Competition Policy in Queensland
The purpose of this paper is to identify the benefits of competition policy in terms of meeting challenges facing Queensland, and to highlight the greater efforts which may need to be made by government as a whole to gain those benefits.
1. What is Competition Policy?
Competition policy is a means to create economic opportunities by exposing enterprises to competitive pressure, both by preventing the abuse of market power, and by removing the sometimes unintended protection of public or private producers which can result from government actions, including legislation and regulation.
Competition policy has been implemented in Australia for several decades through Commonwealth Trade Practices legislation designed to prevent firms from abusing market power to harm their competitors. However it did not apply to many government activities, and to a few private activities. In April 1995 a National Competition Policy Agreement was signed by all governments which extended the coverage of Trade Practices legislation to previously exempt areas, and advanced six other processes intended to identify and eliminate the often unintended protective impact of government actions. These changes also affect Local Government.
2. The Importance of Competition Policy
Competition policy was initially developed in Australia as a means for protecting consumers from excessive prices or undesirable practices by producers whose dominance of a particular market allowed competitors to be effectively excluded.
However, more recently, the role of competition in stimulating improved economic performance has been recognised, and was the motive of the National Competition Policy Agreement. Competition is seen to be the most effective way to motivate and enable individuals and organisations to improve their economic performance - in particular through innovation, which is regarded as the major source of long term economic growth, but which can be avoided by those who `enjoy a quiet life'.
In the 1980s Australia recognised the importance of improving its economic performance, because of its specialisation in commodities exports - which are relatively slow growing and volatile sectors of world trade, and which face declining terms of trade (ie prices of imports rose faster than export prices). It was also recognised that market competition would be more effective than government direction in achieving those changes. Through deregulation (eg of the financial sector) and reduction of protection (eg tariffs) competitive pressure were applied to many sectors of Australia's economy - resulting in improvements in some areas (eg in the very rapid growth of elaborately transformed manufactures) and difficulties in others. All governments also mounted economic development strategies designed to enhance economic performance.
However the overall impact of these initiatives was inadequate - resulting in relatively slow growth by international standards, a declining ability to compete internationally in spite of useful gains in some sectors, current account deficits due to national spending being well in excess of national income, and rapidly accumulating foreign debts and other obligations.
These initial attempts at reform highlighted previously unsuspected impediments. One of the reasons for the slow adjustment was that large segments of Australia's community were in sectors which were little exposed to pressure for improved performance. The National Competition Policy was designed to remove this obstacle, and analysis by the previous Industry Commission identified gains from this policy of about 5.5% in GDP and also gains in employment and government revenues. However there were other difficulties - including the much higher standards required for high value added industries because mass production (the hallmark of developed modern economies until the 1970s) had been captured by newly industrialised countries.
Competition policy is a key ingredient in dealing with Queensland's current challenges.
The Queensland Commission of Audit has identified a fiscal challenge facing the Queensland Government and suggested dealing with it partly by increasing competition in public sector service delivery to induce greater efficiency. This is compatible with, though goes further than, the requirements of the National Competition Policy Agreement.
Queensland's fiscal strategy was not sustainable in its previous format because of: rapidly increasing demands for services due to population growth; a narrow tax base due in part to Australia's system of fiscal federalism; and constraints on Commonwealth funding due to the need for savings to reduce budget and current account deficits. Improved productivity in Queensland's economy (which would increase the base for income taxes) would also improve the fiscal position, if combined with measures for reform of Australia's system of fiscal federalism along the lines suggested by the Commission of Audit.
To improve the productivity of Queensland's economy, the Government is currently evolving a State Economic Development Strategy (SEDS) with the theme of 'improving competitiveness'. The SEDS (to build the capabilities to compete) and competition policy (to remove barriers to competition, and increase motivation) are complementary initiatives because: it is easier to overcome interest group resistance to competition if new opportunities are emerging; and it is not possible to build economic capabilities if segments of the community are artificially inhibited from competing.
