Speech to CEDA
Check against delivery
Good afternoon, ladies and gentlemen. My sincere thanks go to CEDA for hosting this event at short notice.
The Panel’s task
Last year, I was honoured to be asked to lead a review of Australia’s competition policy. As a professional economist, I was already very familiar with the importance of competition in making markets work for the benefit of consumers.
But in discussions across Australia and in almost 1,000 submissions, I and my colleagues, Peter Anderson, Su McCluskey and Michael O’Bryan, learnt just how powerful and important competition is in the lives of many Australians.
We are brought up on examples of competition on the sporting field, making teams strive to be stronger, and to play the game in different and better ways.
However, in one very important way, this sporting analogy does not fully capture why competition can improve the lives we lead. In sport, we are all spectators, watching what the competing teams produce.
But competition in the markets for the goods and services we buy can empower us as consumers; empower us through an ability to choose. And when we can choose between providers, we see businesses competing with one another to attract our custom.
Consumer choice is an incentive for businesses to keep their costs down, and their profit margins narrow.
Consumer choice can also drive businesses to improve the quality of their products and services; offering customers more options; faster innovation and the use of new technology; and better information, which allows for more informed decisions by consumers.
And who are these consumers?
Consumers are individual Australians in shops and banks, as well as those at home buying goods and services online. Consumers include businesses transacting with other businesses. Consumers are also hospital patients, welfare recipients, parents of school-age children and users of our road network.
Competition is good, principally because it is good for us as consumers.
But importantly competition is a means to an end, not an end in itself. Competition is valued because of the role it plays in boosting income growth and productivity, and improving our lives more generally.
When market participants compete among themselves to provide the goods and services that consumers want at the lowest possible cost, productivity levels improve. This underpins stronger and more sustainable economic growth and living standards.
Unfettered markets will not necessarily deliver these outcomes. We need competition policy to protect, enhance and extend the benefits of competition.
Competition policy enables efficient businesses of all sizes to thrive and reduces unnecessary impediments to innovation. Competition policy also focusses on ensuring businesses compete fairly with each other.
Governments may need to intervene in markets—for example, where there are natural monopolies, or to ensure the provision of social welfare services. In these cases, market and institutional design are very important in fostering competition policy benefits.
However, poorly designed interventions—for example, restrictions on who can be in the market or how they can trade—can narrow consumer choice and deliver less competitive outcomes.
Australia has been seen as among the world leaders in competition law and policy, and there is a long and rich history of promoting competition in Australia. From the introduction of the Trade Practices Act over forty years ago, to the significant economic benefits unleashed by governments accepting the recommendations of the Hilmer Review more than twenty years ago.
The need for reform
When we commenced work on the Competition Policy Review last year, some people suggested that, unlike the early 1990s when the Hilmer review was conducted, there is currently no burning need for a further round of competition policy reform.
It is right that the economy is in much better shape that it was back in 1993, when we were recovering from a recession. But, that doesn’t mean that now is not a good time to act.
The productivity-enhancing competition and other structural reform policies of the 1990s, along with other important economic reforms, drove improvements in productivity and living standards.
Reform stalled in the 2000s but Australia’s standard of living was kept high by the mining-driven surge in Australia’s terms of trade, which meant that our incomes were still increasing and our living standards were still improving.
The terms of trade peaked about three and a half years ago and they are expected to continue to fall over the next decade. At the same time, we have entered a period of falling participation in the workforce. The Government’s recent Intergenerational Report notes that, over the next 40 years, the overall proportion of the population participating in the labour force is expected to decline, as a result of population ageing.i
Future growth in Australian living standards now depends on growth in productivity.
Unless we can find ways to boost our productivity growth, we face the prospect of considerably slower growth in living standards than we have become accustomed to.
Treasury has estimated that per capita income growth could drop to around 1 per cent a year on average over the next decade, less than half the growth rate we have been used toii.
So reform focused on improving productivity, including competition reform, is not only desirable, it is necessary.
This report provides an agenda to improve Australia’s competition policies, competition laws and competition institutions. It is wide-ranging, covering all sectors of the economy and all markets, including importantly those where government plays a role.
