NCP GUIDE

1. INTRODUCTION

National Competition Policy (NCP) is: a wide ranging program which has been adopted Australia wide. It is not ignorable.

NCP has seven key thrusts: :

· Extension to governments of the Trade Practices Act (which controls some anti-competitive business behaviour) .

· Allowing third party access to key infrastrucure :(to prevent owners from stopping competition -eg in telecommunications, electricity; railway, oil, gas, and water pipelines, airports)

· Eliminating monopolies (or near monopolies) if possible, and ensuring that , if a monopoly exists, it is subjected to oversight of pricing.

· Restructuring of traditional monopoly businesses or markets to ensure benefits to consumers and the economy, because, if introducing competition in such situations may simply result in continued monopoly.

· Ensuring a level playing field (competitive neutrality), for significant government businesses. For large government business, this may require corporatisation

· Legislative review may be needed, because just applying the TPA may not overcome problems. Legislation should only restrict competition if benefits exceed costs, and objectives can only can be achieved by restrictive regulation.

· Other reforms - The April 1995 agreement to implement National Competition Policy and Related Reforms includes specific requirements for electricity, gas, water, and road transport.

2. NCP GENERAL INFORMATION

2.1 Why do we need NCP: all governments need to encourage better use of resources, for which one major obstacle is a lack of competition. Also through technological change Australia now has single national market. Thus it is desirable to increase competition throughout. NCP is to make society better off.

2.2 Action to date : COAG addressed need for competition in 1992 and set up a review, Hilmer report was produced in 1994. In April 95, COAG endorsed legislative and administrative arrangements

2.3 Aims of NCP: to develop an open integrated Australian market; ensure against anti-competitive conduct; ensure that the same requirements apply irrespective of business ownership; ensure anti-competitve behaviours are assessed; and reduce regulative complexity and administrative duplication

2.4 Benefits of NCP: In a more competitive environment, business gives the community a better deal (eg lower prices). Industry Commission estimates gains of $23bn through greater efficiency (an extra $1500 for each household) An Appendix outlines benefits of microeconomic reform. ]

2.5 April 1995 COAG Agreements: Agreements are in 4 parts:

· Competition Policy Reform Bill (which extends TPA to unincorporated sector, and to State / Local Governments; allows business to negotiate access to services of national significance; applies price surveilance to government businesses; and establishes Australian Competition and Consumer Commission (ACCC) (to enforce competition and consumer protection, access / price surveilance determinations), and National Competition Council (for price surveilance, and overview of states). ACCC only applies to a state which lacks its own price surveilance mechanisms.

· Conduct Code Agreement which defines how TPA will be extended

· Competition Principles Agreement (which deals with third party access, prices oversight of government business enterprises (GBEs); structural reform; competitive neutality; and review of legislation

· NCP Agreement: Provides for Commonwealth payments to the states for achieving reform milestones (eg $2.3bn for Queensland in the decade to 2005-06)

2.6 Key Elements - extension of anti-competitive provisions (Item 1); and reform of state / local government to provide incentives like those applied to private sector (Items 2-7)

2.7 Difference between 'carrying on business' (in Trade Practices Act), and 'significant business' (in Competition Principles Agreement). Anti-competitive behaviour by state will come under TPA (with wide interpretation of meaning of business, but excluding purely regulatory objectives). States have more discretion over `significant business activities'. The TPA impact will be greater than that of CPA..States must specify application of competition policy to local governments by June 1996.

2.7 NCP Implementation Safeguards will to ensure social objectives (ie

· each element in NCP is implemented only if benefits outweigh the costs;

· the following will be considered in implementation of NCP (ecologically sustainable development; social welfare / equity - including CSOs; occupational health and safety; industrial relations; access and equity; economic and regional development including employment and investment; consumers; business competitiveness; efficient resource allocation;)

· exemption will be allowed of uncompetitive behaviour which is in the public interest;

· there will be consumer protection represenation on ACCC

· consumer protection will exist through Fair Trading Act, and TPA

· there will be prices oversight on state monopolies.

