Introduction
The importance of competition policy for Australia
The performance of the Australian economy over the past decade has been exceptional by both historical and international standards. Economic expansion over that period has been longer and steadier than any period since the 1960s, which, together with a stable macroeconomic framework, has resulted in significant reductions in unemployment while providing a low inflation rate. Moreover, ‘in the last decade of the 20th century, Australia became a model for other OECD countries in two respects: first, the tenacity and thoroughness with which deep structural reforms were proposed, discussed, legislated, implemented and followed-up in virtually all markets, creating a deep-seated ‘competition culture’ and second, the adoption of fiscal and monetary frameworks that emphasised transparency and accountability established stability oriented macro policies as a constant largely protected from political debate. Together, these structural and macro policy anchors conferred an enviable degree of resilience and flexibility of the Australian economy.’1
In the period 1990 to 2004, Australia’s average annual growth in real gross domestic product (GDP) per capita of 2.2 per cent exceeded the OECD average of 1.7 per cent and the United States average of 1.8 per cent.
The strong performance of the Australian economy has been underpinned by acceleration in productivity growth. Multifactor productivity increased at an average annual rate of 1.0 per cent per annum during the late 1990s and early 2000’s, and by 2.1 per cent per annum in the mid-to-late 1990s. This compares to a long-run average of 1.2 per cent per annum (1964-65 — 2003-04). These gains are the result of the development and, more importantly, adoption of new technology and innovations, better organisation of production within firms, more efficient resource allocation across industries and improved international competitiveness. Growth and export competitiveness, in the future, will depend on a continued favourable productivity performance.
Before the structural reforms of the 1980s and 1990s, the Australian economy was characterised by highly regulated product, capital and labour markets, which did not have the flexibility and incentives to adjust to changes in the domestic and international environment.
Competition reforms have contributed to Australia’s strong economic performance. Reforms have reduced barriers to market entry and exit, improving anti-competitive regulations and exposing government-owned businesses to market forces in a competitively neutral manner. Competition provides incentives that promote productivity growth and address excessive investment in some sectors and under-investment in others, poor service delivery and inefficient pricing.
Reforms introduced under the National Competition Policy (NCP) framework continue to benefit the economy, with the Productivity Commission observing that productivity and price changes in key infrastructure sectors in the 1990s — to which NCP and related reforms have directly contributed — have increased GDP by 2.5 per cent or $20 billion.2 In addition, the Australian Bureau of Agricultural and Resource Economics (ABARE) estimates suggest that reform in the electricity sector will deliver around $16 billion of benefits between 1995 and 2010, of which over 60 per cent — or about $9 billion — have already been delivered.3
Competition reforms have helped Australia adapt more readily to the internationalisation of the economy. Lower domestic production costs, arising from NCP reforms enhance Australia’s export competitiveness. During the 1990s export volumes grew, on average, by around 7 per cent per year — the highest growth rate of any post war decade.4
Effective competition in markets for goods and services provides the main impetus for firms to seek productivity improvements, and ensures that a greater proportion of these gains are distributed in the form of lower prices rather than retained by firms as higher profits. This reduces operating costs and prices to business and consumers and encourages a wider range and improved quality of goods and services.
Competition reform also reduces market transaction costs — principally through a comprehensive programme of regulatory reform — and increases information available to consumers to make informed choices.
Competition encourages innovation in product design, production processes and management practices as firms seek productivity gains. The manner in which resources are managed within the workplace, the rate of adoption of innovation and the development of associated skills all play an important role in productivity growth.
Sustained productivity growth is essential to the continued improvement in Australia’s living standards. Notwithstanding difficulties in establishing causality, the Productivity Commission has previously concluded that NCP and other microeconomic reform has led to a more flexible, responsive and innovative business culture that should provide additional ‘dynamic efficiency’ against the community over time.5 Competition policy is yielding ongoing benefits for Australia.
National Competition Policy framework
In April 1995, the Australian Government, States and Territories entered into three Inter-Governmental Agreements — the Conduct Code Agreement (CCA), the Competition Principles Agreement (CPA), and the Agreement to Implement the National Competition Policy and Related Reforms (Implementation Agreement). These Agreements aim to provide a timely, coordinated and comprehensive approach to competition reform across all levels of government.
