October 14, 2014
Speech

Professor Ian Harper

'Competition Policy - the Next 20 Years"

Sydney Institute
6pm, 14 October 2014 The Gallipoli Club, 12 Loftus St, Sydney

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Introduction

Good evening ladies and gentlemen. I’m very pleased to be here at the Sydney Institute tonight.

It’s a privilege to present to the Institute, which is one of Australia’s most highly regarded and respected organisations, dedicated to lively and informed debate on key public policy issues of the day.

Tonight, I want to talk about re-invigorating Australia’s competition policy.

It’s such an important public policy issue for our nation, and I am honoured to have been asked to lead an independent review of these issues by the Australian Government.

I will give you an update of where the Competition Policy Review is up to, and step you through some of our thinking, including some of the key Draft Recommendations from our Draft Report that was released on 22 September.

Our Task

On 27 March this year, the Australian Government announced a wide-ranging, independent review of Australia’s Competition Policy.

I am fortunate to be joined on the Review Panel by 3 esteemed colleagues, Su McCluskey, Michael O’Bryan QC and Peter Anderson.

We have been given a wide brief, with Terms of Reference that allows us to look at the full range of policies, laws and institutions that impact on competition in Australia.

Our overall objective is to identify competition-enhancing microeconomic reforms to drive ongoing productivity growth and improvements in the living standards of all Australians.

While a broad Terms of Reference has been seen in some quarters as a challenge – and don’t get me wrong, there has been, and there still is, much to do – we see clear benefits in having a wide remit.

  • It allows us to think about the impacts of competition on the whole economy, not just a small slice.
  • It gives us scope to draw lessons from one area, and think about how they might apply in another.
  • That way, we can formulate recommendations that work across the economy, and which are flexible and adaptable over time, regardless of how our economy evolves.

But to manage a Review this large, we need to ensure we engage with consumers and businesses who are involved in competition every day.

So to focus the discussions early on, we released an Issues Paper on 14 April, where we sought feedback across a wide range of issues.

We wanted to see where and how we could reinvigorate Australia’s microeconomic reform agenda, including in both infrastructure and new reforms in human services.

And we wanted to explore institutional and governance arrangements that can ensure that competition reform can be sustained over time.

We wanted to take a good look at the current competition laws and how they are being administered.

And we wanted to hear about regulatory impediments to competition that sat outside our competition laws.

I’m pleased to say that many people, from right around the country, provided their thoughts in response to the Issues Paper.

We heard from a variety of perspectives including consumers, business people (from both large and small businesses), peak bodies, current and former regulators, government officials and elected representatives and academia.

People were proactive and generous with their time, and they provided wonderful insights. All up, we received almost 350 submissions, and had around 100 meetings with a wide variety of stakeholders.

We’ve put the non-confidential submissions up on our website (at CompetitionPolicyReview.gov.au).

These consultation meetings and the submissions we received have been vital inputs into our thinking. They have given us a better understanding of the forces bearing on the Australian economy now, and in the future.

They also helped us formulate a set of guiding questions, against which we have assessed whether our policy settings are fit-for-purpose.

I’d like to talk about these forces for change and our guiding questions now, before turning to some of our key Draft Recommendations.

Forces for change

Change is a constant presence in our economic landscape, and it brings opportunities as well as challenges.

Fortunately, Australia has form in preparing for change, and adapting our policies to make the most of the economic opportunities as they emerge.

We exposed our economy to greater competition through the 1980s and 1990s, and enjoyed continuous economic growth from the early 1990s. We also weathered the global financial crisis of the late 2000s without slipping into recession.

This success reflects the influence of a range of successful macroeconomic and microeconomic policies, including key competition reforms introduced under the National Competition Policy following the Hilmer review in the early 1990s.

However, unfortunately, much of the competition policy reform momentum stalled in the 2000s.

While we were busy losing that momentum, forces for change continued to impact on the Australian economy.

Some of these forces were barely envisaged, if at all, at the time of Hilmer. But, two decades on from Hilmer, we now have an opportunity to grasp the reform nettle again.

