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What is the role of product market competition in raising productivity?
Productivity measures consistently show that output per hour worked in Australia, while rising briskly, remains well below that in technologically leading countries. This suggests there is further scope for catch up. Policies most prominent in this respect encompass those which foster competition in product markets and thus promote the growth of multifactor productivity and the wider use of new technologies. The NCP has set in train a range of major sectoral reforms, including a process of removing restrictions which legislative reviews have shown not to be in the general public interest. But there is still substantial unfinished business. Areas where reforms are yet to be completed include infrastructure services, agricultural marketing arrangements, liquor licensing, compulsory insurance schemes, pharmacies, the professions and occupations (for example, health and legal practitioners). Bringing the reform programme to completion according to an announced timetable is important to avoid the impression that difficult reforms can be deferred indefinitely. Among jurisdictions, the federal government in particular should make stronger efforts to raise its own compliance rate, which has been among the lowest of all Australian governments and is not commensurate with its leadership role in promoting enhanced product market competition. The Productivity Commission is currently undertaking an inquiry into the future of NCP in the lead up to a review of NCP by the Council of Australian Governments (COAG) in 2005. This provides a significant opportunity to address the unfinished business of the current NCP agenda, reinvigorate the commitment to reform, and extend competition and efficiency enhancing reforms to appropriate new areas.
Growth performance: an international comparison
Annual average percentage changes over 1990 - 2003
1. Or latest year available.
Source: OECD, Annual National Accounts Database.
Regarding infrastructure services, a fully competitive national electricity market, including full retail contestability, has yet to be realised, even across the contiguous eastern states. As an important prerequisite, regulatory inconsistency, which arises from the co-existence of state and national regulators in both the electricity and gas sectors, needs to be removed as planned. The National Competition Policy (NCP) road transport reform commitments, which cover a narrower range of reform modules than initially proposed by the National Road Transport Commission, are now almost complete. Like rail reform, other road reform is being pursued outside the NCP framework through a co-operative intergovernmental process. Recently announced national land transport reforms planned under the AusLink framework need to be effectively implemented, to ensure efficient long-term investment and better integration of the network. Efforts should also be made to promote competition in ocean shipping with a current review by the Productivity Commission suggesting that repeal of the industry-specific regime for international liner cargo shipping will improve outcomes. More broadly, Australian governments should seek to establish an integrated reform agenda within a co-operative assessable framework covering all elements of land transport and shipping transport. Competition in fixed-line telecommunications should be promoted by strategies designed to facilitate further access by competitors, and Telstra should be required to divest its cable network and its shareholding in a major pay-TV supplier, provided independent assessment shows that the benefits of divestiture would exceed the costs. Another effort should be undertaken to open the postal services market to competition.
Progress in liberalisation of service sectors in OECD countries
1. In each year and sector, the indicators have a 0-6 scale ranging from least to most restrictive of competition. They cover public ownership, barriers to entry, market structure, vertical integration and price controls. See Nicoletti and Scarpetta (2003) for details.
Source: OECD Regulatory Database.
“Access regimes” provide a framework for assuring (over time) that the monopoly elements of network industries are managed in a way that does not hamper the development of effective competition in upstream and downstream industries. But these regimes do not in themselves assure that decisions on network investments are made in a cost-effective and timely manner, and especially not if ownership and regulation of networks are spread over several geographical jurisdictions. Efficient infrastructure investment is a complex problem in any economy, as market signals by themselves often do not provide sufficient guidance, market power creates gaps between private and social rates of return, and investment decisions have significant redistributive impacts across regions. There is no obvious “best practice” approach to this problem, and the Australian approach will have to take into account the specific constitutional allocation of competences. But in general, economic efficiency is most likely to be achieved if the analysis is undertaken at a national level, and decisions coordinated across levels of government.
While urban water reforms have made significant improvements, the pace of rural water reform needs to be accelerated. Australia faces particularly difficult water management issues because it is a dry continent. It has become a world leader in some respects in defining clearly a “property right” regime for water. But major issues still need to be addressed, including the enforcement and trading of water property rights as well as the determination and pricing of appropriate environmental allocations. Accordingly, the Council of Australian Governments’ National Water Initiative of 2004 aims to improve the security of water access entitlements, ensure ecosystems health and encourage expansion of water markets and trading. Cross-subsidisation of water usage as between urban and rural users, and also between different types of agricultural users, should be phased out over time.
Which areas could benefit most from better jurisdictional co-operation?
The review of NCP by COAG in 2005 will need to consider the appropriate framework for a reinvigorated, nationally coordinated reform programme including the role of financial rewards and assessment processes. It will also need to consider reform priorities and expanding the scope of reform efforts to new areas. Health care, education and community services are such areas which offer a great potential for closer coordination of reforms across Australian governments to enhance efficiency, given Australia’s brand of fiscal federalism with substantial constitutional powers and responsibilities residing with sub-central governments. This is all the more important as the ageing of the population will impact on government services, revenues and retirement income policies. Another risk to future growth is environmental degradation, which has inter-jurisdictional implications as the Constitution has left most environmental responsibilities to the states, but their interests differ depending on energy production patterns, biodiversity concerns and water-use. Hence, a co-ordinated regional and national approach is needed to deal with cross state spillovers and the need to implement commitments made under international agreements, as well as to ensure that there is a sufficient range of instruments available to cope with environmental problems.
Is there a need for competition law reform?
Vigorous competition law enforcement, reducing firms’ power over price, also contributes to strong economic performance. The latest reform proposals recommended by the Dawson Committee focus on improving accountability, transparency and the timeliness of decision-making so as to provide greater certainty for business. A more transparent and formal process for reviewing proposed merger clearance would be welcome and should make the Australian Competition and Consumer Commission (ACCC) more accountable. The Dawson Committee found that the current merger authorisation process imposed commercially unrealistic timeframes for business, and proposed that the Australian Competition Tribunal decide merger authorisation cases on “public benefit grounds” without prior consideration of those issues by the ACCC. The Government has accepted this recommendation. This approach may involve some risks and it will be important that the ACCC provides investigatory and market expertise to assist the Tribunal in making its decision. Mergers whose effects on competition are indirect or cumulative should continue to be closely monitored. Areas of interest include combinations in recently-deregulated utility sectors, which could prevent the emergence of competition in new markets, and outlet-by-outlet acquisitions in the already-concentrated retail sector. However, the Dawson Committee recently found that the existing merger provisions can adequately deal with such issues. Corporations face civil fines for cartel violations, but these have been subject to a comparatively low statutory cap. The government’s proposals to raise the fine level, to the greater of A$ 10 million, three times the gain from the violation or where the gain cannot be readily ascertained, 10 per cent of group turnover would bring Australia into line with other major jurisdictions. Fines against individuals are common but low; proposals to subject individuals to criminal penalties for hard-core price fixing and bid rigging will improve deterrence if the legal problems involved in defining the offence can be resolved satisfactorily. A small number of recent court decisions have created some uncertainty about how the law can control abuses by dominant firms. The legislative amendments announced in June 2004 will assist in addressing the uncertainties flowing from these decisions.
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