House of Representatives Committees

Standing Committee on Economics, Finance and Public Administration

Inquiry into aspects of the National Competition Policy Reform Package

Government response

(Tabled 26 May 1998)

 

A. PUBLIC INTEREST TEST

Recommendation 1

The Committee recommends the following as necessary components of the 'public interest' process:

1(a) Responsibility for commissioning reviews (ie terms of reference, nature of the review and reviewers) should be taken at Ministerial level;

Response

Agreed.

At the Commonwealth level, Ministers have the responsibility for commissioning reviews and determining matters such as the terms of reference, type of review body chosen, membership of review bodies and reporting requirements.

For reviews that are listed on the Commonwealth's Legislation Review Schedule, the Treasurer is advised by the Office of Regulation Review (ORR) on the adequacy or otherwise of reviews' terms of reference. To assist in the conduct of legislative reviews, the ORR has prepared a template terms of reference (see the response to 1 (c) for more details). Any amendments to the Legislation Review Schedule require the agreement of the Prime Minister, the Treasurer and the Minister responsible for the relevant legislation.

1(b) The nature of the review should be determined taking into account the significance, importance, diversity and sensitivity of the issue to be considered;

Response

Agreed.

The Government has decided that in order to prevent unnecessary expenditure in performing reviews, the intensity of reviews and the composition of review bodies will be tailored to the nature of issues being reviewed.

Eight review modalities have been identified for performing legislation reviews, with the type of modality chosen depending on the significance, importance, diversity and sensitivity of the issue. The review modalities are:

* A review by an independent committee of a group of experts appointed by the Government would be appropriate for high profile reviews of major and/or sensitive issues.

* An inter-departmental committee which would be appropriate for minor reviews of a non-contentious nature.

Competition policy reviews can be performed jointly with other reviews of associated matters. For example, the 1997-98 scheduled review of Part 6 of the National Health Act 1953 and Part 3 of the Health Insurance Act 1973 was performed as part of the Industry Commission's review into private health insurance. When competition policy reviews are subsumed by such overarching reviews the competition policy aspects are still given due consideration. This requirement should be reflected in both the terms of reference and the expertise of the review body.

A discussion of national reviews is included in the response to Recommendation 1(f).

1(c) Clear terms of reference should be developed for the review including identification of the factors, whether in the list of factors set out in subclause 1(3) or otherwise, that the decision maker believes is relevant. Terms of reference should be agreed by the relevant Minister;

Response

Agreed.

The ORR has prepared a template terms of reference to provide guidance for performing legislation reviews. This template sets out the broad parameters for legislation reviews incorporated in the Competition Principles Agreement (CPA) and lists a range of factors that the review bodies are to have regard to when performing reviews. For example, a review should, among other things: clarify the objectives of the legislation; identify alternative approaches to the legislation; and analyse the costs and overall effects of all proposals. This list is not exhaustive and when developing terms of reference, decision makers are free to include any matters believed to be relevant. Legislation reviews that have been performed to date have exercised this freedom to tailor reviews to the nature of the issues being considered.

As already mentioned, reviews terms of reference are approved by the relevant Minister.

1(d) The process and its timing should be as transparent as possible;

Response

Agreed.

Transparency is an important element of any review process. Public awareness of and participation in a review is crucial to the success and ultimate acceptance of a review's findings.

Accordingly, the ORR's template terms of reference specify that the terms of reference should be made publicly available including a requirement to advertise the review in national newspapers, to consult with key interest groups and affected parties, to specify a reporting date (depending on the complexity of issues to be considered), and to publish the findings of the review. The Commonwealth will publish an annual report on progress and outcomes of the legislation review program.

1(e) A plan of the review should be developed including details of the nature of the review to be used, resources and funding, and specify key dates (start, end, advertisement, call for submissions, closing date for submissions, reporting);

Response

Agreed.

