Agribusiness Perspectives Papers 1997/98

Paper 19
ISSN 1442-6951

PLANT AND ANIMAL HEALTH REGULATION: SOME COMPETITION POLICY ISSUES

Nick Milham and Scott Davenport

Program Leader Industry Policy Sub-Program, Economics Services Unit, NSW Agriculture and General Manager, Economics Services Unit, NSW Agriculture

Abstract

To meet their commitments under the Competition Principles Agreement, Commonwealth, State and Territory Governments are reviewing legislation that restricts competition. In relation to agriculture, the focus of the policy to date has been on statutory marketing legislation, with less emphasis placed on legislation aimed at influencing production processes. In this paper, plant and animal health legislation is briefly examined to provide an initial assessment of how these arrangements restrict competition. This is followed by a discussion of the market failure rationales for such arrangements and consequent issues that warrant consideration in public benefit assessments. Conclusions are reached concerning appropriate legislative objectives and design principles, and guidelines for determining who should pay for regulatory intervention to control plant and animal diseases.

1. INTRODUCTION: COMPETITION POLICY 

The Competition Principles Agreement was endorsed by all members of the Council of Australian Governments (COAG) in April 1995. The Agreement commits Australian Governments, by the year 2000, to review legislation that restricts competition.

The Agreement requires that legislation should not restrict competition unless it can be demonstrated that the benefits to the community as a whole outweigh the costs, and that the objectives of the legislation can only be achieved by restricting competition.

In undertaking legislation reviews, Governments agreed that:

• the objectives of legislation will be clarified;
• the nature of the restriction will be identified;
• the likely effects of the restriction on competition and the economy generally will be analysed;
• the costs and benefits of the restriction will be assessed and balanced;
• alternative means for achieving the same result will be considered;
• any new anti-competitive legislation must conform to the net public benefit principle; and
• retained anti-competitive legislation must be reviewed at least once every ten years to determine if it is still required.

In assessing the costs and benefits of particular legislation, COAG agreed that the following matters, where relevant, will be taken into account:

• government legislation and policies relating to ecologically sustainable development;
• social welfare and equity considerations, including community service obligations;
• government legislation and policies relating to matters such as occupational health and safety, industrial relations and access and equity;
• economic and regional development, including employment and investment growth;
• the interests of consumers generally, or of a class of consumers;
• the competitiveness of Australian business; and
• the efficient allocation of resources.

As part of their commitments under the Competition Principles Agreement, some Australian Governments have undertaken to review their plant and animal health Acts. The various Commonwealth, State and Territory Acts which relate to plant and animal health, and the subset of those which Governments have nominated for review, are listed in Table 1.

In addition to assessing whether restrictive provisions within Acts generate net public benefits, Competition Policy reviews are required to assess whether they do so in a manner which least restricts competition. Given general acceptance of the need for some degree of government involvement in disease control, the extent to which current legislation is least restrictive in achieving socially optimal levels of disease control is likely to be a key concern of plant and animal health legislation reviews.

2. BACKGROUND: NSW PLANT AND ANIMAL HEALTH LEGISLATION

The following sections provide a brief overview of a selection of plant and animal health legislation in NSW. These sections and the Attachment draw heavily on material in NSW Agriculture (1998). In general, similar regulatory interventions exist in other jurisdictions in Australia (see Table 1).

(a) Exotic Diseases of Animals Act 1991 

The NSW Exotic Diseases of Animals Act 1991 facilitates the detection of and response to outbreaks of exotic (foreign) diseases which are capable of serious and widespread effect on animals. The Act relates to diseases such as foot and mouth disease and rabies. Its aims are:

• to identify disease risk areas with possible prohibitions or restrictions applying to the movement of animals, animal products, or vehicles into, out of, or within the area concerned;
• to require compulsory reporting of disease outbreaks;
• to provide compensation for animals destroyed for the purposes of controlling an exotic disease;
• to establish border barriers, with a ban on the introduction into the State of certain animals; and
• to authorise the giving of destruction orders.

Inspectors may enter and search premises and vehicles; inspect animals, their fodder and fittings; and test or disinfect animals.

(b) Plant Diseases Act 1924

The aim of the NSW Plant Diseases Act 1924 is to prevent the introduction into the State, and into protected areas within the State, of diseases or pests affecting plants or fruit. The purpose of the Act is to eradicate and prevent the spread of such diseases or pests, and it regulates the sale and packing of fresh fruit and vegetables.

