The Queensland Parliament’s passage of the retrograde sugar bill that was put forward by Katter’s Australian Party is a strong sign that we should not hold much hope for sensible economic policy coming out of this hung parliament (see Brisbane Times coverage).  It means we are very unlikely to see any action at a State level to adopt the Harper Competition Policy Review reforms. This is very disappointing because these reforms would yield substantial economic benefits, as Rod Bogaards, a former director at the Productivity Commission, discusses in his guest post below.

Australian Government response to Harper Competition Policy Review — learning lessons from past reform processes

Last week the Commonwealth Treasurer released the Government’s long awaited response to the Harper Review, accepting over three quarters of the recommendations. With much of the public debate centred on the review’s proposed changes to competition law, the recommendations to reinvigorate competition policy have received less attention.

Competition policy is aimed at exposing previously protected activities to competition — in recognition of the fact that, in most cases, competitive markets deliver better outcomes than regulated markets. This is because they effectively align the interests of suppliers and consumers. In seeking to maximise profits, suppliers have a strong incentive to produce at least cost, to provide the mix and quality of products and services consumers want and to innovate to gain an edge over their competitors. In other words, consumers are better off when businesses compete vigorously to deliver new and better products and services at lower prices.

Many recommendations in the Harper Review are not new but relate to ‘unfinished business’ from National Competition Policy (NCP), which was agreed between the Australian, state and territory governments in 1995. These include restrictions on:

• retail trading hours
• pharmacy ownership and location rules
• taxi licences
• parallel imports of books and second-hand cars
• planning and zoning
• water trading
• coastal shipping and aviation
• retail prices of electricity and gas.

In many cases, properly constituted legislation reviews found that benefits of such restrictions to the community as a whole are outweighed by the costs. For example, numerous reviews of retail trading hours restrictions over the last two decades have found that deregulating trading hours would benefit consumers through greater convenience and choice of products and services and potentially lower retail prices and higher retail employment.

Businesses benefiting from the retail trading restrictions often point to small business participation to maintain the restrictions. But this is not supported by the evidence. The Productivity Commission found consistently high small business participation rates of around 90 per cent in both regulated and deregulated Australian states and territories, suggesting that trading hours have little influence over the level of market participation by small retail businesses.

However, recommendations from such reviews were not ultimately implemented by governments. This was largely because those who stood to lose from a policy change were concentrated, organised and vocal in their lobbying and those who stood to gain were often widely dispersed.

This suggests that the quality of the agreements that will be negotiated between the Australian Government and the state and territory governments and the institutional structure that is developed over the coming months will be crucial to delivering reform.

The Queensland community may be best served through an agreement that commits to implement the set of outstanding reforms, and concentrates future review and policy efforts on anti-competitive restrictions where the costs and benefits of removing restrictions are more finely balanced, or where benefits are heavily dependent on implementation and design of any new arrangements.

The complex nature of human services (health and education) is, for example, one area where jurisdictions should focus their policy analysis. This is because the prevalence of market failures in many facets of health services markets means that unfettered competition will often not deliver the best outcomes. In addition, while competition may deliver lower cost outcomes, it does not guarantee equity of access to basic health services. Other areas where governments could focus their attention include government procurement, road transport and intellectual property.

To ensure that all jurisdictions deliver on reform, the institutional framework will be important. The National Competition Council (NCC) played an effective role in monitoring and assessing progress of jurisdictions against their reform commitments under NCP. While the Commonwealth Treasurer had the final say, whether particular jurisdictions received their competition payments depended largely on the advice of the NCC.

To this end, the Commonwealth Treasurer’s press release stated:

“To support the new competition policy agenda, the Government has supported the recommendation to put in place a new institutional structure with the states and territories, including the potential for productivity payments for delivery of reforms.”

The lesson of past reform programs is that any reward payments for jurisdictions should be tied to the outcomes achieved rather than the processes undertaken. The 2009 National Partnership Agreement to Deliver a Seamless National Economy and to a lesser extent the 1995 NCP agreement were too focused on rewarding jurisdictions for their achievement of process milestones rather than reform outcomes, particularly in the early years of these agreements.

Rod Bogaards is an economic consultant and former Director of the Productivity Commission.