Agribusiness Review - Vol. 4 - 1996

Paper 2
ISSN 1442-6951

National Competition Policy and Statutory Marketing Authorities

Anne Nolan
 Assistant Under Treasurer (Commercial) Treasury Department, Western Australia.

Based on an address presented at a pre-Conference workshop, Agribusiness Association of Australia Annual Conference, Fremantle, Western Australia, 20 August 1996.

• Introduction
• Background
• Competition policy style reforms
• What is the National Competition Policy Package
• Conduct code
• The Competitive Principles Agreement
• Outcomes of the Package
• National Competition Policy and Related Reforms Agreement
• Institutions
• Impact on Statutory Marketing Authorities
• The Trade Practices Act
• Legislation Review
• Competitive Neutrality
• Conclusion

Introduction

National Competition Policy is a policy, which is likely to have far-reaching ramifications for our economy over the next few years. The objective of this paper is to explain key elements of the National Competition Policy Agreement (CPA) and to provide some insights as to its implications for statutory marketing authorities (SMAs). The approach I will be taking is to:

• outline what the National Competition Policy is;
• present the major elements of reform in the Agreement; and
• raise some of the considerations that statutory marketing authorities will need to face regarding competition policy.

Background

First I would like to provide a little background to competition policy, and why it is such a significant public policy issue. The pressures of globalisation on the Australian economy in the late 1980s and 1990s highlighted the need to ensure that the Australian economy was as competitive as possible. This raised the need to re-examine the approach to competition policy across Australia.

First I would like to provide a little background to competition policy, and why it is such a significant public policy issue. The pressures of globalisation on the Australian economy in the late 1980s and 1990s highlighted the need to ensure that the Australian economy was as competitive as possible. This raised the need to re-examine the approach to competition policy across Australia.

In the past the major components of Australian competition policy were embodied in the Trade Practices Act. There were deficiencies in the application of the Trade Practices Act - particularly in terms of application to government owned businesses and unincorporated business including the professions.

At the same time, most of the States were vigorously pursuing microeconomic reform and taking a more pro-competition policy stance. Nevertheless, there were significant divergences in the achievements that were being made across the nation in competition reform.

Against this background State, Territory, and Commonwealth Governments commissioned the Hilmer review. This review formed the basis of National Competition Policy, which was agreed to by all State, Territory, and Commonwealth jurisdictions at the Council of Australian Governments (COAG) meeting held in April 1995.

Fundamental to National Competition Policy was the need for a uniform approach to competition - with exceptions to be justified on the grounds of public interest. The philosophy centres on the proposition that market forces are generally the best way of making resource allocation decisions, with efficient resource allocation being fundamental to a growing and thriving economy.

But, I would also hasten to add that markets can and do fail - governments have a clear role in ensuring that outcomes are achieved which overcome such failure. National Competition Policy clearly recognises this. That is, competition is not being pursued for its own sake but rather for the additional benefits which it can bring to the community. Inclusion of public interest considerations, which encompass environmental social and economic concerns, was made explicit in the National Competition Policy.

While National Competition Policy provides for a national approach at a policy or principle level, substantial flexibility and responsibility for implementation, timing, and agendas remains with each jurisdiction. Local issues and priorities can therefore be taken into account within this national approach.

Why we should proceed down the National Competition Policy path is quite clear the economy will be stronger from the pursuit of these reforms, and this will enhance the standard of living for Australians.

The Industry Commission has estimated that the package will generate substantial economic benefits. While precise figures should not be read too literally, the order of magnitude of the potential benefits in terms of national output is too great to ignore. The Industry Commission estimated these benefits to be $23 billion - ie 5.5 per cent higher than current output.

The Commonwealth and States agreed that as a condition for signing the National Competition Policy Packages, the Commonwealth (subject to all the obligations of the package substantially being met) would provide additional finding to the States. This recognises that while the States in the main are undertaking the reforms, the Commonwealth, through income and company tax, is the main financial beneficiary.

