House of Representatives Committees

Standing Committee on Economics, Finance and Public Administration

Inquiry into aspects of the National Competition Policy Reform Package

CULTIVATING COMPETITION: PUBLIC INTEREST COMPONENTS OF THE REPORT OF THE INQUIRY INTO ASPECTS OF THE NATIONAL COMPETITION POLICY REFORM PACKAGE

DAVID HAWKER MP, CHAIRMAN
PAPER PRESENTED TO THE CONFERENCE ON 'PUBLIC INTEREST IN THE NATIONAL COMPETITION POLICY'

THURSDAY 24 JULY 1997
MELBOURNE

In June this year the House of Representatives Standing Committee on Financial Institutions and Public Administration tabled in the Commonwealth Parliament its report Cultivating competition. That report outlined the results of an inquiry into several aspects of the National Competition Policy reform package. I am pleased to say that the Committee reached unanimous conclusions and recommendations.

Competition policy is a critical area of reform for the public sector. This policy is about ensuring that where public ownership exists, competition should apply.

The inquiry included as its first term of reference an examination of the appropriate means for applying the 'public interest test' included in the Competition Principles Agreement.

The inquiry spanned two Parliaments and our report came two years after the signing of the Council of Australian Governments' agreement on the reforms by the Commonwealth and all State and Territory Governments.

The 'public interest test' is a pivotal element of competition policy.

It is the 'public interest test' that is used to determine whether the competition reforms will be implemented.

A central tenet of competition reform is that competition is not an end unto itself.

While in general introducing competition will deliver benefits to consumers and businesses, there are situations where community welfare is judged better served by not effecting particular competition reforms.

Thus in the implementation of the reforms spelt out in the Competition Principles Agreement, governments have recognised the importance of the concept of a weighing up process of costs and benefits to the community. Competition is to be implemented to the extent that the benefits to be realised from competition outweigh the costs.

Given the scope of the reforms, their potential to substantially impact on the lives of all Australians, and the relative newness of the policy, it is critical that there is adequate public education and consultation about the reforms, and their progress. Holding this seminar is a very positive step in that public education process.

Today I will outline the Committee's interpretation of the 'public interest test' and what we see are the basic principles that should guide the application of the test in all jurisdictions.

Since it is generally accepted that the ultimate decisions on the weighing up of the costs and benefits are basically political ones, to be justified by the Parliament and in the final analysis by electors, I'm sure the Committee's views will be of interest.

The circumstances in which the weighing up process is called for, and some of the factors that need to be taken into account in making the decision, are set out in subclause 1(3) of the Competition Principles Agreement, as follows:

(a) for the benefits of a particular policy or course of action to be balanced against the costs of the policy or course of action; or

(b) for the merits or appropriateness of a particular policy or course of action to be determined; or

the following matters shall, where relevant, be taken into account:

(d) government legislation and policies relating to ecologically sustainable development;

(e) social welfare and equity considerations, including community service obligations;

(f) government legislation and policies relating to matters such as occupational health and safety, industrial relations and access and equity;

(g) economic and regional development, including employment and investment growth;

(h) the interests of consumers generally or of a class of consumers;

(i) the competitiveness of Australian businesses; and

(j) the efficient allocation of resources.

In its report the Committee was required to focus on appropriate means, including review processes, for applying the 'public interest test' included in the Competition Principles Agreement.

'Public interest' matters in other areas of competition policy (such as under the Trade Practices Act) were not within the scope of the Committee's inquiry.

However, in a sense the whole process of competition policy reform is a 'public interest' one. In making decisions on competition policy reform, Governments are acting in the broad public interest as they see it.

Subclause 1(3) is relevant to:

certain aspects of competitive neutrality;
the structural reform of public monopolies; and
the legislation review process.

Since this conference is focusing on the legislation review process I will restrict my comments to that matter. However, the conclusions and recommendations the Committee drew are also applicable to those other areas for those who wish to follow them up.