2.9 Misunderstandings : NCP is: not competition at all cost; not necessarily a path to privatisation; not compromising social obligations; not for all functions; not a way of shifting taxes to Commonwealth; and not necessarily requiring corporatisation. Furthermore, everything doesn't need competive neutrality

2.10 Relationship with corporatisation and commercialisation: Corportatisation involves restructuring - to replicate private business operating environment. Commercialisation is similar, but not as extensive (involving separate business entities, but not separate legal entities). Both involve study of key aspects of NCP. Past examples are in electricity (corporatisation), and forestry (commercialisation). Because of past emphasis on commercialisation and corporatisation much of NCP is already familiar in Queensland.

2.11 Implementation Deadlines must be met for Queensland to get extra funding. -

· Trade Practices Deadlines: July 1996 - lose states general exemption to TPA; July 1997 - remove exemptions for government authorities representing the Crown; July 1998 - remove exemption of some specific businesses

· Competition Principle Agreement Deadlines: July 1996 - need policy statement on: competitive neutrality; application to local governments; and timetable for reviewing existing legislation.

· Other - specific deadlines for electricity, water, gas and road transport

2.12 NCP Implementation Process: involves an NCP Steering Committee (heads of key state government departments); the NCP Implementation Unit in Treasury; and specialist working groups for consultation with industry and stakeholders.

2.13 Further Information : Each department has nominated a contact person for NCP issues

2.14 NCP: A Summary: NCP is: a wide ranging reform program complementing recent Queensland reforms; a policy of benefit; developed to consider other policy objectives; flexible; not competition for its own sake; necessarily a path to privatisation; not a requirement to eliminate community service obligations (CSOs); not able to be ignored (because of benefits, potential tax gains, and otherwise liable to be done by Commonwealth directly)

3. TRADE PRACTICES ACT

3.1 Extension of Coverage: Most businesses are subject to the TPA, but not all participants in the market are. NCP extends TPA's coverage to unincorporated sector and state governments, including those previously protected by the shield of the crown. Arrangements to ensure TPA compliance include: audit of contracts and conduct; and of legislation which might be in breach of TPA; development of TPA compliance program to ensure staff realise what would breach TPA. Treasury produced a Restrictive Trade Practices and Procedures Manual . However it will not cover everything as TPA is a difficult area of law, involving a mix of complex legal issues and economic concepts in a wide range of business activities. Specialist advice may be needed.

3.2 Restrictive Trade Provisions of the TPA .

3.2.1 Extent of Coverage:

· Types of entities caught (involves complex issues);

· Exemptions include - fee collection, taxes, licencing, compulsory vesting in Crown marketing authorities, transactions between persons representing crown in the same right. These are not the same as the exemptions in Competition Policy Reform Act for Queensland. TPA liability does not apply to all SBEs at all times, thus need to consider the matter carefully.

· Definition of `carrying on business' - much of the application of the TPA is decided in the courts. - thus there is no simple definition. However, business is not just profit making activity, but can include any activity which is regular with keeping of accounts. Isolated transaction doesn't count. Pure regulation is not business; licencing is not a business; procurement is not business if for regulatory purposes; use of telephone or advertisements doesn't make a business; use of agent doesn't make business. However exclusions are limited in term and likely to be treated narrowly in the courts.

3.2.2 Penalties - apply to individuals / corporations, but not the crown

3.2.3 Personal liability - while the crown can't be prosecuted, crown employees are not necessarily free of liability (but situation not tested). Thus need to act in good faith. Act honestly, and participate in compliance programs to understand conduct prohibited by TPA. If in doubt see 'Restrictive Trade Practices Processes and Procedures Manual'.

3.2.4 Types of Restrictive Trade Practices include: those prohited automatically - regardless of their effect on the market; and those which depend on analysis. Many issues arise from misuse of market power to damage a competitor.

· Automatic breaches arise from: price fixing between competitors; resale price maintenance; selling one product only on condition another is taken from a third party (third line forcing); and agreements between two parties (exclusionary agreements) .

· To determine if a breach of competition provisions has occurred, there is a need for a detailed analysis of the concepts of market and competition, and how particular concept affects a particular market. Contravention occurs when: contracts or arrangements are likely to substantially reduce competition; two people inhibit a third from obtaining or selling to another (secondary boycott); exclusive practices arise (exclusive territories, customer exclusive requirements; minimum purchases; tying products together for sale; mergers which substantially reduce competition). Many provisions deal with abuse of market power to damage competitors, prevent market entry, or hinder competitive conduct

3.3 Handling Restrictive Trade Practices: SBEs may discover actions which contravene TPC (Part IV), and need to analyse means to overcome the problem either by authorisation (by ACC or by legislation) or by ceasing the activity. Need to consider relevant public benefit test.

