National Competition Policy in Australia

Two propositions• Competition

essentially drives productivity

• Competition best way to simultaneously drive growth and reduce income inequality

• Productivity drives national differences in GDP per capita

• Especially when pro competition reform reduces entrenched market power

1. Extend competition to all sectors

2. Strengthen and widen the reach of competition regulation

Two pronged approach

AUSTRALIA’S RELATIVE DECLINEPer capita GDP (PPP) ranking in OECD

Australia ranked 14th in 1983

Australia ranked 4th in 1950

TOTAL FACTOR PRODUCTIVITY GROWTH, 1980 - 1990

%, average annual rate, OECD countries

Australia with poor productivity performance

OECD weighted average

MAJOR NATIONAL COMPETITION POLICY ELEMENTS Policy Element Example 1. Limiting anti-competitive conduct of firms Competition conduct rules

2. Reforming regulations which unjustifiably restrict competition

Deregulation of egg marketing

3. Reforming the structure of public monopolies to facilitate competition

Restructuring of energy utilities

4. Providing third-party access to certain facilities that are essential for competition

Access arrangements for the telecommunications network

5. Restraining monopoly pricing behaviour Prices surveillance

6. Fostering “competitive neutrality” between government & private business

Requirements for government businesses to make tax-equivalent payments

EXAMPLE OF INFRASTRUCTURE CHANGESFROM TO LATE 1980S LATE 1990S (USUALLY)Telecommunications Government owned Telcom fully

vertically integrated, essentially no competition

Pro-competition access regime plus auction of new licences creates many fixed line and mobile competitors

Electricity Each State owns a vertically integrated

monopoly that faces no competition Many electricity generation companies/retailers

compete nationally across an interconnected east coast grid

Gas Trading only within State boarders,

many barriers to trade Interstate free gas trade; third party access

regime to gas pipelines.

Rail Freight Each State has own rail freight

monopoly, which is vertically integrated, and is loss making

Two privately owned competitors operating nationally formed out of previous State entities with separate rail track company

Road Freight Different rules means trucks often

cannot cross State boarders National road freight rules and user charging, a

national road freight market. Aviation Separate publically owned domestic and

international airlines, the latter strongly protected from competition

Qantas privately owned and flying domestically and internationally in an “open skies” environment

Rural Water Non tradable virtually free water

entitlements create static water usage, particularly to low value activities

World leading water trading regime that separates water property rights from land title and allows temporary and permanent trading

Urban Water Non cost reflective pricing; in some

cases no usage based charges

Largely cost reflective pricing; many cross subsides removed

EXAMPLES OF OTHER REFORMS 1. Deregulation of retail

trading hours6. Removed restrictions on

health professionals

2. Reduced controls on liquor licensing

7. Free up grain export marketing

3. Reduced business licensing ‘red tape’

8. End price and supply restrictions on eggs and poultry

4. Streamlined development assessment processes

9. Remove dairy price and supply controls

5. Removed restrictions on the legal profession

10. Phase out non transferable fishery management licences

FORECAST GROWTH AND REVENUE BENEFITS FROM NCP CHANGES

1995 $

GROWTH Real GDP 5.5% $23 billion pa Real consumption $9 billion pa $1,500 per household Real wages 3% increase Employment 30,000 more jobs

REVENUE Commonwealth $5.9 billion States; Territories, local government State

$3.0 billion

CONTRIBUTION TO GDP GROWTHPercentage points

Total 2.5% increase GDP

INCREASE IN REAL INCOMES FROM NCP REFORMS

% change, 1989-90 to 1999-00

Household Income

EXAMPLE SPECIFIC SECTORAL GAINS

• Electricity prices fall 19% from early 1990s to 2004

• Some coal rail freight rates fall 42% in second half 1990s

• Average telecoms charges fall by 29% for business and 17% for households from 1996-2003

TOTAL FACTOR PRODUCTIVITY GROWTH, 1990-2000 VS. 1980-1990

Percentage Points, difference between average annual growth

OECD weighted average

Strong Australian

performance

REAL GDP GROWTH, AUSTRALIA VS OECDPercentage Points, difference between average annual growth

The National Competition Policy comes into effect

AUSTRALIA’S RELATIVE DECLINE AND RESURGENCEPer capita GDP (PPP) ranking in OECD

Australia ranked 4th in 1950

Australia ranked 14th

in 1983

Australia back to 5th in 2008

Prior to the NCP reforms Australia had experienced a decades-long debate over tariff reform

The Australian economy was performing poorly; challenges set by Treasurer and Prime Minister

With removal of the tariff wall, Australian industries were exposed to international competition, and had to adapt so demanded lower input cost structure

The public had the gains quantified by the respected Industry Commission

There was strong political leadership

Why the NCP reforms occurred

The formation of the Council of Australian Governments (COAG) brought together Australia’s Prime Minister and all State and Territory leaders to drive reform

While the main work was usually undertaken by industry experts, central agency people were closely involved

COAG created a new institution, the National Competition Council (NCC), as an independent body to assess the progress of all governments on implementing their agreed reforms

To encourage reform, the Federal Government established National Competition Payments

Formation of ACCC

How the reforms were achieved

Ten lessons1.Prepare the ground well

before proceeding with reform

6. Provide generous financial assistance and/or incentives

2. Pursue reform on a board front

7. Get industry structures right

3. Formulate a well structured agenda that is not cluttered

8. Avoid seeking “national champions”

4. Bring high level political drive and constant attention

9. Privatise for competition and efficiency, not for maximum sale proceeds

5. Set a considered, not a frenetic pace

10. Remember that deregulation does not mean no regulation