Competition policy—further progress required

Rod Bogaards, Economic Policy

Key issue
The review by Professor Ian Harper of competition law and policy in 2015 signalled that reforming competition policy will be critical to raising Australia’s future productivity growth.
It has proved difficult for the Australian Government and the states and territories to reinvigorate competition policy.
The Harper Review made 56 recommendations. Most recommendations relating to competition law have been implemented. However, very little progress has been made on recommendations relating to competition policy and competition governance.

What is competition policy?

Competition policy consists of government policies, laws and institutions aimed at improving the level of competition in the economy so that it better serves the long term interests of consumers.

Competition policy is based on an underlying assumption that, in most cases, competitive markets deliver better outcomes than administrative (or heavily regulated) systems of service delivery, by providing strong incentives for businesses to operate efficiently and deliver goods and services at competitive prices. Unlike competitive markets, administered market arrangements often fail to provide incentives for efficiency, to respond to changes in consumer needs and foster innovation. Previous National Competition Policy (NCP) reforms undertaken in the late 1990s and early 2000s following an inquiry by Professor Frederick Hilmer resulted in substantial economic benefits for Australia.

Those NCP reforms had eight key policy elements, namely:

  • reforming regulations which unjustifiably restrict competition
  • reforming the structure of public monopolies
  • providing third-party access to infrastructure
  • restraining monopoly pricing behaviour
  • fostering competitive neutrality between government and private business
  • applying competition principles to local government
  • limiting anti-competitive conduct of firms and
  • implementing related reforms in electricity, gas, water and road transport.

According to the Productivity Commission’s 2005 Review of National Competition Policy Reforms, efficiency improvements in the key infrastructure industries targeted by the reforms boosted Australia’s gross domestic product by 2.5 per cent. The report also indicated that NCP reforms contributed to a productivity surge that improved living standards and boosted the ‘average’ Australian household’s annual income by around $7,000 (in 1998–99 dollars).

On the other hand, the Productivity Commission found that NCP was not an unqualified success. Not all reforms achieved their objectives and some outcomes were not in the broader interests of the community. Moreover, the adjustment burden for some was considerable, particularly some regional communities. Notwithstanding these issues, overall the Productivity Commission concluded that the benefits outweighed the costs.

The Productivity Commission singled out a number of features that underpinned the success of NCP:

  • recognition by all governments of the need for reform
  • broad agreement on the the priority areas
  • a solid conceptual framework and information base and
  • effective procedural and institutional mechanisms  to implement reform.

Since the completion of the NCP reforms in the early 2000s, there has been a noticeable decline in Australia’s productivity growth (see the article ‘Australia’s productivity challenge’ in this publication) even though the Australian economy recorded positive growth in gross domestic product (GDP) for the last 27 years (see the article ’27 years and counting since Australia’s last recession’ in this publication).

This is not unusual, given other factors can contribute to GDP growth such as increases in population or labour force participation. Over recent decades, and despite a slowdown in productivity growth during this time, GDP growth increased due to exceptional growth in the terms of trade as a result of the resources boom.

As the Harper Review (discussed below) pointed out, a re-focus on productivity growth is imperative:

Now that Australia’s terms of trade are receding from their peaks and the boom in mining investment is past, as a matter of urgency we must look once again to productivity growth to underpin rising living standards.

In an effort to boost productivity growth and underpin rising living standards, in December 2013, the Australian Government announced a review of Australia’s competition laws and policy. Professor Ian Harper was appointed to lead the review.

Harper Review

The Competition Policy Review (known as the Harper Review) commenced in March 2014 and a final report was released in March 2015.

The Harper Review provided a comprehensive assessment of Australia’s competition framework. The Review Panel made 56 recommendations aimed at reinvigorating competition policy at both state and Commonwealth level, reshaping competition institutions, and modernising and simplifying Australia’s competition laws.

In November 2015 the Australian Government provided its response to the Competition Policy Review, stating:

The Government will implement the majority of the Review’s recommendations … All governments recognise the benefits that were delivered by the NCP and are already working together to develop a new national framework between the Commonwealth, states and territories that will identify and facilitate innovative ways to deliver services and promote economic growth.

The Government supports 39 of the Harper Review’s recommendations in full or in principle and a further 5 recommendations in part. The Government also notes or remains open to 12 recommendations in areas where implementation will be considered following further review and consultation, including with the states and territories.

In December 2016 the Australian, New South Wales, Western Australian, Tasmanian, Australian Capital Territory and Northern Territory governments signed the Intergovernmental Agreement on Competition and Productivity-Enhancing Reforms. The Queensland, Victorian and South Australian governments did not sign the agreement.