Queensland has many obligations under National Competition Policy Agreements which are linked to large compensation payments from the Commonwealth reflecting the much greater tax benefits the Commonwealth will receive from successful reform. And the Commonwealth, where the present administration is committed to competition policy, has options for unilateral action equivalent to that which States could take. However it is in Queensland's interests to have its own competition agenda - and there is wide scope under the Agreement for the State to proceed with this in ways which suit Queensland's circumstances. The core motive is not receipt of Commonwealth Competition Policy dividend payments, but positioning Queensland's economy to prosper in its increasingly internationally exposed position.
Internationally competition policy is now seen as becoming as important to market access as trade policies, because competition policies apply to the ability of firms to operate successfully in other's markets not just to penetrate border barriers. This is especially controversial in the relationship between countries where competition policies are designed to protect against market power (eg USA), and those without such competition arrangements whose policies are rather designed to enhance the dynamic responsiveness of their economy and to increase the market power of national firms (eg in Asia). Previously mainly a matter for concern of lawyers and economists, competition policy is thus becoming also of concern to business strategists. These aspects have not yet been formally considered in relation to Competition Policy in Australia.
3. Progress on National Competition Policy (NCP)
Research into competition policy issues was undertaken under the previous government from 1991, resulting in considerable influence on the development of the national agenda. In addition, as a result of work through the Special premier's Conferences and later the Council of Australian Governments, initiatives generally compatible with competition policy were set in train (eg corporatisation of government enterprises).
In early 1995, an NCP Unit was established in Treasury to implement the National Competition Agreement - resulting in significant progress over the past year as outlined in Attachment A.
Currently emphasis is shifting from providing general information, to detailed practical action. The need to co-ordinate with other agencies and programs with an involvement in issues impacting on competition policy is receiving attention. And preparations are under-way for establishment in early 1997 of a Queensland Competition Authority which will succeed the NCP Unit, and also have review roles in relation to competitive neutrality, oversight of the prices charged by public monopolies and third party access to infrastructure.
4. Impacts of Competition Policy
Competition policy impacts on government firstly in terms of the requirements of implementation, and secondly in terms of the need to operate in the more competitive environment thus created. To date most attention has been given to the former, and it still represents a major challenge for government. However the pressures unleashed by competition will (as they were always intended to) create even more challenges in future.
There are several indications that Government needs to focus a great deal of effort on implementing and responding to competition policy:
Issues affecting Implementation
· There is limited understanding of the relationship between competition policy and improving competitiveness. Thus there is less motivation to go up the difficult 'learning curve' for NCP, more scope for making wrong choices when options are available, and some difficulty maintaining a sense of proportion about what is really important.
· NCP Implementation requires fairly large numbers of persons with scarce economic, policy, legal, and commercial skills - who must be either recruited or trained. In the past departments have seldom created positions requiring such capabilities.
· Some NCP requirements (eg public benefit tests) face technical difficulties in devising procedures which are likely to be effective and satisfactory.
· The Report of the Commission of Audit included many proposals about how competition should be implemented.
· the Commission of Audit's pro-active approach to competition, and the NCP Unit's passive approach (ie removing obstacles) need to be coordinated
· Changes to the operations of agencies as a whole may be required, which can not easily be engineered by the NCP Unit, or by liaison officers (eg third party access may require that the planning / management of some infrastructure be quite different).
· Greater knowledge is required in the public sector about how a market economy works and about business conditions - both in units competing with the private sector; and in units creating market arrangements so as to ensure Queensland is internationally competitive (ie via structural reform, legislative review, 3rd party access). Furthermore onerous NCP compliance requirements would not be constructive.
· Commonwealth payments depend on Queensland's perceived adherence to National Competition Agreement - where uncertainties arise for electricity, rail and water.
· Concerns about the aims and objectives of NCP require that implementation be supported by strong policy capability oriented to maximise benefits to Queensland.
· Minor policy issues are arising from NCP implementation itself which need to be resolved (eg what to do about small infrastructure, for which 'convenient' administrative arrangements in the past now turn out to be anti-competitive)
· NCP tends to be seen as mainly a matter for government, and to involve less effective consultation and awareness with business and the community.