The Act applies to owners and occupiers of premises where plants, fruit and vegetables are produced, transported, stored and marketed.

The Act also permits the declaration of quarantine areas; the establishment of quarantine stations for treatment, inspection and grading of plants; and allows the control of storage, carriage and movement of some items.

Inspectors under the Act have various powers including the power to:

• enter and search land, premises, vehicles, and vessels for plants, fruits, coverings, or other items if there are reasonable grounds to suspect either an infection or that the Act is being contravened;
• seize plants, fruits or other items dealt with in a manner contrary to an inspectors directions, proclamation, regulation or order;
• serve notices and to take prescribed measures to prevent the spread of pests and diseases;
• impose quarantines to prevent the spread of pests and diseases; and
• destroy infected plants.

(c) Stock Diseases Act 1923

The aim of the NSW Stock Diseases Act 1923 is to control and eradicate diseases in stock and to prevent the spread of stock diseases to other stock and to humans.

Proclamation under the Act can:

• declare diseases to be subject to the Act; and
• restrict or prohibit the importation of stock, carcases, fodder, fittings, animal products and other items, from any State or country where there is reason to believe that a disease exists.

Notifications under the Act can:

• declare quarantine areas for suspected presence of disease;
• declare protected areas for specified diseases and prohibit or fix conditions on the bringing into any such area of stock, carcasses and fodder;
• require that stock inside a protected area be tested for disease and be treated by preventative or curative methods;
• require the closing of roads and the building of fences and gates across roads to prevent or regulate stock movement inside a quarantine or protected area;
• declare quarantine lines and set conditions for stock crossing such lines; and
• authorise an order for the destruction of infected stock.

Inspectors authorised under the Act have extensive powers relating to the control and eradication of disease. An inspector who is a veterinarian can, with Ministerial approval, destroy or order the destruction of infected stock, property or buildings which cannot effectively be disinfected.

All cattle (and pigs) sold, sent to a saleyard or sent to an abattoir must be identified by a registered tag (or swine brand) in accordance with the Act.

3. CLARIFYING THE OBJECTIVES OF THE LEGISLATION

The aim of Competition Policy reviews is to improve social welfare throughout Australia by promoting reform of regulation that unnecessarily restricts the free operation of markets and thereby imposes efficiency costs on the economy.

As noted in section 1, the first step in Competition Policy reviews is to clarify the objectives of the legislation. For a restriction on competition to be retained, achievement of the fundamental social policy objective underpinning the legislation must depend on that restriction being in place. It follows that determination of whether or not a competition restriction is necessary, therefore, critically depends on there being a clear definition of the desired outcome.

Very little, if any, agricultural legislation incorporates objectives which clearly identify the outcomes intended to be achieved. Moreover, it is not uncommon for the record of Parliamentary debates associated with the passage of bills to also provide little information on the intended outcomes. Agreement by Australian Governments to the legislation review component of the Competition Principle Agreement containing a requirement to clarify Act objectives suggests that this is the general case with legislation in all jurisdictions.

Traditionally, the stated objectives of agricultural legislation tend to be process oriented. That is, they focus on the way things are to be done rather than on the outcome that is intended to be achieved. Objectives such as to constitute a commodity marketing board or to control the use and possession of pesticides or to control and eradicate diseases in stock are therefore common. Statements such as these beg the question of why the particular legislative intervention was considered necessary and do not reveal what benefits the government of the day envisaged either the people directly concerned, or the general public, would derive from the provisions of the Act. For example, why is it thought that the community as a whole is made better off by regulating the marketing of a commodity, and what is the problem with uncontrolled possession and use of pesticides, and why are diseases in stock a problem that government should be interested in addressing?

From a policy perspective, the reasons for government intervention in the agriculture sector relate to matters such as:

• maintaining human welfare (expressed as concerns about issues such as health, food safety, consumer protection and farm family incomes);
• growth of the economy (expressed as concerns about issues such as farm productivity, market imperfections [spill-overs and free-riders] causing over and under-investment, and protection of international trade);
• protection of the environment (expressed as concerns about issues such as sustainable resource utilisation and the use of chemicals); and
• protection of animal welfare (expressed as concerns about issues such as livestock management and veterinary practices and the use of veterinary chemicals).