Competition policy style reforms

Before turning to the detail of National Competition Policy, I would like to mention some of the reforms, which the Government of Western Australia has taken, and which are consistent with the National Competition Policy:

• separation of the State Energy Commission of Western Australia (SECWA) to form the corporatised AlintaGas and Western Power;
• establishment of the Office of Energy with regulatory functions;
• separation of the Water Authority of Western Australia (WAWA) into a water utility, the Water Resources Commission, and the Office of Water;
• the restructuring of Transperth to form MetroBus - a public transport provider, leaving the Department of Transport as a public transport coordinator;
• the introduction of income and wholesale sales tax equivalents for Government Trading Enterprises (GTEs);
• the introduction of debt guarantee fees;
• the corporatisation / commercialisation of major GTEs;
• deregulation of the gas supply market in the Pilbara region of Western Australia;
• deregulation of the freight transport market, thus subjecting Westrail to fill competition;
• the introduction of open access to Western Power's high voltage transmission system; and
• provision of access for the National Rail Corporation to Westrail's track and infrastructure for interstate rail freight movements.

What is the National Competition Policy Package

The National Competition Policy Package (the 'package') is a set of principles that are intended to enhance competition. A key point to remember is that the National Competition Policy essentially provides a framework for reform. what this actually means

for individual entities, particularly in the public sector, will 6 nly be able to be ascertained following careful consideration of entities' individual circumstances such as their structures, operations and policies.

The package of reforms is about promoting competition in business - both in the public and private sectors - regardless of ownership structures. A particular focus is removing the protection from competition that many government bodies have traditionally enjoyed.

The aim of the package is to stop the protection of monopolies, facilitate competition, and provide uniform national protection of business and consumer rights.

The Competition Policy Package has a substantial structure, which comprises:

• legislation at the Commonwealth level (the Competition Policy Reform Act, Commonwealth of Australia 1995) and in all States and Territories; and
• three Agreements:
• the Competition Principles Agreement;
• the Conduct Code Agreement;
• the Agreement to Implement National Competition Policy and Related Reforms.

There are two broad reform areas, namely:

• The extension of the Trade Practices Act (TPA) competitive conduct rules, to all businesses, including government entities through State legislation; and
• The Competition Principles Agreement, which requires the application of, agreed principles (the competition principles) on competitive neutrality, price oversight, legislation review, access to essential facilities, and the structural reform of monopolies.

Conduct code

This agreement obliges the State to pass legislation, which amongst other things, extends the scope of Part IV of the TPA to all situations - where it is considered that "business is being carried on". Part W contains provisions which prohibit anti-competitive conduct, including:

• anti-competitive arrangements;
• misuse of market power;
• exclusive dealing;
• resale price maintenance; and
• mergers which substantially lessen competition.

The TPA will apply to all persons carrying on a business, including unincorporated associations, professions, and State government businesses.

Exposure to Part IV of the Trade Practices Act is a serious matter. Authorities of the Crown breaching Part IV can be fined up to $10 000 000! Individuals can be fined up to $500 000! It will not be possible for Government agencies to hide behind Agent of the Crown status in the future.

State Governments have the power to exempt certain conduct from the operation of Part IV of the TPA (eg Section 51 Exemptions), but this will be subject to close scrutiny and will need to be justifiable on public benefit grounds to the community at large. That test includes an assessment of economic, social and environmental impacts. An industry's best interest may not be the same as public benefit!

Moreover, any exemption must be passed by legislation (not just regulation). The legislation will be visible, it must specifically refer to the TPA, and the Australian Competition and Consumer Commission must be notified.

Furthermore, the Commonwealth retains the constitutional power to veto such exemptions. It is therefore to be expected that the public benefit test will be rigorously assessed. A Ministerial Circular has been distributed regarding the processes which must be followed for obtaining a section 51 exemption in Western Australia.

From a Government agency's perspective, as a starting point, government agencies and unincorporated associations will need to identify activities which may be considered to be "carrying on a business" and decide if the new policy requires changes to the way in which they are structured and carry on such business.