I will address four main areas of the topic, namely:

the interpretation of 'public interest' in the Competition Principles Agreement;
the application of the 'public interest test' to the legislation review process;
some comments on the jurisdictions' legislation review timetable documents; and
the 'public interest' process.

Interpretation of 'public interest' in the Competition Principles Agreement

There is some confusion surrounding the use of the term 'public interest test' under the Competition Principles Agreement.

The terms 'public interest' or 'public interest test' are not used in subclause 1(3).

The subclause provides a list of only some of the diverse factors that may be relevant where the parties are weighing up the costs, benefits, merits, appropriateness or effectiveness of particular actions.

Thus what is loosely described as the 'public interest test' is not confined to those factors which are specifically described in subclause 1(3).

In a particular case, the most important factor may not even be on the list. For example, South Australia in applying the test to local government included three additional factors: namely, the impact on actual and potential competitors of the relevant local council business activity; the impact on the local community; and the impact on state and national economies.

Further, all the items in the list may not be relevant in each case.

Those conclusions flow from the opening words of the subclause 'Without limiting the matters that may be taken into account' and the words 'where relevant'.

People interested in a matter have sought to stress particular factors in the list or other factors that their perspective regards as of deciding importance. For example, some business groups suggest that the other factors in the list detract from the importance of competitiveness and efficiency. While other groups, such as some unions and local government, place greater emphasis on consideration of social equity issues.

While it is understandable that there will be differing perspectives on the factors, subclause 1(3) gives no significance to the order of listing.

The importance of a factor always will depend on the circumstances of a particular case.

The fact that a matter is specified on the list is an indication of its status as a key public policy consideration that cannot be ignored. Whatever else decision makers decide is relevant, at least they should turn their minds to each of the listed items.

Questions have also been raised about whether the assessment of the benefits and costs is a strict cost-benefit analysis and the relative merits of a qualitative versus quantitative assessment. Several groups also stress that the 'public interest test' should be based on long term assessments of costs and benefits. The Competition Principles Agreement is silent on both these matters. The Committee accepted the use of both qualitative and quantitative assessments, where appropriate.

Application of the 'public interest test' to legislation review

As you are all aware under clause 5 of the Competition Principles Agreement the Commonwealth, States and Territories were obligated to develop a timetable, by June 1996, for the review, and where appropriate, reform of all existing legislation that restricts competition by the year 2000.

That is an enormous task, with some 2000 pieces of legislation being listed for review. The number of legislative Acts under review differ significantly between jurisdictions.

Reviews of existing legislation are to assess and balance the costs and benefits of the restriction on competition.

The parties are to require proposals for new legislation that restricts competition to be accompanied by evidence that the legislation is consistent with the principles that:

legislation (including Acts, enactments, Ordinances or regulations) should not restrict competition unless it can be demonstrated that:

Once a party has reviewed legislation that restricts competition under the principles set out in subclause 5(3) and 5(5), then it should be systematically reviewed at least once every ten years.

In addition, the Competition Principles Agreement recognises that the review of legislation may have a national dimension. If the party responsible for the review considers that the review should be a national review, that party is required to consult with other interested parties to the Competition Principles Agreement before it determines the terms of the reference.

It may request the National Competition Council to conduct the review. For example, in June this year by agreement with the States and Territory Governments, the Commonwealth Treasurer directed that the National Competition Council review the Australian Postal Corporations Act 1989.

Thus the responsibility for deciding whether the review should be a national one, and if so who should conduct it and what its terms of reference should be, rests with the initiating party.

By virtue of subclause 5(1), the 'public interest test' applies to assessing and balancing the costs of the legislative restrictions on competition only. The consideration of alternative means of achieving the objective is an additional issue. Also, the issue in this case is whether the benefits to the community as a whole outweigh the costs.

Legislation review timetable

All parties have prepared their timetables for the review of existing legislation. Some of those documents incorporate methodology for undertaking the reviews; others do not. Some parties have now prepared additional guidelines on the application of the 'public interest test'.