It is on achievement of fundamental objectives of this nature that Competition Policy now requires legislation to focus. For example, cursory examination of the Stock Diseases Act 1923 suggests that it is primarily concerned with maintenance of agricultural productivity by preventing disease spread. Closer scrutiny of the Act and dialogue with industry and those administering the Act reveals, however, a range of other objectives relating to animal welfare, protection of human health and minimising negative impacts on export trade.

Where legislation fails to contain a clear statement of its public objectives, there is greater likelihood that such legislation will be changed over time to address ad hoc issues as they arise, that the original purpose of the legislation will be lost, and consequently, intervention by government will become less effective.

4. RESTRICTIONS ON COMPETITION

The phrase 'restricting competition' can mean obvious and major restrictions, such as restricting entry to an industry, setting prices or banning certain commercial behaviour. However, it may also include restrictions where the effects are more subtle. A definition which can be applied is that a restriction on competition occurs when the investment or market behaviour of individuals or firms is changed from that which would otherwise occur.

Some of the major restrictive provisions of plant and animal health legislation in NSW are outlined in the previous section and are more fully detailed in the Attachment. Generally, these provisions have the effect of changing how animals and plants are managed relative to what might otherwise occur in a disease control situation.

In the absence of legislated restrictions, owners of diseased stock and plants may face fewer incentives to undertake control, resulting in increased numbers of diseased stock and plants being traded, with an associated increase in disease spread. In the short term, disease control regulations may impose financial costs on the farm sector, resulting in higher production costs and reduced industry supply. In the longer term, by reducing the incidence of disease, production costs may be reduced and industry supply increased. In the context of an endemic disease limited in effect to industry, the benefit cost equation therefore becomes one of assessing the net effect on industry supply. To the extent that investment by the agricultural sector in disease control is increased, it follows that there may also be inter-sectoral effects as resources are attracted to agriculture from other sectors of the economy.

The relevant benefit cost assessment may not have agriculture as its primary focus. For example, regulatory arrangements often aim to address spill-overs from industry to other sectors of the economy, such as reducing the impact of plant and animal diseases on human health and the environment. Supply response in those sectors then becomes relevant to the public benefit assessment, and quantification necessarily involves complex models.

Where plant and animal health legislation is effective in targeting appropriate disease problems, and where it does so with minimal competition effects, it follows that the public benefits from such an arrangement will be maximised. Consequently, key concerns to be considered in Competition Policy reviews of plant and animal health legislation are:

• ensuring appropriate processes are in place to assess whether disease problems warrant government intervention, such as ex ante assessments of industry and public costs, and the likely effectiveness of intervention;
• ensuring flexibility in regulation to provide for differential responses to disease problems; and
• since many diseases readily cross state and territory boundaries, consistency across jurisdictions.

5. MARKET FAILURE: A PREREQUISITE FOR PUBLIC BENEFITS

In undertaking Competition Policy reviews the Competition Principles Agreement requires Governments to take a range of factors into account. These are listed in section 1 and include factors such as ecological sustainable development, social welfare and equity considerations, and economic and regional development.

The Agreement states that these various factors should be taken into account "where relevant". The problem of assessing where these factors are relevant can be resolved by reference to market failure considerations (see Figure 1), and indeed, most of those factors which Australian Governments have agreed will be taken into account, have market failure characteristics.

FIGURE 1

Those market failures which are most relevant to plant and animal disease control relate primarily to spill-over effects (externalities) and information deficiencies. For example, the inability of stock and property owners to avoid reinfection/reinfestation of endemic diseases and pests from other properties may result in industry wide under-investment in disease control. This may in turn lead to disease spread and reduced production at an industry level. It is generally accepted that in these circumstances more socially desirable levels of disease control may therefore be achieved through a coordinated industry response, whereby all beneficiaries contribute to control measures.

Care needs to be taken, however, with the under-investment hypothesis. Its static nature can result in an overstatement of the problem and its associated costs. For example, the inability of an individual farmer to control certain diseases due to spill-overs from other properties will normally invoke compensating behaviour such as various forms of input or output substitution (i.e., the development of disease resistant varieties). It follows that it is necessary to account for this type of dynamic in quantitative methods used to assess the benefits and costs of regulation.

Achieving socially optimal levels of investment in situations involving productivity spill-overs within industry may require only minimal levels of intervention, such as the provision of information about possible control procedures and good management practices. Self-regulatory arrangements such as accreditation programs may be a further option depending on factors such as the availability of information about disease transmission and status. Where spill-overs persist, compulsion through regulation may be warranted, however, a sequential assessment of how well less restrictive options meet the intended objective is a necessary prerequisite. The critical underpinning of this requirement is an appreciation of the significant industry and public costs which can arise from the over-zealous application of regulatory measures.