Starting on this agenda now, in incremental steps, will make it a lot easier to manage the challenges and uncertainties that lie ahead. This agenda is also more achievable since the economy is still growing.
Travelling around the country confirmed for us that Australians are generally aware of the end of the mining boom and understand the need to find other ways to keep our living standards growing. A reinvigorated agenda for competition policy reform is one powerful means of doing this. Business groups are calling for the removal of barriers that stop them competing vigorously. NGOs are looking for a new way for governments to support essential community services. People are questioning why over-regulation is raising the cost of living and narrowing their choices.
We were also encouraged by the extent to which governments are starting to drive competition and choice into their policies. Governments at all levels are progressing competition reform.
Perhaps none is more significant than the reforms in disability, which are increasing the choices available for people with disability. No one should underestimate the importance of this to improving the lives of a potentially vulnerable sector of our community.
However, there were some stakeholders who questioned whether the benefits of reform were worth the effort, and asked ‘where was our evidence’? How could we recommend the removal of regulations which shelter their industry from outside competition without having ‘done the modelling’?
The Panel agrees that it is important that the impact of our recommendations on growth and incomes be modelled. However, it is equally important that any modelling be credible. We did not have enough time after finalising our recommendations to undertake modelling to a standard that the Panel considered sufficient.
What we have done is propose that there now be a 2-stage modelling process of our recommendations.
First, we recommend the Productivity Commission should be tasked with modelling the recommendations of the Review as a package, in consultation with Australian governments, to support discussions on the detailed policy proposals that are pursued. We anticipate this should take around 12 months.
Second, once governments have signed up to reforms, we recommend a second-stage modelling process to estimate the economic and revenue effects of agreed reforms. Where disproportionate effects across jurisdictions are estimated, we recommend competition policy payments.
We expect that our package as a whole would provide a similar boost to the economy as did the Hilmer reforms in the 1990s and 2000s. The Productivity Commission estimated that these reforms raised Australia’s gross domestic product (GDP) by 2.5 per cent.
The reform challenge
While the Hilmer reforms drove competition into sectors like electricity, telecommunications and rail, we recommend driving competition across the economy and deeper into services sectors. Many of our recommendations - regarding infrastructure, intellectual property and planning and zoning - will cascade through the economy, providing material and measureable improvements.
There is already published modelling that shows the potential size of the gains. For example, in road transport, the Bureau of Infrastructure, Transport and Regional Economics has estimated the avoidable costs of road congestion at $9.4 billion in 2005iii.
Driving more choice and competition in the human services sector will improve the responsiveness of government services. While difficult to quantify, improvements in people’s lives from better services such as healthcare, education and disability care, are key reasons for pursuing these reforms. Even small improvements in human services can deliver significant benefits.
As an example, if there was a 10 per cent improvement in service delivery in the health care sector, it could lead to efficiencies equivalent to around 1 per cent of GDP at the present time, and as much as 2 per cent by 2050.iv
But I should stress that the benefits of competition policy are not just about GDP. Focussing solely on contributions to GDP misses many of the arguments that persuaded the Panel of the need for further reform. While Australia’s GDP and productivity performance are absolutely important and need to be sustained to maintain our high living standards, there are vital benefits not captured in these numbers.
Factors like the increase in personal wellbeing, dignity and freedom that can flow when a person has more choice and control over their lives. The benefits of reform in human services are likely to be large and to extend beyond the individual – having a healthy, well-educated population benefits us all.
At a personal level, competition reform can benefit people facing disadvantage by allowing them to exercise choice to get what they want, and not just receive a standardised service. It can benefit people who work irregular hours by allowing them to shop when it suits them, and not have arbitrary closing and opening times designed to protect particular types or sizes of businesses. It can allow consumers to choose the product that is right for them – a phone plan with more data than text for example; or an energy company that has lower rates at the times when they need power.
These things may not show up in productivity numbers, but throughout our consultations Australians told us they were the real benefits of competition reform.
Context for the Review
We all wonder, and sometimes worry, about what the future will bring. We question what the world will be like in 20 years.
This is something to which I and my colleagues on the Competition Policy Review panel have given a great deal of thought, focusing on how to make Australia’s competition policy fit for purpose―fit for whatever the future might bring.