As a Review Panel, we consider that there are three major forces for change that are relevant to this Review, and stand out as influencing the Australian economy now and into the foreseeable future:

  • the industrialisation of developing nations and, in particular, the rise of Asia and the growing Asian middle class;
  • ageing of the Australian population and falling workforce participation; and
  • diffusion of digital technologies with their potential to disrupt established patterns of economic activity.

The re-emergence of China and India as global economic superpowers is driving fundamental structural change in the global economy. The sheer size and pace of growth in these populous economies is shifting the pattern of world economic growth.

To date, our supply of raw materials and energy has benefitted from these shifts, and with the right policy settings, the rise of the Asian middle class will present new opportunities for Australia, especially in traded services like education, health and financial services.

But we cannot assume that the rise of Asia will remain an uncontested opportunity.

Australia will need policies, laws and institutions that help us make the most of the opportunities, and we need to build adaptability, flexibility and responsiveness into our systems.

While these global economic shifts continue to evolve, Australia’s population marches inexorably down its ageing pathway, presenting another force for change that we must respond to.

Population ageing will lower expected income growth, and substantially increase demands on our health and aged care systems.

Improving the efficiency and responsiveness of these sectors will be crucial to meeting the needs and preferences of older Australians with dignity. This is where competition comes in.

Allowing people greater choice over their aged care arrangements, where this is feasible, as well as encouraging more diversity among providers, will improve the system’s capacity to meet a widening array of needs and preferences among ageing Australians and their families.

Competitive entry to health, aged care and even education markets – as we pursue more lifelong learning, is more important than ever.

Lowering barriers to entry and having policies that facilitate more options rather than fewer, with greater flexibility, adaptability and responsiveness in delivery, will be vital in meeting the needs and preferences of individual users rather than those of providers.

Global shifts in growth, and our ageing population are unstoppable forces, but so too is the digital revolution.

New technologies are transforming the way many markets operate, the way business is done, and the way consumers engage with markets.

For example, in sectors such as energy and transport we have ‘smart meters’ that enable us to access real-time information on pricing and usage of energy. There are also many smart phone applications that allow us compare offerings, such as airfares in real time.

One crucial element of digital disruption in markets is the capacity of these new technologies and innovations to lower barriers to entry across a range of markets.

Innovative competitive entry can lower costs to consumers and widen their choice of options.

Policymakers need to capture the benefits of disruptive entry while preserving traditional safeguards in many markets. We cannot afford to fall into the trap of assuming that these are mutually exclusive.

After all, the use of technology to foster new markets provides more consumers with access to what they want and need, potentially including lower-income consumers.

The pervasive presence of knowledge networks and the power of innovation to lift living standards means that Australia’s competition policies, laws and institutions must be fit-for-purpose for the digital age.

Six attributes of competition policy

In considering Australia’s competition policies and whether they are fit-for-purpose now and in the future, we have developed a framework against which we have evaluated Australia’s competition policy settings.

We identified six attributes of competition policy which determine its fitness for purpose, both now, and in the future.

Firstly, we looked at whether the policy, law or institutional arrangement focus on making markets work in the long-term interests of consumers.

This may seem like a self-evident test, but it’s surprising how crucial this foundational element is, in framing many of the debates that rage in competition policy.

A focus on the competitive process – rather than competitors – and the interests of consumers, is a well-established principle in competition policy across the globe and it’s one we should continue to keep front and centre in Australia.

The second question we asked was, do the policy settings foster diversity, choice and responsiveness in government services?

Given the size and pervasiveness of government in the Australian economy, as funder, provider and regulator, we need to consider new ways to foster diversity, choice and responsiveness in government services.

We make no comment whatsoever about the level of public funding in crucial human services and other sectors where government plays a dominant role. However, we do think more can be done to extend competition into new areas.

After all, if managed well, moving towards greater diversity, choice and responsiveness in the delivery of government services can both empower consumers and improve productivity at the same time.

The third question we asked was, do the policy settings encourage innovation, entrepreneurship and the entry of new players?

Australians eagerly embrace new ideas when they offer us something of value, and this includes innovations from new players entering markets like never before.

Our existing laws and institutions often struggle to keep pace. Sometimes this is the inevitable consequence of an unanticipated shock, but it can also be because existing laws and policies have instituted some form of preferment to incumbent market participants.