Initially, Western Australia, the Northern Territory and South Australia provided timetables only.

Western Australia, Victoria, Queensland and Tasmania now have detailed guidelines on the review process; NSW and the Commonwealth use related documents to guide the process; and the ACT is preparing documentation.

More details on the various approaches adopted by jurisdictions are outlined in the Committee's report.

From the diverse nature of the timetable documents and related material, it would seem that there has been very little coordination between the jurisdictions. This is an area where some sort of common approach would have been beneficial.

Some of the policy statements including those of South Australia, NSW, Queensland and Tasmania point to areas where joint reviews might be undertaken.

Few national reviews have been initiated to date.

There is potential for national reviews in any of the protected registered professions and occupations such as dentists, pharmacists, newsagents and optometrists.

In their timetable some jurisdictions including Tasmania, NSW, Queensland and the ACT, specify areas for possible national review.

The Committee believes there are manifest advantages in their being national reviews of legislation that restricts competition in the several jurisdictions, rather than diverse separate reviews. Accordingly, the Committee urged all governments, possibly through the Council of Australian Governments, to work towards that end.

Process

Evidence to the Committee and the policy statements and associated documentation pointed to a number of significant factors that should be included in the 'public interest test' process.

Most of the issues raised, and ultimately the process itself, are simply good commonsense.

However, from the evidence available it is clear that there is still room for improvement in how the 'public interest test' is to be applied and processes and procedures are still being developed.

In undertaking its task the Committee believed that a framework process that provides consistency of approach through the various jurisdictions would assist the public.

As previously highlighted, essentially, the ultimate decision as to the weighing up of the merits and costs and benefits is one to be made by the relevant government. While the process may involve the government receiving assistance or advice from some outside body, it is the individual government which takes responsibility for the decision and who must answer for it. This fact will colour how the whole process is structured in each jurisdiction and will inevitably mean that there will be differences, which are sometimes substantial, in how each of the parties deal with the issues.

As I am sure the NCC will stress, generally speaking, it has no role in the weighing up process. It is for the relevant governments to decide.

The major principles jurisdictions should follow in the process are transparency, objectivity, analytical rigour and achieving a balance of input from relevant and interested parties. These principles are also reflected in the NCC's expectations.

Transparency should be the overarching concept. It goes to the heart of concerns about implementing competition policy. It is equally important to business, unions and community organisations.

Transparency means that the processes need to be laid down in advance and publicised. The statements required by the Competition Principles Agreement or the annual reports prepared by jurisdictions on their progress may be a good place to set out the general approach. Some States, for example Queensland, Tasmania, Western Australia and Victoria, have adopted an approach of this nature by way of detailed supporting documentation/guidelines. The Committee believes all jurisdictions should do this.

Parties first need to work out what the process is to be. They will need to decide, for example, whether to have different procedures for different types of decisions and for minor and major matters. This is the route followed by several jurisdictions including Victoria, Queensland and Tasmania.

Decision makers will also need to consider if coordination is necessary with other jurisdictions or whether a national review is called for depending on cross jurisdictional or national dimension or effect.

The process should ensure that interested persons have the opportunity of knowing that a 'public interest' assessment is being proposed in relation to a matter and of submitting their views. Maintaining a register of groups known to have an interest in particular matters and making sure those groups are informed is one suggestion, though this should not be the only method. Newspaper advertisement is another. The nature of the inquiry could be expected to have a bearing on the route chosen.

A decision also has to be made on who is to undertake the assessment. The Hilmer report advocated independent reviews for legislation but this was not included in the Competition Principles Agreement. Given the diversity of matters that are likely to involve the 'public interest test', it is not possible to put forward one model that will fit all. A major independent review might be quite the thing for one matter of high priority and impact, but quite unnecessary in another. Whatever the particular model chosen, and this includes the choice of persons or bodies who are to make decisions, assessments or recommendations, there must be confidence as to the integrity and objectivity of the process.

