The following OECD assessment and recommendations summarise Chapter 2 of the Economic Survey of Ireland 2006 published on 2 March 2006.
Exposing the sheltered sectors of the economy to more vigorous competition is an important part of the challenge to boost productivity. It would also help reduce inflationary pressures, ensuring that exports remain competitive. Ireland has a legacy of policies that favour the interests of producers over consumers. But it has a golden opportunity to push ahead with regulatory reform while the transition costs are low. Unlike many other countries, the labour market is flexible and jobs are easy to find. Adjustment costs from regulatory reform should therefore be manageable.
Some of the network industries in particular need to be reformed. Insufficient competition is raising prices, creating bottlenecks and holding back growth:
Despite six years trying to liberalise the electricity industry, competition has not increased by much. As a result of insufficient investment, there is a risk that demand will outstrip capacity in coming years, pushing prices even higher. The main problem is the dominance of the state-owned Electricity Supply Board (ESB). It owns the transmission grid and dominates generation. The transmission and production sides of ESB should be separated and the government should consider splitting the generation side into competing producers as well. Plans to upgrade inter-connection capacity with Northern Ireland and the mainland United Kingdom are welcome. This would have several benefits: greater security of supply, less need to build new generation plants, less dominance by ESB and the chance to diversify away from fossil fuels.
The main problem in the telecoms sector is the slow take-up of broadband. This may be caused by insufficient competition. Eircom, the telephone incumbent, dominates the market and is dragging its feet in opening up the local loop. The regulator should fast-track this process.
Entry restrictions are blocking competition in the bus market. This worsens the traffic bottlenecks because other forms of public transport are under-developed. The government is considering several options such as making the regulator independent, allowing private companies to compete with the incumbent on inter-city routes and letting private firms operate up to 15% of new routes in Dublin. It should go ahead with all of these, and go further by opening up all Dublin routes. Experience in other countries shows that this can be done without undermining public service obligations.
In some other sectors, regulations that have been designed for specific purposes are having side-effects that make consumers worse off:
Inadequate retail competition pushes up consumer prices. The main culprit has been the Groceries Order which bans the sale of non-perishable grocery items below their invoiced price. The government’s plan to abolish the Groceries Order is welcome, especially as current competition law is strong enough to deal with predatory pricing. In addition, the retail planning guide should be made more flexible to free up entry and allow bigger stores; currently, it sets up entry barriers that favour small shops over large ones, at the expense of consumers. Restrictions to market entry in the pub trade should also be removed.
Prices are high
Price difference between Ireland and EU15, per cent
1. Provisional data.
Source: Eurostat database, January 2006.
There are several barriers to competition in the pharmacy industry. The worst is the restriction on foreign-trained pharmacists. Even Irish citizens who train abroad are not permitted to open or run a new pharmacy – the best they can do is buy one that has been operating for three years. This does nothing to promote healthcare; it is purely an anti-competitive restriction that protects incumbents. The government’s proposal to remove this restriction should be implemented swiftly. However, liberalising the industry is more complicated than just lifting entry restrictions because the (regulated and negotiated) retail margin on pharmaceuticals is too high. The margin has to be lowered – or completely deregulated – before the gates are opened to new entrants.
Unnecessary restrictions in the licensed trades, including legal, medical, dental and veterinarian professions, should be removed. These include controls on entry, fee competition, advertising, demarcation, training, recognition of foreign qualifications and organisational structure. As a general rule, licence holders should not be compensated by government when entry is liberalised.
On top of the sector-specific concerns, there is an issue with the broader competition framework. While competition law meets international standards on paper, it is hard to enforce in practice. The Competition Authority cannot impose fines and sanctions and offenders must be prosecuted under criminal law, which is difficult because the burden of proof is high and the legal system is slow and expensive. There may be constitutional constraints to giving the Competition Authority more powers, and a review of competition law is needed to examine the legal issues involved. The staffing of the Authority should be reviewed regularly to ensure it has adequate resources for enforcement actions.
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Return to the Economic Survey of Ireland 2006
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