· Scope may exist for complementarity / synergy amongst different sectors where, to date, NCP implementation is proceeding in parallel.
Requirements in a Competitive Environment
· Enterprises (private and public) require increased support from a well developed economic system. Such a system is also required if the benefits of NCP (eg reduced business input costs) are to be captured by the Queensland community itself.
· Government businesses (whether internally commercialised, externally corporatised, or potentially being privatised) require new skills, management practices and institutional supports if they are to successfully compete. The strategies chosen to do so may have economic impacts (eg innovation may be more constructive than efficiency in achieving gains which can be captured by the Queensland community).
· Government options to change the organisation or management of a government business for political reasons will need to be considered in terms of the effect on its ability to operate competitively (which requires customer, not political, sovereignty)
· Government businesses will be less able to operate within traditional legislative and government administrative arrangements.
· Correspondingly Government's methods for planning economic initiatives, or arranging infrastructure packages will be need to be modified to reflect the commercial focus of government businesses. The latter is needed for productivity and competitiveness, and requires that they respond to customers rather than to government plans. Government's traditional approach to reducing risk for industrial investors by directly providing infrastructure needs to be reconsidered.
· Dealing with specific proposals in a NCP environment can be technically challenging, requiring the mobilisation of very high level skills (eg businesslike negotiation, sensitivity to the community interest, corporate financial and legal requirements, regional and economic impacts). This is even harder in transition to NCP period.
· Costs will emerge from NCP Implementation. Community Service obligations could become a major political issue as hidden cross subsidies in many public sector operations are identified, especially in rural / regional areas. And dividend payments from GOCs will fall and commercial risks will rise in a competitive environment unless GOCs develop strong competitive capabilities.
· There is some potential conflict of interest between governments' revenue requirements from GOC's and the need for economically efficient pricing
· There is some risk that a public sector wide emphasis on competition might suppress the capabilities and attitudes required for performance of government's non economic roles which are a key part of its contribution to community welfare. Furthermore government's catalytic role in overall economic and social arrangements can not be reduced to the competitive delivery of services to individual persons or organisations.
5. MOVING FORWARD
The key question for Queensland is what approach should be taken to competition policy. The alternatives seem to be: rejection of competition policy as a concept; passive compliance with formal requirements of NCP; or active development of an approach to competition policy which suits Queensland's circumstances.
An active option is indicated by:
· the flexibility contained in NCP to maximise benefits to Queensland.
· the need to substantially strengthen Queensland's economic performance
· acceptance by Government of the recommendations of the Commission of Audit.
· the different implications of competition policy in each particular situation.
To give effect to an active approach to competition policy there is a need to decide: what issues should be addressed; and through what process should they be managed?
An Agenda for Action
Important matters, in addition to action by agencies to comply with the formal requirements of NCP, appear to include:
· increasing NCP knowledge and understanding - a process which has started, but might be strengthened by increasing and demonstrating its importance for improved productivity, its flexibility, and by professional support with a 'communication' strategy.
· developing public service knowledge and skill requirements for pro-active implementation (eg concerning the operation of effective market processes)
· ongoing identification and resolution of competition policy issues from the viewpoint of substantive goals (eg optimal policy given Queensland's competitive environment and economic strengths; what is an effective public benefit test; requirements for small infrastructure; optimal use of competition in specific situations).
· development of effective capabilities and institutional support which enterprises will require in an increasingly competitive environment. This relates both to the State Economic Development Strategy, and to organisational development by GOEs.
· re-development of procedures for responding to major investment proposals
· managing organisation wide changes in some agencies, through the strategic planning process, taking account of NCP and diverse other expectations on agencies
· development of procedures for identifying and funding CSOs and managing them in the community interest, as well as funding other NCP costs
· transitional support for potentially adversely affected rural regions
· evaluation of the fiscal / economic impacts of NCP
· effective liaison with national NCP institutions
· ensuring effective public policy advice, and appropriate attention to social, environmental and other goals in a competitive environment
· resolving disputes in the overall community interest about competitive neutrality and 3rd party access arrangements; and pricing oversight for government monopolies
Organisation
Competition policy is complex and contentious, and impacts upon many different interests in government. Past practices using the simple concept of a 'Lead Agency' do not appear to have allowed these differences to be fully reflected. Furthermore, given the increased importance of commercial capabilities it also seems desirable to involve non governmental representation in advising about competition policy issues.