As noted above the ORR's template terms of reference specify a consultation process, the modality of review, the membership of the review body, the support services supplied to the review body, and the funding arrangements. Beyond this, the review body should develop a clear plan to facilitate the overall design of the review, including the technicalities of performing the review, the timetable for the review etc.

1(f) Consideration should be given to variations of the process for example joint review, national review, etc;

Response

Agreed.

In many instances, competition policy reforms cut across multiple jurisdictions. In such cases there are clear synergies in joint action.

In recognition of the benefits of performing national/joint reviews in the field of legislation review, the Council of Australian Governments (COAG) Committee on Regulatory Reform (CRR) is coordinating development of possible national reviews. The CRR comprises Commonwealth, State and Territory representatives and reports to Senior Officials who in turn report to COAG. An Interstate Legislation review Working Group of officials operated prior to the more formal CRR process.

The CRR's role is to facilitate the coordination of joint or national reviews of legislation in instances where there is common legislation or where legislation has effects across jurisdictions. For example, the CRR is currently overseeing a joint review of Australia's food regulation (which comprises Commonwealth, State and Territory regulation) and the regulation of agricultural and veterinary chemicals. These reviews were announced in the Prime Minister's Statement More Time for Business. The CRR is giving consideration to establishing joint reviews in a number of other fields.

The Competition Principles Agreement allows Parties to request assistance from the National Competition Council (NCC) in examining issues associated with prices oversight, competitive neutrality, structural reform of public monopolies, and legislation reviews. This assistance is most appropriate in circumstances where there is a national dimension or effect on competition. For example, the review of the legislation governing Australia Post has recently been referred to the NCC.

1(g) Methodology used for weighing up the benefits and costs should take account of both quantitative and qualitative data;

Response

Agreed.

A review of legislation that may affect businesses or restrict competition should follow the methodology used for the Regulatory Impact Statement (RIS) process. A RIS aims to ensure that new or amended regulatory proposals are subject to proper analysis and scrutiny as to their necessity, design, and net impact on business and community welfare. The process emphasises the importance of identifying the effects on groups who will be affected by changes in the regulatory environment, and consideration of alternatives to the proposed regulation.

RISs take account of both qualitative and quantitative data. Indeed, RISs should not be limited to tangible items; intangibles such as environmental amenity should be examined where appropriate.

Two recent Commonwealth reviews which incorporated both qualitative and quantitative information are the Industry Commission's Private Health Insurance Report No 57, and the Review of the Nuclear Safeguards (Producers of Uranium Ore Concentrates) Charge Act 1993.

1(h) The review should consider the overall, wider consequences and impacts of the decision;

Response

Agreed.

The ORR's template terms of reference emphasises the importance of taking a broad view of the benefits and costs to the community as a whole, including the public interest.

Where a review examines possible amendment or introduction of regulation that may affect businesses or restrict competition a Regulatory Impact Statement (RIS) is required. In determining the net impact of a proposal a RIS takes an economy wide perspective. Not only business implications are considered, but also any effects extended to the wider community, in order to determine the overall impact of a given proposal.

1(i) Level of consultation may vary with the significance, diversity and sensitivity of the review. Consultation should involve key stakeholder groups;

Response

Agreed.

Just as the type of review modality will vary according to the nature of the issues being considered, so too will the level of consultation. For example, extensive external consultation for minor reviews of essentially in-house matters would be unnecessary.

Nonetheless, in the majority of instances considerable consultation will be warranted. In such instances, affected parties will be given the opportunity to express their views to the review body.

1(j) Where possible reviewers should be independent of the existing arrangements with more significant, more major and more sensitive reviews demanding greater independence;

Response

Agreed.

In part, the variety of review modalities available reflects the level of independence required for different types of reviews. For example, minor reviews on very technical matters may be best performed by an intra-departmental committee, perhaps comprising of individuals involved in administering the matter under review. In comparison, a committee of independent members appointed by the Government would be more appropriate for high profile reviews of major and/or sensitive issues.