Our competition policy, laws and institutions need to be sufficiently adaptable to allow new entry to make innovative and potentially lower-cost products and services available to Australian consumers.

The fourth question we asked was, do the policy settings promote efficient investment in, and use of infrastructure and natural resources?

To improve our standard of living, quality of life and to sustain high income growth, we need to move goods and services rapidly and responsively across the nation and also across our borders.

Our infrastructure – physical and electronic – must be used efficiently by those who need it, when they need it.

While strong progress in some sectors, such as electricity, has been welcome, more remains to be done.

Pricing or other signals that guide the allocation of our infrastructure and natural resources towards their highest value use will support Australian living standards into the future.

The fifth question we asked was whether our competition laws and regulations are clear, predictable, and reliable.

Australians expect consumers to be dealt with fairly and on reasonable terms, and businesses to refrain from conduct that damages the competitive process - and ultimately consumers.

We expect laws to be clear, predictable and reliable and administered by regulators – and applied by the judicial system – without fear or favour.

In our consideration of these issues, we also focussed on the fact that new technologies are rapidly altering market conditions faced by businesses and consumers.

The more tightly specified our laws, the more likely they are to lag behind developments in markets and possibly act against the long-term interests of consumers.

We focussed on these elements in framing our Draft Recommendations to changes in the law.

The final question we asked was whether the policy settings help secure necessary standards of access and equity.

Access and equity dictate necessary standards and genuine opportunities that all consumers should be able to enjoy. The Review Panel is highly alert to these issues.

We want the full benefits that competition can bring, such as genuine choice, responsiveness and innovation being available to all.

This is particularly important for vulnerable consumers, and especially in their dealings with government.

Summary of key recommendations

We have been particularly careful to frame our recommendations against not just today’s issues, but those that Australia might face in coming decades.

As a Panel, we are particularly aware of the risks of tightly defining solutions to only those issues that were raised as problems with today’s laws, given the economy we have today.

While that is clearly important, and is appropriately part of our brief, for a reform agenda to succeed, it must set up our economy for the future.

Our job is as much about making our frameworks more contemporary, as it is about putting in place policies, laws and institutions that can evolve with us over time.

It’s against that background, with the three forces for change we’ve identified, and the six framing questions we posed, that the Panel has developed 52 Draft Recommendations.

These are our thoughts, and now we are looking for feedback and to engage in debate. We want people to tell us where they think we are right and where we are wrong.

I will briefly outline some of those recommendations now, before turning to what we consider to be essential ingredients for the success of any future changes to our competition policy.

The Draft Report essentially deals with recommendations – and panel views – in three broad areas.

Firstly, changes to our policies – which include policies that impact on competition but which sit outside our competition laws.

Secondly, changes to our competition laws themselves.

And finally, changes to our competition institutions, and recommendations for institutional arrangements that can support reform over time.

Competition Policy Changes

Competition policy needs to be reinvigorated. We have identified a set of seven principles that should guide Commonwealth, state, territory and local governments in implementing competition policy, to focus on making markets work in the long term interests of consumers.

We have also identified a number of priority areas for competition policy reform including:

  • extending competition policy deeper into human services and placing user choice at the heart of service delivery;
  • introducing cost-reflective road pricing, while reducing indirect taxes and charges on road users;
  • removing restrictions in relation to liner and coastal shipping, taxi licences, parallel imports, pharmacy ownership and location rules, and the remaining restrictions on retail trading hours;
  • an overarching review of intellectual property focussing on competition issues arising from new developments in technology and markets;
  • the addition of competition principles in the objectives of planning and zoning legislation;
  • updating competitive neutrality policies, with improvements to the complaints process and increased reporting transparency; and
  • a reinvigoration of reform in the electricity, gas and water sectors.

There is also a need to review other regulations restricting competition across all levels of Government, including local government – similar to the NCP process that followed the Hilmer Review – but with a focus on transparency and identifying priority areas where gains are greatest.

Competition Law Changes

Turning to our competition laws.

We seek a simplification of the competition laws, including the removal of redundant and overly specific provisions.

We also think it important to extend the application of the laws to a wider range of government activities.

