It Controversies & ODinionll

Why National Competition Policy?

Claire Thomas Department of the Premier and Cabinet, Victoria

Strategies to enhance Australia’s international competitiveness need to embrace reform of key infrastructure service industries, reform of the regulatory environment, industrial relations reform and taxation reform. Key aspects of this reform agenda can only be addressed through a shared commitment by all levels of government. Ownership of the public utilities responsible for the nation’s key infrastructure networks and services is divided among commonwealth, state and territory (and local) governments. Achieving a substantial lift in the productivity of these industries and ensuring the emergence of truly national infrastructure networks relies on agreement by all governments to public utility reform and the removal of barriers to cross-border competition. Moreover, the regulation of industries, occupations and businesses is primarily the responsibility of state and territory governments, hence regulatory reform also requires a cooperative approach by all governments.

While most jurisdictions have taken some steps to reform public utilities and to deregulate certain product markets, to date reform has been piecemeal. A more systematic approach to removal of impediments to competition across the board is likely to be necessary to lift the overall competitiveness of the Australian economy. The agreement by the commonwealth and all states and territories to implement the National Competition Policy (NCP) not only provides the necessary shared commitment to reform across the board, it also provides the rewards and sanctions needed to sustain that commitment in the face of certain resistance from vested interests.

Infrastructure services provided by public utilities in energy, water, transport and communication sectors account for 11 per cent of the total output of the Australian economy and are a key input into virtually every industry. Their outputs account for at least 7 per cent and in some industries as much as 27 per cent of input costs (Bureau of Industry Economics (BIE) 1996). Electricity and gas, road transport and telecom-munications sectors represent the most significant in terms of direct costs to industry (Industry Commission 1995: 5 1-2). Other elements of the transportation network - such as grain-handling transport, liner and shore- based shipping services and internal air freight services - can be even more significant for the competitiveness of traded sectors. Not only cost but service quality and reliability in these areas can make or break export industries already at a competitive disadvantage because of Australia’s distance from major overseas markets.

Public utilities supply 85 per cent of Australia’s infrastructure services. The cost structures of the distribution/transmission networks which underpin these industries are typically such that a single supplier can produce the total output of the industry at lower cost than two or more suppliers (ie they are ‘natural’ monopolies). But public monopolies have tended to dominate even the potentially competitive elements of these industries through vertical integration which has effectively precluded entry by potential competitors into upstream and downstream markets.

Because their outputs are inputs to most other sectors of the economy, any improvement to the efficiency and productivity of public utilities in infrastructure service industries has the potential to generate significant economy-wide gains. In its assessment of the potential GDP gains of NCP reforms, the Industry Commission estimated that reform of utilities within the state/local government sector would contribute some 36 per cent of the total projected GDP gain from the NCP reform package, with commonwealth utility reform contributing a further 14 per cent (Industry Commission 1995: 51-2).

Structural and administrative reform of Australia’s public utilities has already yielded an overall 10 per cent reduction in real prices over the five years to 1993-94 as well as a threefold increase in dividends (BIE 1996: 46-9). Even so, significant gaps remain between the average

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Why National Competition Policy? 101

efficiency levels attained by most of Australia’s infrastructure industries and world best practice.1 Given continuous improvement in international best practice efficiency, these performance gaps will only be reduced by more comprehensive reform of public monopolies, including the introduction of competition wherever possible to provide ongoing incentives to continuous efficiency improvement.

The introduction of competition into sectors traditionally supplied by public monopolies has the potential to yield substantial gains to consumers and the wider economy. In telecommunications the introduction of competition has been associated with a 28 per cent reduction in international call charges over the period 1990 to 1994. In the electricity supply industry, even before the introduction of competition, administrative reform and cost cutting has seen real electricity prices fall by an average of 9 per cent in Australia over the five years to 1993-94, including an average real decline of 12.5 per cent for commercial customers (BIE 1995: Appendix 1). In Victoria, reform of the electricity supply industry has brought a 16 per cent real reduction in prices for commercial customers to date, with a further 22 per cent reduction in prospect over the five years to 2000.

To deliver these reforms nationally requires the commitment of all Australian governments since ownership of these businesses is divided among the commonwealth and the statesherritories. While the commonwealth is responsible for public enterprises in aviation, coastal shipping, telecommunications and national rail freight industries, it is the states and territories (and in some instances their local government authorities) that own the major public monopolies which dominate electricity, gas, water, ports and intrastate rail networks and associated infrastructure services.