The more significant and sensitive the matter under review the greater the need for independence. However, in all instances there needs to be a judgement made on the necessity for independence versus the necessity for specialist expertise. It is crucial, particularly for reviews of sensitive matters, that while members of the review body not be directly involved in government decision making, they have a suitable understanding of the existing arrangements. In deciding on the appropriate balance between independence and technical expertise, resource implications will also be taken into account.

In order to ensure that appropriate technical expertise is involved, it may be appropriate that any independent review body is supported by a secretariat supplied by the relevant Government Department or Agency.

1(k) Where reviews are undertaken by persons closely involved in the activity in question, there should be provision for a review or reconsideration of the initial conclusion by some person or body independent of the relevant activity;

Response

Agreed in principle.

Review findings do not constitute Government policy. Rather, review findings will be taken into account by the Government when deciding on what action, if any, to take. Government is always ultimately responsible for making policy decisions.

While the Government retains the discretion to commission a further review of a particular matter, it is not envisaged that there will always be a multi-stage review process. A follow up review would most likely occur in instances where public reaction to an initial review's findings indicated ongoing concern with various issues.

The Government agrees that if further reconsideration is warranted, then this should be done by persons independent of both the initial review and the administration of the matters under review.

In the case of implementing competitive neutrality, an independent Commonwealth Competitive Neutrality Complaints Office (CCNCO) has been established within the Productivity Commission. The CCNCO will receive complaints, undertake compliant investigations and provide advice to the Treasurer on the application of competitive neutrality to Commonwealth business activities.

1(l) Results of reviews and relevant key stages in the review process shall be publicly available;

Response

Agreed.

As discussed earlier, transparency is an important element of any review process. Affected parties will be consulted in performing a review (as discussed in 1(i)) and the review will be open to public scrutiny at key stages in the process. For example, review reports are to be published.

However, the scope of a review and the review body's mandate, will not be limited by transparency considerations.

The Competition Principles Agreement requires jurisdictions to publish annual reports on their progress in implementing competitive neutrality and the legislation review principles. Jurisdictions are currently preparing these reports which will be publicly available. They will provide information on the implementation of competition policy, including the results of competition policy initiated reviews.

In addition, the NCC will assess jurisdictions' implementation of competition policy before the payment of each of the three tranches of competition payments, as satisfactory progress towards implementation is a precondition for receipt of competition payments. The NCC has published its first assessment in June 1997 and further assessments will be made in 1999 and 2001.

1(m) Where a matter is reconsidered at a later date, similar processes to those that applied to the initial consideration should be followed; and

Response

Agreed in principle.

There should be consistency in review processes. However, it may not always be necessary to redo a full review. It may be the case that successive reviews would be best limited to considering particular issues that have become apparent since the initial review. This will be decided on a case by case basis.

1(n) The Parties should coordinate their efforts to achieve a common set of basic principles to apply the 'public interest test' as outline in (a) to (m) above.

Response

Agreed in principle.

Under national competition policy all jurisdictions retain sovereignty over how to apply competition policy. This discretion is central to implementing competition policy. However, the Commonwealth, States and Territories have maintained ongoing dialogue on competition policy matters via a number of fora, for example the previously mentioned Interstate Legislation Review Working Group. Multilateral and bilateral contacts have allowed Parties to work together, where appropriate, and exchange information gained from their experiences in implementing competition policy. Nonetheless, the discretion that all jurisdictions retain has resulted in some inconsistencies between jurisdictions.

In recognition of the costs that such inconsistencies can potentially impose, the Commonwealth will work with the States and Territories towards the development of a common set of basic principles to apply the public interest test.

The Committee recommends all jurisdictions should publish guidelines encompassing the application of the 'public interest test'.

Response

Agreed in principle.

The NCC released "Considering the Public Interest under the National Competition Policy" in November 1996. This document provides guidance to managers in assessing the public interest.