To do this, entities will need to develop an understanding of the markets in which they operate, and an understanding of how their business activities will be affected. It should also be noted that "carrying on a business" does not simply mean operating with a profit motive. There is potentially a wide range of activities that can be viewed as "carrying on a business".

The Competitive Principles Agreement

The Competition Principles Agreement sets down principles on the following:

• Prices Oversight of Government Business Enterprises:

This will continue to be a responsibility of the State that owns the enterprise. There will be a need to consider an independent source of price oversight advice and enhanced transparency in prices decision making.

• Competitive Neutrality Policy Principles:

The objective of competitive neutrality policy is the removal of resource allocation distortions arising out of the public ownership of entities engaged in significant business activities. The principle is that government businesses should not enjoy any net competition advantage simply as a result of their public sector ownership.

Competitive neutrality will apply to government trading enterprises, public financial enterprises, and significant government businesses. This will necessitate an examination of advantages such as tax and dividend exemption as well as the impact of disadvantages associated with government ownership.

In June 1996 the Western Australian Government published a policy statement on competitive neutrality. The policy statement includes an implementation timetable and a complaint mechanism.

The Perth Market Authority, Grain Corporation, Dairy Industry Authority of Western Australia, Western Australian Egg Marketing Board, Meat Marketing Corporation, Potato Marketing Authority, and Grain Pool of Western Australia are included on this schedule.

Structural Reform of Public Monopolies:

Before the introduction of competition to a sector traditionally supplied by a public monopoly, the Competition Policy Agreement requires that the regulatory functions that the monopoly may have performed be removed. In addition, there will need to be a review undertaken of commercial objectives; separation of natural monopoly elements and potentially competitive elements of the public monopoly; implementation of competitive neutrality; review of Community Service Obligations (CS Os) and of the financial relationship between the owner of the public monopoly and the monopoly itself (ie rate of return targets, dividends and capital structure).

This aspect of the policy could potentially have implications for the structure and operation of SMAs.

• Legislative Review:

The inter-government agreement requires a review of all State legislation - both current and future - to ensure that it does not restrict competition. Legislative restrictions on competition will have to be justified as being in the clear public interest, and that the objectives of the legislation can only be achieved by restricting competition. Otherwise, legislative restrictions must be reformed.

Ministers were asked to examine the legislation, which they administer so as to gain an understanding of where legislation restricts competition and what the priority areas are for amendment.

As a consequence, the Western Australian Government published in June a Legislation Review Timetable - this Review Timetable includes the legislation establishing Statutory Marketing Authorities. A program, of legislative amendment will then need to be actioned over the period to the year 2000. Legislation Reviews for SMAs will be examined in a little more detail later in this paper.

• Access to Services Provided by Means of Significant Infrastructure Facilities:

The Commonwealth's Competition Policy Reform Act established a regime for third party access to services provided by means of significant infrastructure facilities. There is also scope for States to put in place an 'access regime' for a facility provided it conforms with the principles set out in the Agreement (ie an "effective regime").

Such essential facilities include natural monopolies in the form of electricity transmission grids, gas pipelines, rail tracks, and the telecommunications network (public or privately owned).

Consideration needs to be given to what essential services exist in Western Australia, which could be the subject of an access regime. This will also necessitate determining the consequences of allowing the Commonwealth access regime to apply to facilities in Western Australia. If Western Australia does not want the Commonwealth regime to apply it will need to ensure that it is considered to have an "effective" regime for the facility.

Outcomes of the Package

The Package, once filly implemented will:

• result in the application of the Part IV competitive conduct rules of the TPA to all persons across Australia (rather than its present limited application to corporations);
• remove the 'shield' of the Agent of the Crown protection for government agencies carrying on a business;
• provide a legal right for third parties (ie private firms) to negotiate access to essential services provided by nationally significant facilities (such as power transmission lines, rail lines etc);
• create a more level playing field between the public and private sectors in markets where they are in competition, for example by requiring government businesses to pay fill taxes and comply with all government environmental and planning regulations;
• result in the structural reform of public monopolies;
• result in the reform of all legislation that unjustifiably restricts competition; and
• lead to greater price transparency by government trading enterprises.