Although it is likely that governments would each face pressure from industry to extract further efficiency gains from their public utilities, NCP provides a framework for a more unified national approach which emphasises pro-competitive reform and establishes clear incentives for the states and territories, in particular, to accelerate their reform programs. It also commits each government to a set of policy principles designed to maximise the benefits of reform. These principles recognise the essential complementarity of structural reform, on the one hand, and reform of the legal and regulatory

framework, on the other, before effective and sustainable competition can be introduced to these markets. They also impose some external disciplines to ensure that the benefits of reform are passed on to consumers - for example, by committing governments to the establishment of independent prices surveillance mechanisms and of complaints mechanisms to ensure they adhere to principles of competitive neutrality with respect to their significant business activities.

The incentives and sanctions built into the NCP agreement also extend to COAG agreements on the inter-operability of state based infrastruc- ture networks - including the development of a national electricity grid, free and fair trade in gas and a program of national road transport reform. Interconnection and inter-operability of infrastructure networks will expand opportunities for increasing the efficiency of infrastructure industries by enabling competitive sourcing of new capacity and allowing scale economies to be realised in these highly capital intensive industries without limiting competition. It will also foster freer trade across state borders and open up the possibility of new national markets in related industries.

Through the extension of structural reform and competitive neutrality principles to other signifi- cant business activities of government agencies, it is likely that in time NCP will also stimulate structural and institutional reform of other sectors traditionally supplied by public monopolies, potentially leading to the development of genuinely national markets in other key services - such as technical and further education - which will underpin future growth in Australia’s international competitiveness.

Cooperative Approaches to Regulatory Reform Improving the competitiveness of the Australian economy also requires reform of many areas of economic activity where government regulation itself represents the most significant impediment to competition. As well as legislated monopolies for public utilities, these include a host of statutory marketing arrangements for agricultural products and licensing arrangements for various occupations, businesses and professions. Many current aspects of industry and business regulation evolved in an earlier era when Australia was primarily a resource:

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based economy with agricultural industries exposed to international competition but manufacturing and finance industries largely protected and service industries relatively underdeveloped.

Statutory marketing arrangements evolved in that era to meet a perceived need to provide collective bargaining power for large numbers of small producers in negotiating major contracts - particularly in export markets. Income stabili- sation for growers was also an important consideration in industries highly susceptible to seasonal factors. With income stabilisation now better managed through the tax-transfer system and the basis of national wealth generation now much more dependent on value adding potential than on efficient production of raw materials, there is increasing recognition that the retention of restricted pricing and marketing arrangements for agricultural produce has inhibited the growth of domestic processing industries within the value added food chain, preventing the emergence of viable export and import replacement industries.2 Statutory marketing arrangements in some industries have also kept prices for domestic consumers artificially high. In NSW, for example, real egg prices fell by some 25 per cent following deregulation of the egg industry in 1989.

A variety of statutory restrictions on professional practices may similarly have posed little threat to the competitiveness of the national economy in days when professional services represented a small part of the total economy and served primarily domestic markets. However, professional services in health and community service and finance and business service sectors now constitute a much larger part of the national economy. Finance, law and accounting services, for example, represent major inputs to the costs of both domestic and export industries and even generate significant exports in their own right.

Professional services enjoy a number of statutory protections against competition. Typically, these reserve certain areas of work for particular occupational groups and place restrictions on the business arrangements and work practices of particular professions. Many of these restrictions evolved to protect consumers and the public more generally against unsafe practices or inadequate standards of personal or fiduciary care. They have their origins in an era when there was no general statutory protection for consumers against mis-

leading advertising or deceptive or unconscionable conduct or any general statutory prohibitions against anti-competitive conduct. While there may be overriding public benefit in continuing regulation of these industries, there is increasing recognition of the need to reduce the highly prescriptive forms of regulation which limit consumer choice, inhibit innovation and impede opportunities for the development of more efficient methods of service delivery.

Reducing impediments to competition inherent in these forms of industry and occupational regulation requires cooperative action across all levels of government. In areas such as environmental regulation where there is a degree of regulatory overlap between levels of government, a shared commitment to reform is essential to ensure that deregulation by one level of government is not undermined by re-regulation at another. In areas of industry and business regulation which are primarily the province of the states - including business licensing, occupational regulation, planning and building regulations, health and safety standards and product standards - reform will require separate but complementary action by each state.