Of course, the only certainty about Australia 20 years from now is that it will be very different from the Australia we know today.
In the 1989 movie ‘Back to the Future II’, Michael J Fox’s character, Marty McFly, travelled forward in time to 2015.
Some of the technological advances he observed, like video telephones, large flat wall screen TVs, iPhone-style cameras and video glasses we actually do see today.
But many others, such as flying cars, hover-boards, robotic dog-walkers, shoe laces that tie themselves and jackets that adjust to your body size have not yet materialised.
And, wrongly as it turns out, other technology, such as faxes and telephone boxes, were expected to be as important today as they were in 1989.
The writers of ‘Back to the Future’ were no more accurate with their predictions that we can expect to be today about Australia in 2035.
What we do know, however, is that change is inevitable. Change will occur over the next twenty years in how we work, what goods and services are available to us, the structure of our economy and how we live our lives.
The implication of this inevitable change is that Australia’s competition policies, laws and institutions need to be flexible, responsive and adaptive.
Major forces for change
While we can’t know exactly what the future will bring, there are some broad factors that will play a role in driving change:
- the industrialisation of developing nations and, in particular, the rise of Asia and the growing Asian middle class;
- the ageing of the Australian population and falling workforce participation; and
- the 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 size and pace of growth in these populous economies is shifting the pattern of world economic growth, currently favouring suppliers of raw materials and energy commodities like Australia.
The continued rise of Asia is likely to provide opportunities for Australia to export a wide variety of goods and services, not just mining exports but also agricultural products, education, tourism and financial services and others. However, this is an opportunity that we can’t take for granted, as we will face competition from other nations.
Also, Australia has an ageing population, and as the baby boomer generation moves into retirement, the proportion of working age people supporting people in retirement will reduce. Currently there are 4.5 people of working age for every person aged 65 and over, but the Intergenerational Report projects that this will halve to only 2.7 people by 2054-55. Changes in demography will drive down the contribution labour force participation makes to our national income, as the ageing population retires.
Population ageing will increase demands on the health and aged care systems. We are seeing older Australians demanding greater choice and diversity in their aged care arrangements. Older Australians, increasingly I suspect, have high expectations about their service providers. They will favour competitive and innovative providers who can offer more options that meet a widening array of needs and preferences.
More options, with greater flexibility, adaptability and responsiveness are likely to be sought, as users demand an increasing say in the system rather than letting providers dictate outcomes.
New technologies are transforming the way many markets operate, the way business is done, and the way consumers engage with markets. The internet has already had a significant impact on the way we shop and communicate, and on the Australian economy.
As technology changes, new products and markets will continue to emerge, often expanding beyond conventional geographic boundaries. This increases choice for consumers and allows small, agile and often distant firms to compete with large, local incumbents.
Consumers want more options, and they are demanding solutions that are customised to them. They want to be able to harness technology to exercise choice. In our consultations, we heard from young people in particular that they were increasingly frustrated with regulation that gets in the way of their choices.
Again these factors highlight that Australia’s competition policies, laws and institutions need to be flexible, responsive and adaptive. They need to cope with fluid markets with constantly shifting boundaries, and not be constrained by unnecessary barriers.
So what is it that we are recommending in our Report to achieve these outcomes?
We have 56 recommendations in our Final Report. Taken together they are a comprehensive forward-looking agenda for improving productivity and the lives of Australians. The agenda extends from changes to competition policy, through changes to competition laws to changes to competition institutions.
We have assessed Australia’s competition policies, laws and institutions to see if they remain ‘fit for purpose’. We have focused throughout on the interests of Australian consumers.
Changes since the Draft Report
Much of the material in our Final Report was also in our Draft – we haven’t altered our key focus on the consumer; or our forward-looking examination of the forces for change; or our focus on ensuring that competition policies, laws and institutions are ‘fit-for-purpose’.
However, we did receive valuable feedback on our Draft Report and we have used this to finesse the recommendations in the Final Report.
For example, the importance of information was stressed to us. Consumers can’t make proper choices if they don’t have all the information in front of them in a usable format – for example, an easy-to-use comparison website or mobile phone app, especially for complex products like health insurance or mobile phone plans.