In addition, a number of jurisdictions have already published material on the performance of public interest tests. However, these publications are of varying detail and do not reflect a constant approach between jurisdictions. The Commonwealth will raise this matter with the States and Territories.

B. COMMUNITY SERVICE OBLIGATIONS (CSOs)

Recommendation 2 - Transparency of CSOs

The Committee recommends that all CSOs be explicitly defined and their details made publicly available.

Response

Agreed.

The Commonwealth agrees that, wherever possible, full details relating to specific CSOs, including the full cost of provision, be provided in the annual reports of each government owned entity, including departments responsible for that particular CSO. Reporting is addressed in the response to recommendation 6(a).

Recommendation 3 - Coordination of CSOs & Welfare Payments

The Committee recommends that the Council of Australian Governments address ways of better coordinating the provision of community service obligations and welfare payments to safeguard the equitable distribution of payments and benefits for all recipients.

Response

The identification and funding of CSOs may have some implications for the provision of welfare payments. The need for COAG to address any inter-jurisdictional issues could be determined in light of initial consideration by the relevant Ministerial Council.

Recommendation 4 - CSO Funding Arrangements

The Committee recommends that the funding arrangements for both existing and new community service obligations be transparent and assessed on a case by case basis.

Response

Agreed.

Funding arrangements for all CSOs should be made as transparent as possible. As a general rule, the Commonwealth favours direct budget funding of CSOs, rather than relying on cross-subsidisation. However, there are exceptions where large transaction costs are involved with Budget funding. For Commonwealth commercial business activities CSO costs should, wherever possible, be negotiated as part of a commercially negotiated agreement so that the business will still be able to pay taxes and commercial dividends.

Recommendation 5 - Contracting Out CSOs

The Committee recommends that any decision by a party to contract out the provision of community service obligations is most appropriately made on a case-by-case basis. Any contracting arrangement should contain clearly identified performance criteria and exit provisions.

Response

Agreed.

The Commonwealth's May 1997 'Performance Improvement Cycle: Guidance for Managers', exposure draft, indicates that government agencies should review all current government activities, including CSO activities on a case by case basis. These reviews should address whether the Commonwealth should retain responsibility for those activities, and if so, what performance improvement tool, such as competitive tendering and contracting, might be appropriate.

The Minister for Finance has been tasked with reporting back to Government, in 1998/99 on the implementation of Competitive Tendering and Contracting (CTC) within Commonwealth agencies, along with specific initiatives to broaden the scope of CTC.

* Where agencies choose to subject CSOs to more contestable arrangements, including CTC, the principles of competitive neutrality will apply.

Government Agencies remain accountable to the Government, to Parliament and to their clients, even when they contract out delivery of CSOs. Therefore, it is essential that contracts clearly define the CSO activity and its objectives; specify required outcomes; determine expected performance levels; and contain appropriate termination provisions. Agencies should seek expert legal advice as early as possible during the contracting process. The Competitive Tendering and Contracting: Guidance for Managers, exposure draft outlines how government departments can ensure that contracting arrangements adequately reflect these specifications.

Recommendation 6 - Reporting & Monitoring of CSOs

The Committee recommends that all governments:

6(a) require their government business enterprises to include in their annual reports and corporate/business plans or other publicly available documents detailed information on the objectives, definition, costing, funding and contracting arrangements for community service obligations;

Response

Agreed in principle.

GBEs and business units are required to include details of CSOs in their corporate plans/business plans. CSOs will be included in the annual reports of operations of Commonwealth authorities, required under the Commonwealth Authorities and Companies Act 1997.

6(b) implement effective monitoring programs for community service obligations and ensure that those programs be outcome oriented.

Response

Agreed in principle.

As with the provision of general government programmes, monitoring, evaluation and review of CSO programmes is central to ensuring cost effective provision.

Performance criteria for CSO programmes should be 'outcome' based as far as is practicable. A focus on outcomes will assist governments in achieving the stated public policy goals of explicit CSO programmes. This need to focus on outcomes is equally applicable to either Government Departments, GBE's or private sector businesses that are involved in providing CSO programmes.