3.3.1 ACCC Authorisations are available (subject to public benefit test). Competition Policy and Reform Act allows advance authorisations, before TPA applies in July 1996. ACCC test is similar (but narrower) than statutory authorisation. Authorisation procedure makes conduct illegal until authorised. Notification procedure (only applies to exclusive dealing) allows conduct under statutory authorisation, unless revoked by ACCC. GBEs may seek authorisation / notification; but must first gain cabinet approval and have application forwarded by NCP Unit.

3.3.2 Statutory Authorisation: States may authorise action otherwise in breach of TPA through Act of Parliament or regulations. Statutory authorisation must be specific and refer to TPA. Departments must consult with NCP Unit, and justify the proposal. ACCC must be notified in 30 days of enactment. State legislation can be over-ridden by Commonwealth, up to four months later without explanation. After 4 months Commonwealth must table a National Competition Council report. State can only give authorisation if benefits exceed costs, and there is no alternative. SBE requests for exemptions must be channelled via NCP Unit for cabinet agreement. Regulatory authorisations can only be valid for two years, without extensions. This is to be used where: there is insufficient time to correct breaches of TPA. Regulations should rarely be used.

3.3.3 Terminating Anti-competitive conduct: where a potential breach is discovered, consider need to engage in it, and apply public benefit test. If activity is not needed, cease it in consultation with NCP Unit, after considering legal implications if contracts exist

3.3.4 Avoiding TPA Breaches: Good practices include:

· compete in each market using pricing; standard of service; product benefits and other ethical means;

· do not enter contracts which are anti-competitive in terms of ... ;

· don't sell products only as a package if this could substantially reduce competition.(can sell 'packages' if sell items separately for the same total price);

· be careful of agreements that customers will buy all of a product from government;

· don't discuss with competitors matters of competition between you;

· don't allow agreements with competitors to exist or limit behaviour;

· record sources of information received regarding competitors or which influence your market strategy;

· be very careful about small markets or where government has substantial power.

· Consult when in doubt.

3.4 Specific SBE issues: see also Restrictive Trade Practices Processes and Procedures Manual:

3.4.1 Sales and Marketing: (a) Anti-competitive exclusive dealing arises if offer goods on condition that purchaser not acquire goods from competitor (+ examples); (b) Third Line Forcing involves requiring purchaser of one product to take another product from particular source

3.4.2 Business Strategies: Assessing contranention by Joint Ventures requires consideration of price fixing, anti-competitive contracts, exclusionary provisions, and misuse of market power. Exceptions may apply in joint ventures, though an agreement which prevents a person supplying goods to others will be an exclusionary provision or primary boycott. If Joint Venture sews up the market it is misue of market power, but may be accepted if it satisfies public benefit test.

3.4.3 Misuse of Market Power: some SBEs have considerable market power which should not be used to: damage competitor; prevent market entry; or prevent competition in market. Conduct in all markets a SBE operates in will be considered. Examples are given (i) preventing supply of goods to others (ii) cross subsidisation to damage competiors in new market using market power in old (eg can't offer package of items at low cost as bait to get all customer business ) (iii) Predatory Pricing: - which is hard to detect. (iv) Licencing: arises when SBE itself operates in a market where it can issue licences (v) substantial buying power - may misuse buying power if force supplies to give discounts not related to bulk supplies - as this gives SBE cost advantage over its competitors

3.5 Timing: Key dates are (as in TREE).

3.6 Further Information: TPA is difficult and advice should be obtained. Departmental Co-ordinating Compliance Officers should consult NCP Unit when: undertaking a TPA Audit, introducing a TPA compliance program, developing public benefit tests, seeking external legal assistance, analysing whether `carrying on business', ending non-competitive behaviour; needing help with economic concepts; granting statutory exemptions; seeking ACCC authorisation / notification. Restrictive Trade Practices Process and Procedure Manual provides more infomation.

4. Third Party Access:

4.1 Objective is to ensure that infrastructure owners can't prevent competition by denying access to others (eg on telecommunication / electricity distribution networks / rail). Also likely to include pipelines and airports. If infrastructure is not covered by a complying arrangement, Commonwealth access regime will apply.