So we have included a new recommendation in our Final Report that governments should work with industry, consumer groups and privacy experts to allow consumers to access more information in a usable format.
Priority policy reforms
In terms of competition policy, the main area where we break new ground in this Review is further extending competition into all the places where government has an impact on the market: including human services and government procurement.
In the area of human services, we discuss how to get suppliers to respond to user needs and preferences in areas where traditionally users have received a ‘standard offering’.
So in addition to productivity benefits, this offers greater choice, life satisfaction and control for Australians.
The human services sector covers a diverse range of services, including health, education, disability care, aged care, job services, public housing and correctional services.
At the time of Hilmer, there was little thought to the application of choice and competition in this area. The Hilmer Report makes a passing reference to the then new trends of contracting out and competitive tendering for government services, and suggests that this should continue.
But times have changed. Many Australian governments are already developing choice-based competition reforms in areas such as aged care and disability services. Our report picks up on these important reforms and proposes ways to extend and continue them.
We recommend that all Australian governments, both individually and collectively, adopt choice and competition principles in the domain of human services, including a guiding principle that user choice should be placed at the heart of service delivery.
What would this look like in practice?
Well, the Panel heard many examples of the benefits service users have enjoyed from increased choice. For instance, when people in need of aged care services were put in control of funds, they experienced an increase in bargaining power and service providers became much more responsive to their needs and requirements.
In one case a man employed someone to fetch a meal from a local takeaway as an alternative to his regular ‘meals on wheels’. In another case, a user employed a support worker who cooked meals of the person’s choosing.
Users also benefitted from being able to choose their support workers, rather than being assisted by agency staff who changed frequently.
This is what choice is about.
Access and choice are particularly relevant to vulnerable Australians or those on low incomes, whose day-to-day existence can mean regular interactions with government. They too should enjoy the benefits of choice, where this can reasonably be exercised, and where service providers can respond to their needs and preferences.
In our view, the general presumption needs to be that individual Australians are the best judges of what they want and need, in the area of human services, just as in other aspects of their lives.
To implement our proposal for human services, we recommend that each government at the Commonwealth, State and Territory level should extend the range of trial projects. The lessons learned from these trials should then be disseminated through an intergovernmental process.
We recognise that government can and does compete with private providers in many markets. While the existing competitive neutrality framework puts some restrictions on what government businesses can do, it doesn’t cover other activities of government including procurement – which is where governments purchase goods and services from private providers.
Our Final Report includes a new recommendation on government procurement. Government procurement guidelines and practices can have a significant impact on the range of goods and services available to consumers. Procurement can also affect the structure and functioning of competition in markets.
We recommend that competition principles should be incorporated into procurement, commissioning, public-private partnerships and privatisation policies and practices.
Also, the Panel considers that the National Competition Policy reforms should be carried a step further, and that the Crown should be subject to the competition laws insofar as it undertakes activity in trade or commerce, not just where it is carrying on a business.
Another area which has changed significantly over the past 20 years is intellectual property. Disruptive technologies have put IP rights in the spotlight. While IP rights can create incentives for innovation, they also have the potential to restrict market entry by preventing access to technologies.
Getting the balance right between creating incentives for innovation and not restricting competition is not easy. There have been a number of reviews into IP, but they have focussed on particular aspects of the policy. What we need is an overarching review of IP, focusing on competition policy issues arising from new developments in technology and markets.
Australia is a net importer of IP. The IP provisions in international trade agreements are therefore important to us. Agreements can have potentially harmful impacts on competition, and so we recommend that trade negotiations should be informed by an independent and transparent analysis of the costs and benefits to Australia of any proposed IP provisions.
While in most cases granting an IP right is unlikely to raise significant competition concerns, IP rights can be used in a manner that harms competition. The Panel recommends that the use of IP rights should be subject to the Competition and Consumer Act.
Much of the public discussion around infrastructure is about competing projects, or how to pay for it. But just as important is that the infrastructure we have be used as efficiently as possible and that the people who use the infrastructure can send a direct signal about what is needed.