The need for regular and formal monitoring of the delivery of CSOs is particularly important where the provision has been contracted out. This is because 'contracted' providers have direct contact with clients, but the government agency 'purchasing' the services does not.

Evaluation and review is sound management practice and should be applied in all cases, including situations where delivery of CSOs has been contracted out.

C. IMPLICATIONS FOR THE EFFICIENT DELIVERY OF SERVICES BY LOCAL GOVERNMENT

Recommendation 7 - Taxation of Local Government Businesses

The Treasurer as a matter of priority address the issue of taxation of local government businesses at the next meeting of the Council of Australian Governments as under the current regime there is a powerful disincentive to corporatise.

Response

Agreed in principle, however, the issue is being addressed through other fora.

The Government is aware that some councils are considering corporatising local government business enterprises and is concerned to ensure that important micro-economic reforms are not impeded by the Commonwealth's tax system. The Commonwealth has provided a commitment to local government that it will not be financially disadvantaged, at an aggregate level, through the implementation of national competition policy reforms.

However, the Commonwealth does not consider it appropriate to extend the arrangement of tax equivalent regimes (TERs), under which wholly State-owned entities are exempt from Commonwealth taxation and subject to State-levied tax equivalent payments, to local government. There are significant administrative and practical difficulties involved in establishing workable TERs, particularly for wholesale sales tax. Each local council would be required to set up an equivalent regime to administer TER payments, and the administrative costs of such an exercise could be as large as the tax equivalent payments collected. Difficulties such as these have led to State Governments requesting that many of their entities remain directly subject to Commonwealth taxes via 'black lists'. Approximately 300 State-owned entities are listed on the black lists.

There are two important processes under way which will bear on how the no-financial disadvantage arrangements will operate with respect to local government.

Firstly, the Commonwealth and the States are currently conducting a review of existing Commonwealth/State taxation arrangements as they apply to business activities at the Commonwealth and State levels, including arrangements put into place under the Statement of Policy Intent.

Secondly, the Prime Minister announced on 13 August 1997 the Government's intention to undertake more fundamental taxation reform, including reform of Commonwealth/State financial relations.

Recommendation 8 - Local Government Accounting & Management Systems

The committee recommends that State and Territory Governments encourage their local councils to more urgently implement appropriate accounting and financial management systems to assist resource allocation decisions, including those relating to community service obligations.

Response

Agreed in principle.

This is a matter to be addressed by State and Territory Governments in consultation with their local governments. The Commonwealth will forward the Committee's recommendation to the States and Territories at the next COAG meeting.

D. RELATED ISSUES

Recommendation 9 - Dual Role of The National Competition Council (NCC)

The Committee recommends that following the completion of the current assessment round the Council of Australian Governments evaluate the dual role of the National Competition Council to determine if both roles are appropriate.

Response

Disagree.

The NCC does have a dual role under the Competition Principles Agreement. First, it has a general advisory role, promoting national competition policy and advising jurisdictions on competition policy. Secondly, the NCC will assess the performance of the States and Territories in implementing competition policy and related reforms. There are clearly tensions between the role of adviser and assessor.

Nonetheless, the NCC has accumulated extensive competition policy expertise which is of value in executing both roles. In considering the responsibilities of the NCC, the importance of effectively utilising the specialised skills of the NCC must be given due weight.

The CPA states that each jurisdiction may refer proposals to the NCC for possible inclusion in the NCC's work program. In accordance with the CPA, the NCC is currently reviewing the legislation governing Australia Post. The approval of the NCC's formal work program by all Parties limits the potential conflicts that may arise from the NCC's dual roles.

Parties have the opportunity to review the need for, and the operation of the NCC after it has been in existence for five years.

Recommendation 10 - More 'Open' Approach By The NCC

The Committee recommends the National Competition Council adopt a more open approach to its work and be more active in disseminating information about the activities of the Council and National Competition Policy.