The commitments embodied in these Agreements effectively underpin NCP in Australia.6 These reforms perform a mutually reinforcing role with other competition policy initiatives, such as the limitations on anti-competitive conduct established by the Trade Practices Act 1974 (TPA).
The NCP framework targets particular opportunities for governments to encourage competitive outcomes. These include:
- the review and, where necessary, reform of legislation that is anti-competitive, with the requirement that where such legislation is to be retained or introduced it must be demonstrably in the public interest (Chapter 1);
- the implementation of competitive neutrality for all government business activity operating in a contestable market, which requires that such businesses not benefit commercially simply by virtue of their public ownership. For example, they should be liable for the same taxes and charges, rate of return and dividend requirements as their private sector competitors (Chapter 2);
- the structural reform of public monopolies, where their markets are to be opened to competition or they are to be privatised, to ensure they have no residual advantage over potential competitors (Chapter 3);
- the provision of access arrangements to services provided by significant infrastructure facilities (such as electricity grids, airports and communications networks) that would be uneconomic to duplicate, to encourage competition in upstream and downstream markets and reduced prices for related products (Chapter 4);
- independent oversight by State and Territory governments of the pricing policies of government business enterprises, to ensure that price rises are not excessive (the Australian Government already has prices oversight provisions) (Chapter 5);
- the application of competition law across all jurisdictions (including the scope for exceptions in certain circumstances), centrally administered by the Australian Competition and Consumer Commission (ACCC) (Chapter 6); and
- ensuring commitment to related reforms in key infrastructure areas of electricity, gas, road transport, and until 2005, water with a view to improving efficiency, implementing nationwide markets and standards, and protecting the environment (Chapter 7).
Governments have made significant progress in implementing reform in the ten years since the commencement of NCP. Benefits to the community from this reform process are becoming more evident, particularly in terms of lower prices to consumers.
NCP reforms have contributed to reductions in costs and prices across most infrastructure services that have been subject to reform. However, it is important to recognise that this is a long-term process. Ongoing commitment by all levels of government to effective reform will be necessary to realise significant returns.
Public interest test
NCP, microeconomic reform and globalisation have been claimed to result in adverse social outcomes.7
The Productivity Commission found that, though varying in size, the benefits of NCP and related reforms have been spread across the community, including most of rural and regional Australia.8
NCP is not concerned with reform or competition for its own sake. Rather, the focus is on competition reform that is in the ‘public interest’. To this end, the CPA provides a mechanism — the public interest test — to examine the relationship between the overall interests of the community, competition and desirable economic and social outcomes. These factors are broader than the economic benefits and costs of a proposed reform (see Box 3 on page 15).9
Further, the Council of Australian Governments (COAG) at its November 2000 meeting agreed, inter alia, to enhancements to the public interest test.10
COAG agreed that in meeting the requirements of the public interest test governments should document the public interest reasons supporting a decision or assessment and make them available to interested parties and the public. When examining those matters identified under the public interest test, governments should give consideration to explicitly identifying the likely impact of reform measures on specific industry sectors and communities, including expected costs of adjusting to change.
The need for safeguards
Situations may occur where competition does not achieve efficient resource use and maximum community benefit (due to market failure) or where competition conflicts with other social objectives. In many instances, reforms will be complemented by a regulatory framework that provides a safety net against market structures failing to deliver adequate competitive outcomes, addresses markets that are in transition towards competitive structures, or enables the delivery of Community Service Obligations (CSO).
Furthermore, reforms may result in short-term adjustment costs — potentially concentrated on specific sectors or geographical regions. While greater than the costs, the benefits usually accrue over the longer term and are more widely distributed across the community.
In addition, the gains from competition reform will only be fully realised where resources can effectively move to more efficient uses.
As a consequence, in certain circumstances, consideration needs to be given to the assistance necessary to facilitate the adjustment to reforms.
In most cases, generally available assistance measures are the most appropriate form of assistance. General assistance measures have a number of advantages, including treating all people adversely affected by changed circumstances equally, addressing the net effects of reforms, concentrating on those in genuine need, supporting individuals and families rather than a particular industry, and being generally widely understood and already in place.