The Intergovernmental Agreement sets out how participating governments will work together in undertaking reforms to raise Australia’s economic performance and improve living standards. The COAG communique issued with the agreement stated:

This important agreement lays the foundations for governments to work together to build a more productive and well-functioning economy ... This will see efforts to remove unnecessary regulatory barriers to competition; to boost innovation to deliver high quality, effective human services; and to promote efficient investment and usage of infrastructure for road transport, water and energy.

Progress on implementing the Harper Review recommendations

Progress on implementing the Harper Review recommendations has been slow. While reforms to competition law have been implemented since the signing of the Intergovernmental Agreement, there has been little action in other areas such as undertaking competition and productivity-enhancing reforms and bedding down institutional arrangements to facilitate such reforms.

In August 2017 the Australian Parliament passed what is now the Competition and Consumer Amendment (Misuse of Market Power) Act 2017, the first piece of legislation to implement one of the recommendations from the Harper Review.

The Act changed the operation of section 46 of the Competition and Consumer Act 2010,which deals with misuse of market power and predatory pricing.

Section 46 now prohibits a firm with substantial market power from engaging in conduct that has the purpose, or that has or is likely to have the effect, of substantially lessening competition in any market in which the firm supplies or acquires goods or services. Section 46 had previously prohibited a firm with substantial market power from engaging in conduct that has the purpose of substantially lessening competition in any market in which the firm supplies or acquires goods or services.

In October 2017, the Australian Parliament passed what is now the Competition and Consumer Amendment (Competition Policy Review) Act 2017. This Act implemented in full or in part most of the recommendations from the Harper Review that were designed to simplify the law and better deal with anti-competitive conduct.

There have been some individual reforms at state or territory level, but little, if any, interjurisdictional collaboration on cross-cutting competition policy reforms. This is not surprising given not all jurisdictions signed the Intergovernmental Agreement.

This can be contrasted with the high level of cooperation between the Australian Government and state and territory governments in the early life of the NCP, when there was recognition by all governments of the need for reform and that the benefits to the community would outweigh the costs. This political consensus was facilitated by analysis that was undertaken by the Productivity Commission (then known as the Industry Commission) prior to the NCP’s commencement that estimated the potential gains and how it would result in increased revenue at both Commonwealth and state levels of government.

The final recommendation of the Harper Review was that the ‘Productivity Commission should be tasked with modelling the recommendations of this Review as a package (in consultation with jurisdictions) to support discussions on policy proposals to pursue’. The Government ‘noted this recommendation’ and thus far no modelling work has been undertaken by the Productivity Commission.

There is no institution responsible for providing leadership or driving implementation. Failing to reinvigorate an existing body (such as the National Competition Council (NCC)) or to establish a new body, which the Harper Review suggested be called the Australian Council for Competition Policy, to oversee progress on competition reform, appears to be a significant factor contributing to the lack of progress with implementation of the competition and productivity-enhancing reform agenda.

The current role of the NCC is limited to considering certain infrastructure access matters. It comprises three independent (part-time) councillors and it uses staff seconded from the ACCC as a secretariat for its limited work program as described in the Memorandum of Understanding between the two agencies.

In contrast, a critical feature of the previous NCP reform process was the establishment of the independent NCC with a broad range of functions. At that time, the NCC monitored competition reforms across the jurisdictions, publicly reported on progress and identified where commitments had not been met or where actions fell short. It brought transparency to the NCP process and helped ensure that jurisdictional flexibility was consistent with the agreed high-level principles and objectives of the NCP reform program.

In the 2017–18 Budget, the Commonwealth announced that, as part of its response to the Harper Review, it would provide $300 million over two years to establish a National Partnership on Regulatory Reform (NPRR) with states and territories to remove regulatory restrictions on small business and competition.

However, in the Mid-Year Economic and Fiscal Outlook 2017–18, the Government reallocated the $300 million for the NPRR to a Small Business Regulatory Reform Agenda, stating:

The Government will redirect funding of $303.7 million over two years from 2017-18 from the National Partnership on Regulatory Reform to a new reform agenda that will reward States and Territories that reduce the regulatory burden on small businesses. The funding includes $3.7 million which will be reallocated from the National Competition Council to the Department of the Treasury, to develop and administer agreements.

To gain traction, the new competition reform agenda requires enhanced commitments from all Australian governments. As the Harper Review advocated, it also requires an institution to provide transparent oversight of the reform implementation process. This may require a fully independent body, separate from the ACCC.

Further reading

Competition Policy Review Panel, Competition Policy Review: final report, Commonwealth of Australia, March 2015.

Australian Government, Australian Government response to the Competition Policy Review, Commonwealth of Australia, November 2015.

Council of Australian Governments, Intergovernmental Agreement on Competition and Productivity-Enhancing Reforms, December 2016.

 

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