4.2 Key Issues to be resolved: who determines whether infrastructure should be subject to third party access, and what test should be applied; and how disputes are to be resolved. The Queensland Government is currently addressing this.

4.3 Entities Covered: state owned infrastructure (not Commonwealth or private unless part of a state network) would be covered by state third party access arrangements.

4.4 Timing: operative by late 1995, early 1996

4.5 Future developments will be in guide as the policy develops

5. Prices Oversight

5.1 Objectives of Prices Oversight: to prevent monopoly (or near monopoly) government businesses charging excessive prices. Competition Principles Agreement requires that: oversight be independent of the undertaking being assessed; oversight be applied to all (near) monoploy businesses; submissions be allowed by interested parties; and that recommendataions (with reasons) be published. Prices Surveilance Authority applies to state business enterprises, unless an independent state regime is in place. Queensland is creating a state regime.

5.2 Entities Covered: (near) monopoly GBEs, and some other major business operations - eg coal rail freight

5.3 Timing: as soon as possible , but no later that 1/7/96

5.4 Future Arrangements: More details of this mechanism will be in future guides.

6 Structural Reform of Public Monopolies

6.1 What is Structural Reform: refers to restructuring of businesses or the way market operates, which is important where monopoly power arises. Many large monopolies in Australia (eg water and electricity, sea and air ports] are government owned

6.2 Why is Structural Reform Necessary: introducing competition often requires more than applying the TPA. If competition is to be introduced, must examine market structure, or true competition may not result (eg elsewhere sometimes simply changed a government monopoly into a private monopoly. Introducing competition into a traditional monopoly requires careful consideration of level of competition. This has implications for corporatisation, and commercialisation.

6.3 Key Issues: Mechanisms to solve third party access problems are not definitive, but in introducing competition to traditional monopoly markets, the CP Agreement requires consideration of: removing regulatory responsibility from the monopoly; commercial objectives of the monopoly; separation of 'natural monopoly' from potentially competitive elements; introducing competitive neutrality; assessing merits of CSOs; and of financing relationship between owner and monoploy (eg rate of return, dividends and capital structure)

6.4 Relevance to Queensland: because of corporatisation and commercialisation, Queensland is well advanced in implementing a structural reform program. Examples of how each issue to be considered was applied to electricity industry reform is quoted. Entities corporatised to date include: port authorities (8); QIDC; QIC; electricity industry; and QRail (Suncorp is in progress. Business activities being commercialised include: Administrative Services (many); Department of transport (engineering and design); public housing; DPI (commercal forestry and water); Crown Law; Public Trust; and TAB

6.5 Timing is at government discretion, however affected by competitive neutrality requirements of CP Agreement.

6.6: Future: timetable for introducing competitive neutrality (by June 1996) will detail future corporatisation and commercialisation, and be includedd in future guides

7. COMPETITIVE NEUTRALITY

7.1 What is Competitve Neutrality? When governments compete with private sector, the latter find they are not on equal terms (eg government is traditionally: tax free; not required to pay dividends to owner; and has cheaper sources of finance - using government credit rating). TPA exemption was also a factor. Competittive neutrality applies to removing these inequalities. It is valuable on equity grounds and in terms of efficient use of economy's limited resources. Application of TPA does not remove all of private sector's concerns. CP Agreement proposes reforms to ensure government businesses operate on terms equal to private sector.

7.2 Key Issues: Competitive neurtality requirement applies to `significant business activity' which is not non business / non profit activity of government. Definitions of these concepts will be complete by the end of 1995. For some businesses, CP Agreement recommends corporatisation with: requirement to pay taxes; pay debt guarantee fees; and satisfy equivalent regulations. For commercialised (but not corporatised) business activities, above costs should be included, and `full' costs met. These changes( corporatisation and full costing) only apply where benefits to the community outweigh costs. An appropriate test is being devised. Queensland can determine its own competitive neutrality agenda.

7.3 Relevance to Queensland: Most of the above requirements have already been met by corporatisation and commercialisation processes in Queensland.

7.4 Timing: CP Agreement requires policy statement on competitive neutrality by June 1996 (detailing timetable and complaints mechanism) and subsequent annual reports.