NCP provides the necessary basis for a co- operative approach to reducing regulatory impediments to competition across the board. Through it all governments are committed to review and, where appropriate, reform legislative restrictions on competition and to take steps to ensure that any proposed new legislative restrictions on competition satisfy net public benefit criteria. This does not imply that competition policy should have preference over other public policy objectives. Rather, the application of net public benefit criteria to all regulatory proposals aims to encourage a more transparent assessment of the balance of public policy objectives.

NCP also includes an agreement by the states and territories to extend the competition laws contained in Part IV of the Trade Practices Act to all market participants, regardless of ownership or legal form to ensure that unincorporated enterprises (including the professions) and statekemitory government business enterprises are subjected to the same competitive conduct rules as any other market participant.

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Incentives to Comply Politically, the constituency for competition policy reform is likely to be weak and the reform path difficult, particularly for governments with slender majorities. Although wider public benefits may be considerable, beneficiaries will be neither as organised nor as vocal in support as those who stand to lose will be in opposing reform. Without strong external incentives, therefore, across-the- board reforms of the kind now required to strengthen the competitiveness of the national economy could prove too difficult for any government acting alone. An important feature of NCP is that it provides such incentives at the same time as preserving the sovereign right of each government to pursue its own reform agenda. This cooperative approach represents perhaps the only workable strategy for achieving across-the-board reform within a federal structure where any attempt at uniformity would be bound to fail.

The incentives for the states and territories for ongoing compliance with the NCP agreements include additional public accountability requirements, financial incentives in the form of competition payments and formal sanctions through potential loss of power to make exemptions from competition laws. The fact that all governments have made a public commitment to implement these reforms has given rise to expectations that they will now be under some pressure to meet. This includes the expectation that all sectors which currently enjoy statutory protection from competition will be subject to public benefit assessment with no ‘exemptions’ from the process. In addition, public accounta- bility is to be strengthened by the requirement that each government publish annual reports on progress in reviewing and reforming regulatory restrictions on competition and on applying policies of competitive neutrality to their significant business activities.

Annual reports will be considered by the National Competition Council along with other evidence of compliance when assessing the performance of state and territory governments in fulfilling their obligations under NCP and recommending on the distribution of competition payments. While perhaps not sufficient in themselves to ensure compliance, the financial incentive of competition payments will certainly help to keep state and territory governments

focused on the reform task and true to the principles which they have agreed to adopt. At the end of the day, however, perhaps the most important incentive is the potential growth in investment, wealth and jobs which will flow to those jurisdictions best able to deliver reforms which improve their relative competitiveness.

Endnotes In its most recent international benchmarking study, the Bureau of Industry Economics found that with respect to labour productivity in rail freight and telecommunications, and with respect to capital productivity in electricity, waterfront container handling productivity in Australia has actually declined relative to world best practice. Moreover, Australia’s rail freight, electricity, telecommunications and aviation industries continue to have labour productivity gaps in excess of 100 per cent relative to world best practice. while in rail freight, gas supply and aviation industries Australia suffers capital productivity gaps in excess of 100 per cent. Bureau of Industry Economics (1995) Inter- national Benchmarking Overview 1995, AGPS Canberra. For example, in a submission to a Western Australian parliamentary review of NCP, the Pastoralists and Graziers Association of Western Australia, together with an industry-wide coalition of representatives from all grain marketing chain sectors, claimed that statutory marketing arrangements had robbed the state of the investment and employment opportunities flowing from value added manufacture based on primary produce. (See Standing Committee on Uniform Legislation and Intergovernmental Relations (1995) Competition Policy: Consideration of the Implementation of a National Competition Policy, Legislative Assembly, Perth, Western Australia, 94-95.)

REFERENCES

Bureau of Industry Economics 1996. Setting the Scene: Micro Reform - Impacts on Firms, Report 9611, AGPS, Canberra.

World Bank 1995. World Development Report 1995, OUP.

Industry Commission 1995. The Growth and Revenue Implications of Hilmer and Related Reforms, A report by the Industry Commission to the Council of Australian Governments, AGPS, Canberra.

Independent Committee of Inquiry into National Competition Policy 1993. National Competition P o l i c y , Report to Heads of Australian Governments, AGPS, Canberra.