Response

Agreed.

The NCC has begun to take a more pro-active role. For example, it has recently commenced a monthly newsletter which provides an update of developments in competition policy and structural reform matters more generally. The NCC also maintains a web site on similar matters. In addition to its annual report the NCC has published explanatory documents on matters such as the public interest and the national access regime. The NCC's first assessments of jurisdictions' implementation of competition policy in 1997 has been published. Subsequent assessments to be performed in 1999 and 2001, will also be published.

It is recognised that a greater profile will assist the NCC in performing its role as an advisory body on competition policy.

Recommendation 11 - Review of NCC Activities After 5 years

The Committee recommends that the review of the need for and operation of the National Competition Council after it has been in existence for five years be an independent review and if the review determines the Council is to continue, a sunset clause on this matter be inserted into the Competition Principles Agreement.

Response

Agreed in principle.

The Competition Principles Agreement requires that parties to the CPA review the need for, and the operation of, the NCC after it has been in existence for five years. In addition, the CPA itself is to be reviewed once it has operated for five years.

Terms of reference for these reviews will be performed jointly by parties to the CPA.

The issue of any sunsetting arrangements would best be considered in the context of that review.

Recommendation 12 - Financial Assistance Grants & Competition Payments

The Committee recommends that the Treasurer ensure that:

12(a) the assessment for payment of both the Financial Assistance Grants and Competition Payments be performance based and reflect both the spirit and intent of the competition policy reform legislation and the inter-governmental agreements;

Response

Implemented.

The NCC completed its first assessment of State and Territory progress in implementing competition policy and related reforms in June 1997. The Treasurer accepted the NCC's recommendation that all jurisdictions receive their 1997-98 payments contingent upon completion of specific steps which jurisdictions will be expected to take over 1997-98.

The NCC stated in its June report that when assessing States' and Territories' progress it will be looking for substantial compliance with national competition policy obligations, both in terms of processes and reform outcomes. In essence, the NCC will be requiring a demonstrated commitment both in substance and spirit before making a positive recommendation to the Treasurer.

12(b) details of the assessment outcomes and process are made publicly available following each tranche's assessment.

Response

Agreed.

The NCC's findings and recommendations were made public in the form of a report released in July 1997. This practice will be followed for each of the next three tranches' assessments.

Recommendation 13 -Measurement & Monitoring Systems

The Committee recommends that the State, Territory, and Commonwealth Governments put in place measurement and monitoring systems so that the outcomes of implementing national competition policy can be adequately assessed in the future.

Response

Agreed in principle.

An ex post assessment of competition policy will be performed at an appropriate time. Such an assessment will require adequate measurement and monitoring systems. To an extent, such systems are already in place. For example, the NCC maintains a watching brief over all jurisdictions' implementation of competition policy and will provide a formal assessment of progress before payment of each of the competition payments. In addition the NCC comments upon the progress of competition policy in its annual reports. Each jurisdiction is also required to publish an annual report on its efforts towards implementing legislation review and competitive neutrality. These reporting arrangements will assist in the future assessment of the outcomes of implementing national competition policy.

An appropriate time to consider a more formal review would be in the context of the review of the operation of the competition policy intergovernmental agreements which will take place around 2000. The major part of the first round of the regulation review exercise will then be complete.

Recommendation 14 - Raising Community Awareness of Competition Policy Issues

The Committee recommends that all agencies involved in the implementation of national competition policy devote resources to ensure community understanding and debate about the contents of the policy and its outcomes.

Response

Agreed in principle.

Understanding of competition policy is central to community acceptance. Currently there exists a degree of apprehension about competition policy; this needs to be corrected and allayed if the momentum for reform is to be maintained.

It is the responsibility of all involved in competition policy to raise public understanding of competition policy and for the community to be given the opportunity to input into the implementation of competition policy reforms. Commonwealth, State and Territory bodies have made progress towards this end.

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