Spill-overs from industry to other sectors of the economy typically generate significant interest in terms of government involvement in control. It is generally accepted that avoiding significant human health and environmental effects will generate significant public benefits. Non-endemic (exotic or foreign) diseases imported from overseas are also an important focus of plant and animal disease control legislation.

In terms of regulatory best-practice, an issue which arises from there being a multitude of spill-over scenarios, is whether it is more appropriate to design generic legislation to address disease problems regardless of their source, instead of having legislation specific to exotic diseases, or specific to plant and animal diseases, as currently exists. That is, using the source of a disease, or the fact that it relates to animals or plants as the basis for legislation, may serve only to promote inconsistencies in how governments become involved in disease control.

6. WHO PAYS?

A significant issue with respect to disease control is determining who should pay. Despite the contemporary trend to government intervening on a cost recovery basis (public goods and community service obligations excepted), disease control remains an area characterised by significant levels of government funding. More recently cost sharing formulae between industry and government have been developed based on assumptions about the mix of 'industry' and 'public' benefits from disease control.

Administrative difficulties associated with the cost sharing approach are the need to split public contributions between Commonwealth and State Governments, the need to split industry contributions between industry groups, and the need to assess relevant costs to be included in industry and government contributions.

Of greater significance, however, is that while the concepts of private, industry and public benefit have been promoted by economists, such terms are open to misuse through creative interpretation, or when they are used in a manner which fails to acknowledge that most goods consist of a complex mix of private, industry and public characteristics. To the extent that the cost sharing approach is accepted, a concern is that a system is created whereby economic rents may be pursued by using biased and inaccurate definitions of what constitutes industry and public benefits in order to maximise public contributions. For example, definitions of industry benefit which are restricted simply to the avoidance of production losses, rather than also incorporating price effects, will tend to understate the benefits received, and hence, the industry cost share.

Cost sharing arrangements based on 'neat' delineations of industry and public benefits, tend to be justified on the need to pursue 'beneficiary pays' principles and the problem of beneficiaries being diverse and not easily identified. The main reason offered for not pursuing a 'polluter pays' approach is that it is only on rare occasions that the source of the disease incursion can be identified. The problem, however, seems to be overstated given the possibility of levying farmers on an industry basis for disease control. A useful discussion of the merits of the 'polluter pays' approach over the 'beneficiary pays' approach is contained in Marshall (1998).

Importantly, adherence to the 'beneficiary pays' approach precludes the use of markets to efficiently distribute the incidence of disease control costs along the production chain and on to those particular consumers who benefit from disease free plant and animal products. It further prevents the possibility of disease control costs being treated as a normal production cost, such as investments in measures to manage other business risks (eg. price and climate variability).

Moreover, simplistic use of the 'beneficiary pays' principle to underpin cost-sharing arrangements in plant and animal disease control may inappropriately lead to all public benefits associated with such control being identified as relevant in determining the public share. It is not realistic or efficient for government to contribute to the cost of all public benefits which society enjoys (on those grounds, every home-owner who maintained a beautiful front garden would be subsidised on the basis of the spill-over benefits enjoyed by passers-by). Rather, as outlined earlier, the role of government is to intervene as and where necessary to ensure the achievement of socially desirable outcomes that would not otherwise be delivered by the market.

This concept of the role of government explicitly recognises that activity undertaken by private agents purely for private benefit purposes may also generate public benefits. Where there are sufficient private incentives to encourage activity that delivers incidental public benefits, there is no efficiency justification for a public contribution to the cost of the activity. Government intervention is only warranted where the public benefits delivered by the market differ significantly from those which are considered socially desirable. In other words, there is a strong economic case for government contributions to cost sharing arrangements to relate only to a proportion of the public benefits generated.

It follows that the case for public financing of plant and animal disease control arrangements depends, first, on an assessment that the public benefits generated at the privately profitable level of investment in control by the agricultural industries concerned, are in some way inadequate. Second, and crucially in the context of Competition Policy, the proposed intervention must be shown to be the least competition restricting way of achieving the additional public benefits sought.

The concerns expressed above obviously favour industry meeting a higher share of the costs of disease control than is generally the case at present. Consistent with this approach there is currently increasing interest in contingency funds and insurance arrangements at either the individual or industry level to finance regulatory intervention for disease control purposes.