7.5 Future developments: list of significant businesses will be compiled by early 1996, and principles used in developing list, as well as cost / benefit test for use in application to individual businesses. These will be in future versions of the guide.

8. LEGISLATIVE REVIEW

8.1 Why do we need to Review Legislation: legislation can impede competition, eg through creating monopoly or licencing requirements. The TPA can not overcome such restrictions. The legislative review element of NCP requires that legislative restrictions meet a public interest test.

8.2 Key Issues: CPA requires that state legislation should not restrict competition unless: benefits outweigh costs; and objective is only achieved by regulation. Review of legislation should: clarify objectives of legislation; identify restriction on competition; analyse likely effects; assess costs and benefits;and consider alternatives. Review should be on a national basis if several states are affected.

8.3 Relationship with Trade Practices Audit: As TPA is to apply to state governments, Queensland has arranged for an audit to ensure against breaches of TPA. This is separate to (but related) to legislative review under CPA. The former seeks only TPA breaches, where the latter is concerned with any restrictions on competition. Usually the TPA review will be conducted first.

8.4 Legislative Review Process: methods yet to be determined. However it is likely to be: decentralised; concerned only with competition; drawing upon DBIRD's prior regulatory reviews (ie review of business regulations, Regulatory Impact Statements)

8.5 Timing: State has flexibility, but must develop timetable by June 1996; review and reform legislation by 2000; report on progress; review `suspect' legislation every 10 years; and ensure compliance of new legislation

8.6 Future Developments: Criteria and methodology for conducting reviews will be prepared by late 1995, as will cost benefit guidelines.

9. OTHER REFORMS

9.1 COAG Reform Process for Key Industries. As part of NCP development, COAG addressed micro-economic reform in key industries, ie electricity, gas, water and road transport (which are significant for business costs). In April 1995 (when signing the NCP agreements) governments restated commitment to key industry reforms. This is part of requirement for states to gain additional financial assistance, and of value in improving the business environment in any event.

9.2 Electricity Reforms: Major focus is on establishment of a national electricity market, which is to be competitive and commence in 1996. Principles of national electricity market are: separation of transmission and generation elements; establishing interstate transmission network; and removing barriers to interstate trade; electricity industries are to be characterised (in 1999) by: customers ability to choose supplier; access to transmission networks; no regulatory barriers to entry to industry; no interstate barriers. In Queensland this implies (in addition to coproratisation) the establishment of appropriate trading arrangements, and an interconnection to the national grid.

9.3 Gas Reforms: Free and fair trade is to be introduced in gas by July 1996., including: removal of barriers to interstate trade; allowing uniform third party access; defining national pipeline standards; corporatisation of public gas utilities; ending restrictions on gas usage; and separation of transmission and distribution entities.

9.4 Water Reform: Urban and water reforms are to be phased in over 5-8 years. For urban water will have: full disclosure of cross subsidies; user pays pricing; positive rate of return under some circumstances; separation of providers and regulators; and identification of CSOs. For rural water pricing is to: provide financial viability (including disclosure of subsidies); and ensure best water use. New projects will have to be economically viable and ecologically sustainable. Markets for trading water entitlements will be introduced. Regulatory / resource management will be separated from from service delivery. Environmental management, and integrated catchment management will apply to both urban and rural water. Many of these requirements had begun in Queensland, but will gain momentum, and take time to resolve.

9.5 Road Transport reform: Focus is mainly on heavy vehicles, with intention to address road safety, economic efficiency and cost of administration. Initiatives include devising uniform legislation which: can be consistent across Australia; can produce mininmum standards; fosters co-operation between juresdictions, and innovation; and has minimum administrative procedural requirements. The legislation is divided into six modules: heavy vehile charges; vehicle operations; dangerous goods; vehicle registration; driver licensing; compliance and enforcement. A package is to be available by early 1997. Queensland's Transport Operations (Road Use Management) Act 1995 provides basis for implementing national road transport legislation

APPENDIX: BENEFITS OF MICR-ECONOMIC REFORM

One of Governments' obligations is to improve the living standards of citizens, which requires effective performance by the public sector, and an environment conducive to best private sector performance. Governments in Australia and overseas have embarked on micro-economic reform, based on the idea that the community is best off if markets are as competitive as possible.