The Hilmer Review led to reforms in electricity, gas and water and telecommunications. But unlike these parts of economic infrastructure, roads are still provided by governments at no direct cost to road users and funded indirectly through taxation.
The technology exists to charge directly for roads. And it can be revenue neutral – so no additional impost on road users – if indirect taxes and charges are reduced at the same time.
Many of the other competition policy recommendations we make are not surprising. Some of these were concerns identified 20 years ago under the earlier National Competition Policy process. That does not undermine their importance but it does argue for a reinvigoration of the National Competition Policy agenda.
Anti-competitive regulations remain today. They are a barrier to businesses growing and innovating. Like the Hilmer Review, we recommend an ongoing review of regulations to remove unnecessary restrictions on competition that are not in the public interest. This will need to be driven by all governments in Australia.
The Panel has identified priority areas for the review of planning and zoning, taxis and product standards. We recommend immediate reform in areas where reviews have already been undertaken such as retail trading hours, parallel imports and pharmacy location and ownership rules.
It is important to note that we are not proposing total and unfettered deregulation, and each regulatory restriction will have its own particular public benefit considerations that need to be weighed carefully along the way.
What we do highlight though, is that there should always be a thorough analysis of alternative, less anti-competitive ways to achieve public policy objectives where there continues to be a need for regulation.
Competition law reforms
In the area of competition law, we have evaluated the law to ensure it is fit for purpose. A key focus has been on simplifying and streamlining the law to reduce the cost to business of uncertain and complex law.
While we have made a number of recommendations about changes to the law, it’s the misuse of market power provision or ‘section 46’ that has generated the most discussion.
The misuse of market power provision is included in the law to recognise that conduct undertaken by a firm with market power can have anti-competitive effects that would not result from the same conduct undertaken by a firm without market power.
Our focus when considering whether to make changes to this section was whether the policy intent was properly reflected in the law. We believe that our recommended changes will give better effect to the policy. Our changes focus on the harm that could be done to the competitive process, not on damage to individual competitors in a market. That’s in line with all the other provisions of the Competition and Consumer Act. We have also brought the provision into line with other parts of the Act by looking at both the purpose and the effect of the conduct.
Through our draft report we sought to road-test how we could frame a provision that strikes the balance between prohibiting conduct which has the purpose, effect or likely effect of substantially lessening competition, but not harming pro-competitive conduct.
We received many submissions about our draft proposal. In response, we have reframed our misuse of market power prohibition to be clearer and better targeted to anti-competitive conduct and ensure that pro-competitive conduct is not captured.
The main change we have made is to recommend including principles in the legislation to guide the court when assessing whether conduct is anticompetitive or is designed to enhance efficiency, innovation, product quality or price competitiveness.
We also make recommendations aimed at simplifying the law and lowering the regulatory burden on businesses. These include recommendations to simplify the authorisation and notification provisions and to remove redundant provisions from the law.
Our approach to the law is that brighter lines and less complexity increase certainty for businesses.
Reforms to competition institutions
Lastly, I believe our recommendations on competition institutions are vital. Good institutions matter to achieve outcomes.
Reform can be a slow process. For example, subsequent to the Hilmer Review, it took governments 18 months to agree the mechanics of implementing NCP. It took 20 years after the Hilmer report to implement the reforms to electricity.
The reforms we are proposing need to be able to survive changes of governments and key personnel. This will be aided if we have strong institutions to progress reform. The elements of a strong institution include independence, transparency, and credibility.
We propose a new institution be established to take forward this work, the Australian Council for Competition Policy, or ACCP. We want this body to be independent, well-constituted and transparent in its actions.
The ACCP would be a ‘truly national body’, that is, it would have strong ties to the States and Territories alongside the Commonwealth, with shared governance and funding and ability for all governments to refer work to the ACCP.
The ACCP would play a strong leadership role, including advocacy for competition policy, holding governments to account, and regularly analysing the state of competition.
The ACCP would also be responsible for assessing whether jurisdictions were eligible for competition policy payments. We recognise that payments were useful under the previous National Competition Policy reforms. We recommend that such payments be made only if the government implementing the reforms is not the one that receives the payoffs.