7. CONCLUSIONS

Competition Policy reviews have tended to focus on statutory marketing legislation. Lesser importance has been placed on legislation which influences production processes, such as plant and animal health legislation, as reflected in inconsistencies between jurisdictions in nominating this type of legislation for review.

Plant and animal health legislation is necessarily highly competition restricting. Therefore, unless it is well designed and used to address appropriate disease issues, it can result in significant income transfers and public costs. To avoid this problem, areas of focus for Competition Policy reviews include the following:

• Legislative objectives need to reflect outcomes rather than processes. Generic legislation capable of effectively addressing disease outbreaks irrespective of particular classes of spill-over, or the disease source, may offer considerable benefits. The objective of this legislation may then simply be expressed as "enabling disease control where significant public benefits can be identified".
• Legislation design will remain highly competition restricting given the need to act quickly in many situations to avoid disease spread. However, there may be scope to better integrate restrictive legislation into a package of disease measures which first encourages the use of less restrictive arrangements, such as accreditation and insurance schemes, where these are appropriate. In this way industry and public costs associated with the over-use of prescriptive regulatory measures will be minimised.
• Who pays for regulatory disease control measures will be an ongoing issue for industry and government. Cost sharing arrangements based on the beneficiary pays principle have significant shortcomings, not the least of which are:

1. their failure to rely on markets to distribute the incidence of disease control costs to the beneficiaries of disease free plant and animal products; and
2. the precedent they set for all public benefits to be funded by government.

Consequently, this form of funding arrangement appears likely to fail the requirement of Competition Policy that the objectives of legislation be achieved in a manner which least restricts competition.

References

Marshall, G.R. (1998), Economics of cost-sharing for agri-environmental conservation, contributed paper to the 42nd Annual Conference of the Australian Agricultural and Resource Economics Society, University of New England, Armidale, January.

National Competition Council (1997), Legislation Review Compendium, National Competition Council, Canberra, April.

NSW Agriculture (1998), Review of Legislation Relating to the Health of Agricultural Plants and Animals: Issues Paper, NSW Agriculture, Orange, November.

Attachment

Competition Restrictions in NSW Plant and Animal Health Legislation 

Exotic Diseases of Animals Act 1991

• Declarations of infected places/vehicles (Sections 10 and 11).
• Declaration of restricted areas (Section 15).
• Declaration of control areas (Section 21).
• Issuing of destruction orders (Sections 32 and 34)
• Making of quarantine orders (Section 35).

Inspectors have powers of search, entry, seizure and destruction (Sections 41, 42, 45 and 48)

• Penalties may be imposed.
• Compensation is payable (Sections 54 and 55).

Plant Diseases Act 1924

• Regulate or prohibit the importation, introduction, or bringing into the State, or part of the State plants, fruit etc likely to introduce any disease or pest (Section 4).
• Appointing ports or places of entry into the State of specified plants or fruit (Section 5).
• Appointment of quarantine stations and declaration of quarantine areas (Sections 5b and 6).
• Accepting the undertaking of an owner to control disease (Section 7).
• Prohibiting the removal from any place of any plant or fruit (Section 5(1)(d)).
• Serving owners or occupiers notices requiring control measures to be undertaken (Section 15).
• Inspectors have extensive powers of search, entry, seizure and destruction (Sections 9, 13, 14 and 17)
• Issuing of destruction orders (Section 21)
• Penalties may be imposed.
• There is no entitlement to compensation for anything done under the Act (Section 25).

Stock Diseases Act 1923

• Imposing a quarantine and requiring stock to be confined to the specified land or to a quarantine area (Section 8 (1)(c)).
• Declaring protected areas and restricting or prohibiting the movement of stock into the area (Section 11A).
• Regulate or prohibit the importation of stock into the State.
• Accepting an undertaking of an owner instead of quarantine to control disease (Section 14).
• Establishing quarantine lines with conditions applying to stock movement across the line (Section 15).
• Closing specified roads, stock reserves and public places to stock (Section 15B).
• Inspectors have powers of search, entry, seizure and destruction (Sections 7(1)(b), 8(1)(b), 12A, 16(2), 19 and 19R).
• Issuing of destruction orders (Section 17).
• Penalties may be imposed.
• There is no entitlement to compensation for anything done under the Act.

TABLE 1: Plant and Animal Health Legislation Administered by Commonwealth, State and Territory Governments 

*Legislation listed for review under the Competition Principles Agreement (National Competition Council 1997).