If Australia is to prosper, it must improve productivity and international competitiveness of its firms and institutions, by all becoming more efficient, innovative and flexible. There has been worldwide recognition over the past decade of the role of competition in spurring improved performance and responding to changing circumstances. Competition offers promise of lower prices / improved choices for consumers; and greater efficiency, higher economic growth and better job prospects. Competition policy is a significant component of micro-economic reform.

Only some of the benefits of microeconomic reform are immediately obvious (eg price reductions for consumers). Others can be obscure and take a long time (eg allowing firms to use their time productively producing goods, rather than complying with red tape).

To understand microeconomic reform need to distinguish between macro and micro economics. Macroeconomic policy is mainly a matter for the Commonwealth which can directly influence the overall level of taxes and government spending; and indirectly affect things like interest rates and the level of investment and savings. Such changes have widespread impacts on the economy generally.

Microeconomics however focuses at the industry level. Micro-economic reform is implemented by three levels of government. It involves: reform / removal of legislation which impacts on business; tariff reduction; labour market reform; and reform of GBEs (such as corporatisation, commercialisation or contracting out). Goal is to better utilise resources within society.

Microeconomics seeks economic outcomes which: produce goods cheaply; ensures that prices are similar to costs; and best investment decisions are made. Experience indicates that these conditions are likely to best utilise resources. When goods and services are provided by government at a subsidy (which others have to pay) those services tend to be over-utilised, resulting in premature need for further investment. Overpricing discourages use of facilities and results in under-utilised capacity. Thus correct pricing is a key part of micro-economic reform. When the Hunter Water Board introduced 'users pays' for water pricing, demand growth slowed and need for the new dam was deferred for 30 years. But if markets are not contestable then incentive to drive the above three pre-conditions is usually absent.

Thus the best use of limited resources follows from: ensuring competition (or that what happens is like what would happen under competition). The goal is not competition for its own sake, or maximum output, but to get the most from the limited resources at our disposal.

Social concerns, service standards and quality are not undermined by microeconomic reform, but rather reform allows these to be more thoroughly evaluated by government. For example, corporatisation allows direct funding of uneconomic rail lines to achieve social and regional development ends (through community service obligations). Also restructuring of GBEs involves establishing performance monitoring regimes which incorporate service standards. Social policies can be continued, and better value for money obtained .

Gains from Microeconomic Reform: An extensive microeconomic reform program has been underway in Australia since the early 1980s. National Competition Policy (which aims to increase the level of competition across the entire economy) is recent extensive example. It will increase gains by further exposing the public sector to the same competittive disciples as the private sector.

In Queensland such reform has occurred for some time through: corporatisation to allow major government business enterprises to operate on a commercial basis (eg corporatisation allowed electricity tariffs to be frozen; and explicit agreements to be put in place which link social services with quality standards); competittive tendering for road construction and maintenance has produced large savings; many reviews of legislation have occurred resulting in savings to business; enterprise bargaining was introduced; government telecommunications needs have been brokered out to a private company which aggregates demand and negotiates best tariff (resulting in $18m saving)

Similar reforms have occurred around Australia eg resulting in reduced prices for telecommunications; reduced container costs on waterfront; subsidies implicit is statutory agricultural marketing; savings to consumers from trading enterprises reform in NSW; reduced airfares from ending of two airline policy; cheap international and long distance telecommunications;

Microeconomic reform has been pursued internationally eg: dramatic turnaround in performance of NZ Post; substantial savings in NZ electricity; substantial savings in cost of air traffic control equipment;

Microeconomic reform has costs as well as benefits, though benefits are harder than usual to measure, and have been obscured by recession. Factors to consider are: slow emergence of benefits; benefits are spread widely, while costs are concentrated; costs can be directly attributed, more easily than benefits; different aspects of reform interact, requiring complementary actions. The goal of reform is to increase flexibility in responding to change. While costs can be eliminated in short term without reform, the result is that these costs simply increase over time.

In conclusion, benefits can be understated as it is not possible to make simple before and after statement (as so many other changes are going on). National Competition Policy will create a more coherent approach (and thus greater benefits) than could any government in isolations). Benefits have been estimated by the Industry Commission. Australia can not stand still, and must strive for more competition in sectors where such pressures were traditionally limited (especially in government). Failure to do so reduces benefits at home, and our abiltiy to export.