The advantages of a universal and general approach to meeting the needs of the people adversely affected by change constitute a clear, in-principle case for continued reliance upon the safety net.
Where general assistance measures are not considered effective, targeted assistance may be necessary to facilitate change. This should be designed to assist individuals make the transition to the new environment, smoothing the path for the adoption and integration of the reforms, not to maintain the status quo or to hinder or distort the desired outcome.
In general, specific assistance should be temporary, for special cases, transparent and inexpensive to administer.
The Australian Government’s reporting requirement
Under the CPA, the Australian Government is required to publish an annual report outlining its progress towards:
- achieving the review and, where appropriate, reform of all existing legislation that restricts competition (as outlined in the Commonwealth Legislation Review Schedule)11; and
- implementing competitive neutrality principles, including allegations of non-compliance.
However, to recognise fully the range of Australian Government commitments established by the NCP Agreements, all areas of Australian Government involvement have been reported.12
This report formally covers the period from approximately 1 July 2004 to 30 June 2005.
National Competition Policy payments
Under the Implementation Agreement, the Australian Government agreed to make competition payments to those States and Territories assessed as making satisfactory progress towards the implementation of specified competition and related reforms.
These payments represent the States and Territories’ share of the additional revenue raised by the Australian Government as a result of effective competition reform, and are worth approximately $5 billion (between 1997-98 and 2005-06).
These payments originally comprised three tranches of competition payments and the real per capita component of the annual Financial Assistance Grants (FAGs). However, the FAGs component ceased on 1 July 2000, as agreed to by all States and Territories, with the signing of the Intergovernmental Agreement on the Reform of Commonwealth-State Financial Relations.
- The first tranche of competition payments commenced in 1997-98, and involved a maximum annual payment of $200 million (in 1994-95 prices).
- The second tranche of competition payments commenced in 1999-2000, and involved a maximum annual payment of $400 million (in 1994-95 prices).
- The third tranche of competition payments commenced in 2001-02, and involved a maximum annual payment of $600 million (in 1994-95 prices).
The Implementation Agreement specifies the commitments States and Territories must meet in order to receive the maximum competition payment. The National Competition Council (NCC) assesses jurisdictions’ performance in implementing the required reforms.13 This assessment forms the basis for determining state and territory eligibility for payment.
For the period 2001-02 all States and Territories received their full allocation of payments, with the exception of Queensland. Queensland incurred a permanent deduction of $270,000. The total amount of competition payments was $733.3 million.
For the period 2002-03, all States and Territories received their full allocation of payments, apart from Queensland. Queensland incurred a suspension of $270,000 and as a result NCP payments in 2002-03 totalled $739.6 million.
For the period 2003-04 the estimated maximum level of competition payments was $759 million. The Australian Government determined the level of payments after taking into account the NCC’s penalty recommendations and comments from the States and Territories on the penalty recommendations. The Australian Government accepted the NCC’s recommended penalties, consisting of $53.9 million in the form of permanent deductions and $126.9 million in payment suspensions, for jurisdictions’ lack of progress in meeting their NCP obligations. The Government also agreed to release Queensland’s 2002-03 suspended funds. As a result, $578.5 million in competition payments was paid to the States and Territories in 2003-04.
The NCC has indicated that it will recommend that specific suspensions be lifted and reimbursed if and when jurisdictions sufficiently progress reform. With respect to pool suspensions, the NCC will reassess these penalties in subsequent assessments and, where satisfactory progress is made, may recommend that the suspension be lifted or reduced and the suspended amounts reimbursed. The NCC had deferred its assessments of New South Wales and Victoria’s progress with implementing water reform until 2004 and these assessments were released in mid 2004. The NCC did not recommend any payment penalties for the two States in relation to their 2003-04 competition payments.
For the period 2004-05, the Australian Government accepted the NCC’s penalty recommendations unchanged, so imposing penalties totalling $140.3 million (of which $26.3 million would be a permanent deduction) for jurisdictions’ lack of progress in meeting their NCP obligations. However, the States and Territories did receive reimbursements of 2003-04 suspended amounts totalling $85.1 million (of a possible $126.9 million), with opportunities for reimbursement of 2004-05 suspended amounts of $114.1 million subject to further assessment by the NCC. In total, $724.4 million in competition payments was paid to the States and Territories in 2004-05.