However in considering future management options, it appears desirable to build on existing capabilities (because the major difficulty is the complexity / uncertainty of the subject rather than any lack of efficiency by those involved in the past).
An option which might be considered would involve an expansion on the current management mechanisms by:
· forming a Forum on Competition Policy including interested parties (such as the proposed QCA, relevant CEOs, experts, business and community groups);
· making the CEO Committee into a sub-committee of the above Forum, responsible for recommendations to government through the Minister;
· forming an NCP Implementation Working Party of liaison officers from relevant agencies, which reports to the Forum through the CEO subcommittee, and liases with the State Strategic Plan with respect to NCP issues (eg 3rd party access) which may require system wide changes;
· establishing the Queensland Competition Authority (QCA) as planned, and requiring that it provide the Forum with information about the technical standards to be used in performance of its statutory duties
· transforming the existing NCP Unit into an NCP Management Unit as part of the proposed QCA whose responsibilities would include: convening and acting as secretariat to the Forum; acting as secretariat to the CEO subcommittee and other working parties of agencies if required; publicly disseminating information on behalf of the Forum; and disseminating information / promoting cooperation amongst all parties.
· issuing five specialist commissions as below
Two year specialist commissions could be issued by the responsible Minister as follows:
a A Technical Commission to (someone with relevant economic skills) to convene a Working party including implementation experience to research and report to the Forum on: the relationship between competition policy and competitiveness; options for effective competition implementation in specific sectors (as referred by the Minister); propose policy approach to CSOs and to the principles used by the QCA; identify developments related to competition policy; and to advise the Forum on future technical research needs
b A Commercial Commission to (someone with relevant commercial skills) to convene a working party to advise the Forum on the capabilities and support institutions required for GOEs to operate in a more competitive environment; and to advise agencies about technical aspects of creating effective competitive market mechanisms;
c A Governance Commission to (some group with both public administration and investment facilitation skills) to convene a working party to advise the Forum on: performance of governments' policy advice, social and environmental responsibilities in a competitive environment; and future liaison with major investment proposals
d A National Affairs Commission to the Intergovernmental Relations Branch of the Premier's Department to advise the Forum on Federal State relationships, and on matters affecting the National Competition Policy
e A Rural Impact Commission to (someone with skills in real community / economic development) to stimulate positive outcomes for communities otherwise adversely affected by the application of competition policy, and to report to the Forum. This group would work closely with local government.
Such Commissions would typically be given internally within the Queensland Government to formalise the involvement of different specialists - though the Commercial Commission (for example) would presumably be to an external organisation.
Attachment A: Major Progress in NCP Implementation
· informative material about competition policy (in documentary and computerised formats) has been produced disseminated, and a newsletter published
· a network of NCP implementation officers has been established in various agencies
· training sessions have been conducted for agencies, and as part of public sector staff training generally, and in regional areas in particular
· a steering committee of CEOs of heavily affected agencies has been established
· guidelines for government agencies in avoiding restrictive trade practices which might have been produced in the form of a Process and Procedures Manual, and departments have audited their compliance with the Trade Practices Act
· agencies have begun work on the six other process required by NCP : changing the structure of government monopoly businesses to facilitate competition; ensuring that government businesses compete on equal terms with the private sector; arranging for prices charged by remaining government monopolies to be monitored; enabling third party access to key infrastructure; review of legislation which restricts competition; and continuation of COAG reforms in electricity, water, roads and gas.
· guidelines have been produced for promoting competitive neutrality
· a timetable has been produced for review of legislation, and a method for testing the public benefit of legislative restrictions on competition proposed
· the application of competition policy to Local Government has been defined with considerable cooperation from the Local Government Association.