Economic survey of Switzerland 2007: Deficiencies in the regulation of goods and services markets remain

 

Contents | Executive summary | How to obtain this publication | Additional info

The following OECD assessment and recommendations summarise chapter 4 of the Economic survey of Switzerland published on 6 November 2007.

 

See alsoRegulating the electricity market: further reforms are necessary

Contents                                                                                                                           

Barriers to competition are still holding back productivity performance

The degree to which product market regulation encourages effective competition is one of the determining factors of productivity performance. Over the last decade there have been efforts to make the regulatory framework in goods and services markets more conducive to competition, but compared to most OECD countries, product market reform is still lagging behind, especially in general competition law and in the regulation of agriculture and the network industries. Reforms in these policy areas could both stimulate trend total factor productivity growth, which has been low relative to other OECD countries, and raise the investment share of GDP (which has weakened in international comparison), thereby lowering the current-account surplus and arguably enhancing future output gains. The measures in the government’s 2004 “growth package” will make progress in opening up these markets to competition if fully implemented. However, many will need to be followed up by further steps if they are to bring about the desired gains in productivity. Technical barriers to trade still contribute to high goods prices. Products marketed in the EU internal market should be allowed to enter Switzerland without complying with further Swiss technical requirements.

 

Enforcement of general and sector-specific competition legislation needs to be toughened

The reformed competition law, in force since 2005, has allowed the enforcement authority (the Competition Commission, ComCo) to step up action against anti-competitive practices. However, its independence is still compromised by the appointment of representatives of organisations such as the employers’ association and trade unions. Its independence should be ensured by excluding members that represent particular economic interests. Furthermore, its resources should be raised so that its staff level comes into line with its enlarged responsibilities. Finally, action against hard-core cartels is still hampered by the need to prove abuse. The prohibition principle should be applied to all hard-core cartels.

In the enforcement of rules to ensure competition in network industries, short terms of office for senior staff, combined with the option of reappointment, weaken the perceived independence of regulators, as do, in some instances, lack of enforcement powers and low staffing. The independence of sector regulators should be strengthened, for example by lengthening the terms of office of senior staff and by removing the possibility of reappointment. A case in point is the postal services regulator, which does not have the power to fine market participants breaching its decisions and whose decisions require government approval. All sector regulators should have powers to fine those who contravene its regulatory determinations, and government departments should not be able to intervene in such judgements.

 

Despite reform, the regulatory framework in the network industries is still too weak

Performance in the network industries is held back by weak framework conditions, as reflected in productivity outcomes and prices. As part of the measures in the 2004 “growth package”, a new regulatory framework for the electricity industry has been legislated and will come into effect in January 2008 – introducing sector-specific ex ante regulation of prices and gradually liberalising consumer choice. New entrants have been granted access to the incumbent’s local loop in telecommunications. Planned railway reform foresees, inter alia, tendering of regional passenger transport services in cases where benchmarking indicates poor performance. While these measures mark significant progress, they should be followed up to ensure the intended competition-enhancing benefits are realised:

  • Potential gains from competition in the electricity industry are likely to be strongest in generation. Competition in this activity requires ownership separation from transmission network operations, whereas the new legislation foresees only weak vertical separation requirements. Ownership separation between electricity generation and transmission operations should be introduced. With the impending liberalisation of consumer choice, the motivation for incumbent integrated generation and transmission operators to extend ownership to local distribution and retailing utilities will grow sharper, generating stronger incentives to discriminate against new entrants in the generation business and undermining those facing retailers to put competitive pressure on generators. The acquisition of further stakes in electricity distribution networks by vertically integrated incumbents should be prevented. The weakness of vertical separation constraints conflicts with the limited powers and staffing foreseen for the new regulator and reinforces the need to bolster its enforcement capacity.
  • In the telecommunications industry, limits to the new access rights to the local loop for new entrants are likely to prolong the dominant market position of the telephony incumbent, notably in broadband services, where lack of competition has contributed to high prices and low data transmission speeds. The legal limitations on access of competitors to the local loop should be lifted. The absence of ex ante regulation has undermined the timeliness of regulatory decisions that should serve to maintain a level playing field among market players and, with respect to interconnection charges, may deter development of competing networks. Therefore, ex ante price regulation should be introduced.
  • In the railways industry, competition is virtually absent in national passenger transport. Making the tendering of regional passenger services compulsory should be considered. Experience from other OECD countries suggests that such tendering requires removing incentives facing vertically integrated operators to discriminate against new entrants in investment decisions, as well as guaranteeing access of competitors to rolling stock. The incumbent operator exercises a high degree of discretion over small-scale investment projects, and access to rolling stock is unregulated. Equal access to rolling stock should be ensured by obliging the incumbent operator to rent it out under non-discriminatory conditions. Investment decisions should be based on an independent assessment of costs and benefits.
  • In the postal services, legislation still keeps letter-delivery services largely closed to competition. The government intends to open this market further. Some current provisions create cost advantages for the incumbent vis-à-vis its competitors. Regulations disrupting a level playing field for competition between the incumbent and market entrants should be removed. Competitors are also required, in effect, to offer similar working conditions as the incumbent, including on wages, reducing the scope for cost reductions, such as through the introduction of new technology. Regulation regarding the fixing of pay and working conditions that is specific to the sector should be abolished. All services in market segments where La Poste Suisse holds a legally guaranteed monopoly are subject to price regulation by the relevant Ministry. Currently, cost-based ex post price regulation is applied, reducing incentives to lower costs. Price caps should be used to regulate the prices of services for which La Poste Suisse holds a dominant or monopoly position and price regulation should be entrusted to an independent body.

 

ADSL speed and prices in international comparison
October 2006

http://dx.doi.org/10.1787/140226325131
1. Cheapest offer for maximum speed available in Switzerland, or faster.
Source: OECD (2007), Communication Outlook, 2007 Edition, OECD, Paris.

 

Progress in dismantling barriers to competition in agriculture is slow

Legislation adopted by Parliament in summer 2007 foresees keeping subsidies to the agricultural sector – currently worth about 1.3 % of GDP – constant until 2011, with some shifting from price support and export subsidies to less distorting forms of assistance. A limited unilateral reduction of feed grain tariffs is also part of the package, but tariff protection continues to contribute to the high overall price level in Switzerland. Prospects for a lower degree of tariff protection further in the future – for example, as a result of a free trade agreement with the EU, as sought by the government – reinforce the need to remove regulatory hurdles to structural adjustment, notably in land law, so as to avoid having trade liberalisation result in calls for extended subsidy payments. Impediments to structural change in land law should be removed. The replacement of subsidies linked to production activities by direct income support in Switzerland should be accelerated, since it is less distortive of prices. While positive environmental externalities remain a justification for some direct payments to farmers, unconditional income support should be reduced by tying it to incumbent farmers, rather than farming businesses, so as to prevent government payments from biasing inheritance decisions.

 

How to obtain this publication                                                                                      

The Policy Brief (pdf format) can be downloaded in English. It contains the OECD assessment and recommendations.The complete edition of the Economic survey of Switzerland 2007 is available from:

Additional information                                                                                                  

 

For further information please contact the Switzerland Desk at the OECD Economics Department at eco.survey@oecd.org.  The OECD Secretariat's report was prepared by Andrés Fuentes, Claude Giorno and Eduardo Camero under the supervision of Peter Jarrett. Research assistance was provided by Françoise Correia.

 

 

 

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