Concerns were also raised about not duplicating studies that have already been undertaken by reputable third parties. Most states have woven the processes around existing legislative reviews.

Input from the public and government will be facilitated by clear terms of reference which identify the factors, whether in the list of factors set out in subclause 1(3) or otherwise, that the decision maker believes is relevant. This would not prevent the public and others from pressing other factors thought to be relevant.

There needs to be adequate opportunity for interested persons to input their views to the inquiry or review, and the process should be such that people can be confident that their submitted views will be given due consideration and taken into account. In other words, the consultation process must be, and be seen to be, bona fide.

Once a decision is made, the result must be made publicly known.

There is then the question of a possible review or reconsideration of a decision made in relation to the application of the 'public interest test'.

The actual decision itself is more than likely to be made by government itself, acting on advice or recommendations as to the public interest issues. In such cases, any review or reconsiderations would seem to be more appropriate at the earlier stage.

Also, some matters might be quite minor, and this could influence whether a review is necessary and if so, what form it should take.

But, however the whole process is structured, as a general principle, there should always be provision for a review/reconsideration of the outcome of the 'public interest test' examination where that examination was carried out by a person or body with a close involvement with the activity in question, and that review/reconsideration should be conducted by a person or body with no such involvement and who is independent of the primary decision maker.

It is not suggested that this needs to be someone outside the government, for example, one suggestion is that this could be the agency responsible for coordinating the government's national competition policy implementation. Implicit in a review/reconsideration is:

the initial decision and the reasons for it need to be publicly available;
interested people need to be given a reasonable opportunity to put their views to the reviewing body; and
bona fide consideration of the issues by the reviewing body.

Decisions in relation to matters which are subject to the application of the 'public interest test' do not necessarily have final and irrevocable outcomes. There should therefore be a commitment by the parties to revisit a matter should the position change or the anticipated benefits not eventuate. In any reconsideration of the public interest issues, similar processes to those that were applied to the initial consideration should be followed.

The Committee has alluded to the apparent lack of coordination by the parties in the preparation of the legislation review statements. The same comment can be made about the processes that apply generally to the application of the 'public interest test'. Some consistency of approach through all jurisdictions would obviously be of benefit to those who have to deal with similar issues in more than one part of Australia. This does not mean that everything need be exactly the same, but at least all the issues set out below should be common, and to achieve this will require more coordination than has been evident to date.

Accordingly the Committee recommended the following as necessary components of the 'public interest' process:

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

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

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;

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

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);

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

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

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

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

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

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;

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

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

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

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

Related matters

While some may be critical of some jurisdictions' performance on some matters, overall, the Committee was impressed by the amount of effort parties have put into meeting their obligations under the Competition Principles Agreement. The Committee also noted that much progress has been made, even though much, of course, remains to be done.

In its report the Committee also addressed: a specific example of the general public interest matters - the impact of the policy on the efficient delivery and funding of community service obligations; the implications of competition policy for the efficient delivery of services by local government; assessed the performance of the NCC; the arrangements for the Competition Payments; the need for effective public education and consultation; and gave the Committee's overall assessment on how the policy is progressing. For those interested in those wider issues I encourage you to contact the Committee's Secretariat for a copy of the Committee's report.

Again I stress the importance of the public education process. The community needs to know what the reforms are, and what the expected outcomes are likely to be. Without this, support and understanding of the process will not develop and the momentum for the policy may be lost. Public education must begin early while the areas for reform are being assessed and introduced. The community needs to be involved with competition reform as it evolves.

In June the Committee also tabled a report reviewing the Australian Competition and Consumer Commission's 1995-96 annual report in which the Committee sought greater transparency in the ACCC's authorisation and undertakings processes. Later this year the Committee will review the ACCC's 1996-97 annual report. I encourage those who have concerns with any matters with the ACCC to contact the Committee about those concerns.