National Competition Policy and Related Reforms Agreement

This Agreement provides the States with incentives to implement pro-competitive   returns and allows them to share in the revenue benefits flowing from these reforms.

The Commonwealth has agreed to:

• maintain the real per capita guarantee of the financial assistance grants pool, and
• make a series of three tranches of "competition payments" commencing in July 1997.

Payments to the States are conditional on satisfactory progress being achieved with the implementation of reforms. Over the next five years these payments are worth over $450 million to Western Australia - a not insignificant amount. This Agreement also contains defined milestones in specific reform areas the electricity, gas, water, and road transport industries.

Institutions

At the national level, two new bodies have been established. These are:

• the Australian Competition and Consumer Commission (this body is an amalgamation of the Trade Practices Commission and the Prices Surveillance Authority); and
• the National Competition Council, which will oversee the implementation of the Competition Principles Agreement involving competitive neutrality, access, pricing etc.

The National Competition Policy Package will take some detailed 'thinking through' to filly appreciate its implications for the operations of Government. This challenge will need to be faced by all public sector agencies.

Impact on Statutory Marketing Authorities

The preceding has outlined the National Competition Policy framework. The following areas of this policy will be particularly relevant to Statutory Marketing Authorities.

The Trade Practices Act

The Trade Practices Act will apply to all persons "carrying on a business". The acquisition of primary products by a government body under legislation, when the body has no discretion as to whether to acquire the products, is explicitly excluded from the scope of "carrying on a business" as set out in the Trade Practices Act (if there is discretion to acquire the products then the TPA will apply). However, conduct after compulsory acquisition will be subject to the Trade Practices Act.

Therefore, it would be prudent to review the operation of each Statutory Marketing Authority to ensure that it complies with the Trade Practices Act. However, if t~ action which contravenes the Trade Practices Act is provided for in State legislation then the action is permissible until July 1998. Such legislation should be reviewed prior to that time.

After July 1998, action will need to be modified. If this is not in the public interest, specific authorisation will need to be sought from the Australian Competition and Consumer Commission or authorised under State Legislation as a section 51 exemption.

Legislation Review

As indicated above, legislation, which is considered to be potentially anti-competitive, has been identified and scheduled for review. The Competition Principles Agreement sets out the Terms of Reference for such Review. Without limiting the terms of reference of a review, a review should:

• clarify the objectives of the legislation;
• identify the nature of the restriction of competition;
• analyse the likely effect of the restriction on competition and on the economy generally;
• assess and balance the costs and benefits of the restriction; and
• consider alternative means for achieving the same result including non-legislative approaches.

In balancing the costs against the benefits of a policy or course of action, the Competition Policy Agreement indicates that the following matters shall, where relevant, 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 Australian businesses; and
• the efficient allocation of resources.

I would emphasise the need to thoroughly consider the costs and benefits from restrictions of competition on the public as a whole. Any anti-competitive legislation must demonstrably be in the public interest. Alternative means for achieving the same result, particularly non-legislative approaches, will also need to be considered. The analysis will be subject to close scrutiny by many interested players and therefore must be analytical and thoroughly undertaken.

Competitive Neutrality

The Government's Policy Statement on Competitive Neutrality includes the need to apply competitive neutrality principles to Statutory Marketing Authorities to 'eliminate' resource allocation distortions arising from the lack of a level playing field with the private sector. Competitive neutrality is to be applied to the extent that the benefits to be realised from implementation should outweigh the costs. This will need to include a thorough analysis of competitive advantages and disadvantages and their impact on resource allocation. Again, the presumption is that competitive neutrality will be implemented unless the costs exceed the benefits - such an analysis must be rigorous and open.

Conclusion

The National Competition Policy provides an opportunity to enhance the effectiveness and efficiency of the Western Australian and Australian economies so that they can achieve the fill potential by harnessing the power of competition.

The strength of the policy is that it provides a new framework through which to see reform, which will increase competition in order to raise standards of living.