One issue which has already garnered significant feedback, which we welcome, is our proposal to recast the misuse of market power provisions in the Act. The section 46 provision.

We want to remove the focus on the impact on competitors.

It should instead, prohibit conduct that has the purpose or effect of substantially lessening competition in a market, with a defence available if that conduct would be a rational business decision and in the long term interests of consumers.

We seek a repeal of the price signalling provisions. They simply don’t work as intended, by failing to strike the right balance between pro- and anti-competitive conduct.

Instead we propose to cover problematic behaviours by extending the existing provisions covering anti-competitive agreements to concerted practices.

These would apply economy-wide, avoiding one of the main criticisms that the price-signalling provisions only apply to the banking sector.

We also heard many positive comments about the informal merger clearances processes and suggest their retention, but argue that we should combine the current formal clearance and merger authorisation processes.

We suggest the ACCC be the decision maker in the first instance, with review available by the Australian Competition Tribunal. Decisions would also be subject to strict time limits.

With an eye to reduced business costs and regulatory impacts, we also propose providing a block exemption power for the ACCC. This provides safe harbours for business, by exempting conduct that does not raise competition concerns.

These are just some of the law changes we have made Draft Recommendations upon. More can found in our Draft Report.

Competition Institution Changes

Turning now to institutional reform.

As a panel, we spent considerable time on these issues. They are important to sustaining reform over a long period of time ... long after our final report is handed to Government.

Our major proposal is to establish a new Australian Council for Competition Policy (ACCP) to replace the National Competition Council.

The ACCP should have a broad role, including as an advocate for competition policy, and in independently monitoring progress in implementing agreed reforms and identifying potential areas for reform across all governments.

It should be jointly funded and accountable to all Australian governments. Functions could include market studies powers, and an annual competition analysis which would be made public.

We also propose establishing a separate access and pricing regulator covering regulated infrastructure industries. I note that the recently released Vertigan report to the Government proposes a similar approach, to deal with network industries.

Finally, the panel heard many views about the ACCC. Fundamentally, our assessment is that the ACCC is a strong, highly performing agency.

However, it can be strengthened further.

Our Draft Report proposes incorporating a wider range of business, consumer and academic viewpoints that would improve the governance of the ACCC at a Board level.

Ingredients for success

There is much more to those and other recommendations in our Draft Report, but I’ve given you the brief highlights.

I’ve been fortunate enough to have played a role in previous government reviews and policy processes.

What resonates with me and the other three members of the Review Panel is the need to have a plan laid out, for governments at all levels, to consider in a measured, careful manner.

As a panel, we’ve laid out our preliminary views. It’s a Draft Report after all.

I’ve been particularly encouraged by the largely sensible and measured responses we’ve had to date, not just from government and oppositions, but also from those most likely to be affected by any changes.

With our Draft Report, what we are looking for is an engaged and informed debate.

All we ask as a panel is that stakeholders step back, pause, and think about how and where competition can help improve our lives as they frame their responses to our Draft Report.

Next steps

As I have outlined, this review is a broad-ranging assessment of Australia’s competition policies, laws and institutions.

As a Panel we are currently engaged in thorough and detailed consultation on our Draft Recommendations and panel views, through a second round of submissions and consultations.

We do have a lot of issues to think though; to group where possible, where that makes sense; and to consider specific revisions to our Draft Recommendations where the evidence base and information or debate so far support that.

However, it is a Draft Report and as I mentioned earlier, it is an opportunity for us to test our thinking, based on what we have heard so far.

We know that these processes are time-consuming for business, consumers and the broader community, but we do have a wonderful opportunity here to really examine our competition landscape in a comprehensive way.

With the right approach, we can make final recommendations that will genuinely strengthen our economy and our living standards, not just now but in coming decades.

Thank you for your time today, and I look forward to continuing the debate, so that we can frame a set of final recommendations to government that will help to set our nation on a new reform pathway, responsive and adaptable to the challenges, and opportunities we face.

 

The Competition Policy Review Final Report was released on 31 March 2015 and the Review has concluded.

On 24 November 2015 the Treasurer released the Government response to the Competition Policy Review and the Government response on the National Access Regime.