premier) John Brumby had instigated his own VCEC Victorian Inquiry in September 2006 without waiting for Canberra to move. The fact that two of the reports are now in draft form and that a draft report for the Bethwaite Review is due to be released in January 2008 suggests that there is now a recognition of the overlap between the different reports and that there is a need for a unified approach.

The underestimation of the importance of food safety to consumers and industry

As part of the methodology for its Draft Report, the Productivity Comission has looked at the regulatory needs for each industry sector and in doing so has placed the emphasis on the level of cost for what is described as the ?“consumer detriment?. This has been defined to include the following costs to consumers: (1) ?“repair and replacement costs?, (2) ?“follow-up and time costs? and (3) a generic 25% premium for costs relating to ?“emotional distress?. The Productivity Commission has then measured ?“consumer detriment?. Based on a 2006 Consumer Affairs Victoria survey, the Productivity Commission report suggests that the average cost of ?“consumer detriment? relating to each incident of food safety breach is only $40 (plus 25% for emotional distress) compared to an average of $400 (plus 25% for emotional distress) for all product safety breaches and compared with $1600 (plus 25% for emotional distress) involving incidents for building and renovation breaches. Even though food safety breaches were specifically mentioned in the Productivity Commission Draft Report, it is still unclear whether or not the recommendations of the Draft Report are intended to apply to the food industry.

The Draft Report to recommend that industry specific regulations be set up for the consumer credit, utility services and home building industries while streamlining all other ?“overlapping? State and Territory consumer policy laws and regulations into one generic regulatory regime. There are no explicit mentions of other indirect public or industry health-related costs in the report, but the specific quantitative analysis of the cost of food related incidents in the Draft Report might lead one to think that the Productivity Commission views food safety non-compliance as a low-risk area. Interestingly, there is no reference to any methodology or quantifying the broader cost of food-borne disease and illness as against the $40 ?“consumer detriment? per incident ?“measure? of a food safety breach as set out in the Draft Report.

Our own view is that any publicly sanctioned reduction in food regulation would compromise food safety. This would be because policy discouragement of active inspections and auditing would create greater risks in various food sectors. The generic recommendations of the Draft Report are that tougher penalties might be imposed after a safety breach occurs.

The Miscalculated Theory

In our view, any reduction in regulatory obligations for the food industry due to the low perceived cost of food related incidents would be analogous to the approach adopted by Ford Motor Company when assessing its Pinto car problem in the United States in the late 1960?s and throughout the 1970?s. The Ford Pinto vehicle was built with a safety flaw in its design which caused the fuel tank to explode or catch fire if the car suffered a collision from behind. Ford were aware of the problem, but did a calculation of the cost of inserting a piece of plastic behind the fuel tank, which could have prevented the problem and worked this out at only $11 per vehicle. Using statistical data on the number of rear-end collisions in the US and the average amount of damages given to victims of similar accidents, the Ford Motor Company, in a later revealed document (dated in 1968) known as ?“the Pinto Memo?, thought that while the likely cost of settling litigation and damages claims was approximately US$50 million, the total cost of inserting an $11 piece of plastic into 11 million vehicles would be $121 million. Unfortunately for consumers, the Ford Motor Company?s analysis failed to mention that many people would die in the meantime. In fact, 27 people died as a result of subsequent fires in the Ford Pinto.

While the direct expense caused to individual consumers by food incidents may be relatively low to consumers, one must consider the broader implications of food safety breaches such as the dangers and potential loss of confidence for the regulation of particular foods or particular food sectors. We believe that apart from the impact and losses a food safety scare might cause for the food industry itself in any particular sector, the effect on public confidence in the event of a widespread food safety concern would be far greater than the direct cost of $40 per person that was estimated by Consumer Affairs Victoria in a very narrow context and which has now been relied upon by the Productivity Commission in this Draft Report in referring to the cost of regulation.

