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The following OECD assessment and recommendations summarise Chapter 2 of the Economic Survey of New Zealand 2005 published on 4 July 2005.
Product market competition is contributing to productivity growth, but more could be done in some areas
Overall, product markets work well, especially given the constraints faced by a small and geographically isolated nation. Indeed, the country was a leader in deregulating a range of sectors that were previously shielded from competition and has in place well designed laws and institutions that provide a solid framework to underpin competition and promote efficiency. Minimising barriers to entry has been especially important for promoting competition by constraining potentially anti competitive behaviour. At the same time, it makes sense to assess the merits of allowing firms exposed to international competition to become more productive through consolidation, as the Commerce Commission does by applying a total surplus standard in assessing mergers and acquisitions. This formula also gives recognition to dynamic efficiency gains. The Commission’s recently announced leniency and co operation tools and its new “cease and desist” powers are welcome and should now be applied vigorously to combat cartels and monopolies. More generally, the Commission’s work would be even more effective if it were empowered to exchange information and co operate in enforcement matters with overseas authorities. The Government’s recent initiatives to strengthen the Commission’s ability to provide investigative assistance and share information with overseas competition regulators will help.
Remaining regulatory uncertainties affecting the electricity sector need to be resolved to allow investments to move forward
The main sector where competition is not working satisfactorily is electricity, which has been through a series of droughts and regulatory changes in recent years. Significant new generation capacity will be needed to ensure that supply keeps up with expected future demand and to replace production that currently depends on soon to be exhausted Maui gas. But regulatory and other uncertainties have stymied some new investment plans by making it difficult to determine the most cost effective alternatives among various possible projects that would use a range of different energy sources, including coal, wind, hydro or liquefied natural gas. The recent announcement of the level of the carbon tax has removed one source of short-term uncertainty, but others still need to be addressed before investors will be willing to get some projects off the ground. In 2003, the government shifted away from a light handed regulatory approach and established the Electricity Commission to oversee the electricity market. The Commission is also charged with laying out a decision making process and pricing methodology for upgrading the transmission grid, providing for security of supply, improving demand side participation in the wholesale market and ensuring consumer protection. As quickly as possible it needs to specify clearly how it will deal with these issues. For its part, the government needs to make sure that planned changes in the Resource Management Act effectively reduce the risk of long delays in project approval without curtailing proper consideration of the environmental dimensions involved. It also needs to expedite the current broad review of water rights and ensure an effective mechanism is in place for allocating water among all its competing uses.
Energy market regulation requires further scrutiny
Transmission of energy – electricity or gas – involves natural monopolies. In 1998, to promote competition in electricity retailing, the local electricity distribution companies were obliged to divest their retail activities. But most were sold to generators, resulting in vertical integration and making it difficult for new retailers to enter the market and/or for an effective market in forward contracts to develop. Further investigation into the impact of vertically integrated suppliers on competition is warranted, and the costs and benefits of splitting them up need to be carefully assessed against other alternatives. For the natural gas network, transmission costs would be minimised if restrictions on access to pipelines were lifted and rules established to foster the development of a wholesale market amongst gas suppliers. In addition, a surveillance price threshold approach similar to that used for the electricity network would be less distorting and provide producers with greater flexibility than the direct price control approach recommended by the Commerce Commission, while providing safeguards against any abuse of monopoly power.
Most other sectors are working well, but a few merit adjustment
Elsewhere, competition is thriving in many sectors, including retail trade, banking, broadcasting and passenger and freight transportation services. But some improvements could be made in others. Prices are high in some telecommunications market segments, including mobile telephony. This suggests that regulation of mobile call termination charges is needed, but it will be important to minimise uncertainties and distortions such regulation could potentially generate. Prices for broadband Internet access have been falling relative to dial up access, contributing to an increase in broadband penetration. But it remains low by OECD standards. The authorities should closely monitor price developments and investigate whether any regulatory impediments exist that require corrective action. In addition, given the trend toward more government involvement in market activities since the beginning of the decade, resuming privatisation, especially in potentially competitive sectors, would be likely to yield important improvements in static and dynamic efficiency. In contrast, there is vibrant competition among agricultural producers, who receive virtually no government support, in contrast with their rivals in most other OECD countries: their capacity to compete successfully on world markets and contribute to overall productivity growth in the economy would be significantly enhanced by the successful completion of the Doha round.
Broadband subscribers per 100 inhabitants
December 2004
Source: OECD, Communications Outlook database.
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A printer-friendly Policy Brief (pdf format) can also be downloaded. It contains the OECD assessment and recommendations, but not all of the charts included on the above pages.
To access the full version of the OECD Economic Survey of New Zealand:
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Non-subscribers can purchase the PDF e-book and/or printed book at our Online Bookshop.Government officials can go to OLISnet's Publication Locator.
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For further information please contact the New Zealand Desk at the OECD Economics Department at webmaster@oecd.org. The OECD Secretariat's report was prepared by Deborah Roseveare and Annabelle Mourougane under the supervision of Peter Jarrett.
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Also available: Etude économique de la Nouvelle-Zélande 2005 (French)
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