For the period 2005-06, the Australian Government accepted the majority of the NCC’s penalty recommendations unchanged. It did not accept the recommended penalty for the Northern Territory. No deduction has been applied to the Northern Territory in relation to liquor licensing as the Government considered that the Northern Territory is working to address the significant social and health issues associated with excessive alcohol consumption, and that the restrictions contained in the Northern Territory’s legislation are directed at achieving harm minimisation objectives. Penalties totalling $40.7 million are to be imposed, all of which were permanent deductions, for jurisdictions lack of progress in meeting their NCP obligations. Reimbursements of 2004-05 suspensions, totalling $74.5 million, were also agreed to. In total, $834.0 million will be paid to the States and Territories in 2005-06.
The 2005-06 competition payments are still subject to jurisdictions’ progress in relation to their water reform obligations. The assessment of progress will be conducted by the National Water Commission (NWC), in line with the National Water Initiative, rather than the NCC. The NWC has yet to complete its assessment and the Government expects to receive their recommendations in early 2006.
Further information relating to payments, including announcements of the Australian Government’s decisions on NCC assessments, is available on the Treasurer’s website (www.treasurer.gov.au).
The future of National Competition Policy
In November 2000, COAG agreed that the terms and operation of the CCA, CPA, the Implementation Agreement, and the NCC’s assessment role would be review in 2005. This review is being conducted by COAG Senior Officials and is to report to COAG by the end of 2005. The COAG review of NCP is to draw from, but not be limited by, the recommendations of the Productivity Commission’s inquiry report into NCP reforms. The recommendations of this review are expected to be considered by COAG in early 2006.
Internet resource material
Various Australian Government publications relating to NCP matters are available from the Department of the Treasury website (www.treasury.gov.au), including previous annual reports.
Other relevant sites include the NCC (www.ncc.gov.au); the Productivity Commission and Australian Government Competitive Neutrality Complaints Office (www.pc.gov.au); the ACCC (www.accc.gov.au) and the Department of Finance and Administration (www.finance.gov.au).
1 OECD Economic Survey of Australia 2004, p 9.
2 Productivity Commission, Review of National Competition Policy Reforms, Final Report, Canberra, 2005, p xvii.
3 C Short, A Swan, B Graham and W Mackay-Smith, ‘Electricity reform: The benefits and costs of Australia’, Outlook 2001 Proceedings of the National Outlook Conference, vol 3, Minerals and Energy, ABARE, Canberra, 2001.
4 Productivity Commission, Review of National Competition Policy Reforms, Final Report, Canberra, 2005, p 39.
5 Productivity Commission, Microeconomic Reforms and Australian Productivity: Exploring the Links, Commission Research Paper, AusInfo, Canberra, 1999, pp 133-7.
6 The 1995 Agreements also resulted in the establishment of the NCC, an inter-jurisdictional body funded by the Australian Government. The NCC has statutory responsibilities under the Australian Government TPA as well as specified roles under the Agreements aimed at ensuring the effective implementation of NCP.
7 Senate Select Committee on the Socio-Economic Consequences of the National Competition Policy, Riding the Waves of Change, February 2000, p xiii.
8 Productivity Commission, Review of National Competition Policy Reforms, Final Report, Canberra, 2005, p xvii.
9 The matters listed in clause 1(3) of the CPA are relevant when undertaking reviews of anti-competitive regulation, introducing competitive neutrality and reforming government businesses.
10 See the Commonwealth National Competition Policy Annual Report 1999-2000 for further detail.
11 In November 2000, COAG agreed to extend the deadline for this commitment from the end of the year 2000 to 30 June 2002.
12 The commitments contained within the NCP Agreements apply to both Australian Government and State and Territory governments. This report discusses these commitments from the Australian Government perspective.
13 In November 2000, COAG agreed that following the 1 July 2001 assessment, the NCC would undertake an annual assessment of each jurisdiction’s performance in meeting its reform obligations as specified by the Implementation Agreement or as subsequently advised by COAG, and provide a recommendation on the level of competition payments to be received by each State and Territory.
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