Our Report also discusses the main competition regulator, the ACCC. The ACCC is a well-regarded and effective body. In our draft report we recommended that its performance would be strengthened by a Board.
Following submissions we consider that including a more diverse range of views and experience can best be achieved by introducing part-time Commissioners whose commitments beyond the ACCC — including, potentially, in business, consumer advocacy and academic roles — would broaden the Commission’s perspective on issues before it.
We also recommend establishing a new Access and Pricing Regulator to take on access and pricing functions across the economy, including telecommunications, energy, water and access under the National Access Regime. This would strengthen analytical capacity in this important area of regulation, and having an economy-wide ambit would avoid the risk of industry ‘capturing’ of the regulator.
Before I conclude today, I want to touch specifically on small business and implementation of the reform package.
Small business makes a vital contribution to Australia’s economy. The Panel has been especially mindful of the concerns and interests of small business in this package of competition reforms.
It should be easy for all businesses to set-up, compete and win customers in Australia. Removing unnecessary impediments to competition will help all businesses to thrive, including small businesses.
During the course of consultations, the Panel met in forums with over 150 small businesses. The issues raised with us included unequal bargaining power in dealing with larger businesses, the compliance burden of regulation, and difficulties in competing with government-run enterprises, particularly where government is also the rule-maker.
Our Report contains a number of recommendations that address these and other concerns of small business. The changes to strengthen the ‘misuse of market power’ provisions, which I touched on previously, should help small businesses to compete. We also recommend simplification of the processes for collective bargaining and collective boycotts and for accessing exemptions under the law.
Making government regulations more competitive in the areas of standards, licensing and planning and zoning, and obligations on governments not to breach competitive neutrality principles will also support small business.
Taken together our 56 recommendations are a comprehensive forward-looking agenda for improving productivity and the lives of Australians, through changes to competition policy, changes to competition laws and changes to competition institutions.
For any agenda to succeed, a clear plan for implementation is needed. Our Report sketches a ‘road map’ for implementation that identifies pathways forward.
There are risks if changes are too rushed.
The Panel is sensitive to this. We have set out a process for reform, including elements such as:
- Pilot programs and trials in more complex areas such as human services, so that lessons can be learnt about what does and doesn’t work;
- Additional, more detailed reviews in complex areas such as intellectual property before embarking on any changes;
- A transitional process for reform to regulatory restrictions in areas such as pharmacy and air cabotage, recognising that existing businesses need proper notice and assistance with the transition.
There will always be some who feel disadvantaged by reform, and they tend to be more concentrated and have a louder voice than those who benefit, who are often more widely dispersed and less capable of articulating their view.
The Panel understands the importance of bringing people on the reform journey, and providing transitional pathways for those who may need them.
While some of the recommendations in the Review can be implemented by the Australian Government or individual States and Territories acting alone, many will require joint implementation, or at least benefit from being implemented jointly.
We believe that competition reforms should be signed up to as a package by governments, to create an integrated way forward. Also, there needs to be a process for governments to share lessons learned on what does and doesn’t work, particularly in sensitive areas like human services.
The time has come to reinvigorate competition policy. This will unleash the forces of choice and diversity, so that the lives of Australian users and consumers improve over the next twenty years.
Our long-term competitiveness, productivity, real wage growth and rising Australian living standards depend on us successfully meeting the challenge as we did in the 1990s.
We have set out a competition policy framework based on sound, stable and enduring principles. We have identified areas where our current framework falls short of the mark, and suggested ways to improve it.
This is a significant opportunity to improve Australia’s future economic prospects. We believe that our Report provides a roadmap for that journey.
i Commonwealth of Australia 2015, Intergenerational Report – Australia in 2055, CanPrint Communications Pty Ltd, Canberra, page 16.
ii Commonwealth of Australia 2015, Intergenerational Report – Australia in 2055, CanPrint Communications Pty Ltd, Canberra, page 33, Chart 1.24
iii Bureau of Infrastructure, Transport and Regional Economics 2007, Estimating urban traffic and congestion cost trends for Australian cities, Working paper 71, BTRE, Canberra ACT, page XV.
iv Productivity Commission 2005, Review of National Competition Policy Reforms, Report no. 33, Canberra, page XLIII.