Food Safety enforcement levels

Another suggestion from the report is that product safety enforcement will become a matter for the Australian Competition and Consumer Commission. To a large extent, the ACCC already has responsibility in product safety issues (eg it has product safety recall powers under Section 65F of the Trade Practices Act).

In the food area, at present, food safety issues and recalls are handled principally by the State and Territory Health Departments and Food Authorities, who also are expected to oversee inspections and auditing of food premises by Local Governments (whether they are doing so is a separate matter, the subject of other FoodLegal Bulletin articles that we have recently written). In the case of recalls, the bi-national food standards setting agency Food Standards Australia New Zealand (FSANZ) is also involved in the coordination and publicity role. The Food Recall Protocol recognises Section 65F of the Trade Practices Act, although the ACCC has, up until now, allowed FSANZ to play the co-ordinating role in food recalls. We await the Bethwaite Report to answer the question as to whether the ACCC will play a greater hands-on role in food safety enforcement. For example, if the ACCC were to have greater responsibilities over food safety issues, the question must be asked as to whether the ACCC would have the manpower to be sufficiently hands-on all around Australia? Would it delegate its functions to local governments? How would it supervise local governments or other food inspection agencies? How far would ACCC powers extend into other jurisdictional areas now occupied by FSANZ and also AQIS (which deals with imported and exported foods)?

Up until now, the ACCC has generally taken a smoking gun approach to product safety issues, taking action after a safety or other concern has been raised.

The lesson of Mad Cow Disease forgotten

It will be interesting to see what philosophy and methodology is adopted by the imminent Bethwaite Review and whether or not it will adopt a similar philosophy and methodology to that adopted by the Productivity Commission.

In our view, there can be problems with a whole-of-government approach to food safety with its over-emphasis on direct economic cost and promoting the economic efficiency in the laws governing the food industry. This was a lesson that should have been learned by economists during the outbreak of Mad Cow Disease in the United Kingdom a few years ago. In that instance, delays occurred in notifying the British public of the dangers of consuming beef because the government body responsible for food safety regulation felt it was also in the business of promoting the economic efficiency of the British beef industry suppliers.

We believe there is a risk that if the Bethwaite Review adopted the same philosophy and methodology as this Draft Report of the Productivity Commission, it would be pushing the Australian food regulatory system in the wrong direction. If preventative food safety measures currently in place were to be removed due to the perceived burden on businesses, the front line of defence of the food supply against outbreaks of food-borne illness would effectively be removed. Furthermore, food safety regulation is an area of law that needs to be managed by those whose focus is on food safety and health, rather than by economists who wish to emphasise the need to lower direct production costs.

The problem with the smoking gun approach in Australia

Another concern with the ?“smoking gun? or ?“after the event? approach if it were to be applied to food safety regulation and enforcement is that unlike the historical position in countries such as the USA, the Australian litigation and court system currently restricts the potential for hefty claims either for damages or other remedies for victims of food safety breaches.

In Australia, severe limitations have been imposed on making damages claims. Since 2001, various State and Territory legislation such as the Wrongs Act in Victoria and the Civil Liability Act 2002 in New South Wales have been amended or introduced to restrict consumer damages claims. Much of this amending legislation was a response to the ?“insurance crisis? following the terrorism attacks on September 11, 2001 in New York. As a result of the legislative changes in Australia, victims of product safety breaches are often confined to receiving damages for economic loss (such as loss of income and medical expenses) while damages for non-economic loss (such as pain and suffering and emotional distress) have been both capped and made subject to additional discounts. The award of exemplary damages (such as may be imposed by a court to punish the party who breached safety standards) has been removed as a remedy in most jurisdictions in Australia for a wide range of civil and statutory wrongs.

Significantly and ironically, the USA is now moving towards re-regulation of the food industry by tougher preventative regulatory measures. Although litigation (and especially class action) has been the traditional weapon used in the United States to fight food safety breaches, (eg outbreaks of e.coli or salmonella), US government agencies are now being empowered to take stronger preventative measures for law enforcement to prevent new breaches. In an article entitled ?“Can the Food Industry Police Itself?? appearing in the Wall Street Journal on 15 October 2007, the following was stated:

“Realizing that a weak Food and Drug Administration affects consumer confidence ? and their bottom line ? several trade groups, such as the GMA [Grocery Manufacturers Association] and National Fisheries Institute, are lobbying for more funding and authority for the agency to oversee food safety.”

The abovementioned article in the Wall Street Journal highlighted the precedent of the US Department of Agriculture in 1993 having introduced tougher food safety controls as preventative safety measures for the meat industry. Prior to these additional preventative measures, an e-coli outbreak in a hamburger chain had killed 4 customers and made many hundreds more very sick. The USDA then appointed 7,500 meat inspectors who were dispatched to enforce the new rules, and e-coli infections involving meat dropped by 42% over 8 years. The latest push to give more power to the US Food and Drug Administration is possibly driven, in part, by safety concerns about imported foods.

The conclusion to be drawn from this is that even in the USA, where the legal system has traditionally favoured enforcement by ?“after the event? litigation rather than preventative regulation, there may be justifiably good reasons to break from a ?“pure economic model? when it comes to ensuring adequate preventative measures in relation to food safety.

Given this trend in the USA, it would appear that any move in Australia away from regulation and towards ?“after the event? enforcement would be swimming against the new tide. It would create a system that has been shown to be ineffective in other countries in protecting consumers adequately. The legal position protecting consumers in Australia would be even weaker given that Australian consumers? ability to recover damages for breaches of food safety has already been heavily circumscribed by Australian laws, as mentioned above.

Continuing the shift towards Federal Treasury

The recommendations of this Draft Report to divest more State and Territory powers to Federal bodies such as the ACCC (which is also controlled by the Department of Treasury) is a continuation of long term trends. One way of Treasury extending its powers federally has been to require that government agencies adhere to non-reviewable policy settings designed by Treasury. Once upon a time, the ACCC and ASIC were parts of the Attorney General?s Department. Nowadays, both agencies form part of the Treasury. Likewise, FSANZ is an emasculated version of its predecessor the Australia New Zealand Food Authority (ANZFA). Unlike FSANZ, ANZFA enjoyed policy-making powers, but was replaced through legislation to create a very weak FSANZ. Slowly but surely, FSANZ has been pushed out to the sidelines by a Ministerial Council that is committed to the Treasury?s ?“whole of government approach?. FSANZ is told to ?“stick to the science? in setting Australia?s food standards. At the same time, FSANZ is being forced to comply with policy settings and new legislation that leave FSANZ deprived of any time or room to undertake genuine scientific assessment or being allowed any independence or enforcement powers to protect food consumers. The emphasis of the new ?“streamlined? system for assessing standards for new types of untested foods allows self-assessment by the company making the application and being permitted to rely on its own research without full and proper scrutiny.

Is it any wonder that FSANZ itself feels totally baffled? If one reads the recent Annual Report (June 2007) of FSANZ, one might well be amazed by a statement in the report by the Acting CEO of FSANZ who wrote:

“We (FSANZ) recognise the value of the food industry to the national economy and the need to facilitate innovation and trade. There is no magic formula for getting the balance right? But ultimately the most effective feedback on whether we have succeeded in getting the balance right comes from the Ministerial Council? Getting the balance right is more of an art than a science. However, our processes and culture allow us to do better than expose a wet finger to the wind. There is method, even in our subjectivity”.

One?s heart should go out to the scientists at FSANZ: What are they meant to be doing? There are international food science and Codex conferences to fill some of their time but, at this stage, one might well ask what are they meant to be doing when they get back to Australia?

The full draft report is available on the Productivity Commission website:

We await the next episode when the Bethwaite report is released shortly.

This is general information rather than legal advice and is current as of 12 Dec 2015. We therefore recommend you seek legal advice for your particular circumstances if you want to rely on advice or information to be a basis for any commercial decision-making by you or your business.