Review of National Productivity Competition Commission Policy Reforms Inquiry Report No. 33, 28 February 2005 © Commonwealth of Australia 2005 ISSN 1447-1329 ISBN 1 74037 169 0 This work is subject to copyright. Apart from any use as permitted under the Copyright Act 1968, the work may be reproduced in whole or in part for study or training purposes, subject to the inclusion of an acknowledgment of the source. Reproduction for commercial use or sale requires prior written permission from the Attorney-General’s Department. Requests and inquiries concerning reproduction and rights should be addressed to the Commonwealth Copyright Administration, Attorney-General’s Department, Robert Garren Offices, National Circuit, Canberra ACT 2600. This publication is available in hard copy or PDF format from the Productivity Commission website at www.pc.gov.au. If you require part or all of this publication in a different format, please contact Media and Publications (see below). Publications Inquiries: Media and Publications Productivity Commission Locked Bag 2 Collins Street East Melbourne VIC 8003 Tel: (03) 9653 2244 Fax: (03) 9653 2303 Email: [email protected] General Inquiries: Tel: (03) 9653 2100 or (02) 6240 3200 An appropriate citation for this paper is: Productivity Commission 2005, Review of National Competition Policy Reforms, Report no. 33, Canberra. The Productivity Commission The Productivity Commission, an independent agency, is the Australian Government’s principal review and advisory body on microeconomic policy and regulation. It conducts public inquiries and research into a broad range of economic and social issues affecting the welfare of Australians. The Commission’s independence is underpinned by an Act of Parliament. Its processes and outputs are open to public scrutiny and are driven by concern for the wellbeing of the community as a whole. Information on the Productivity Commission, its publications and its current work program can be found on the World Wide Web at www.pc.gov.au or by contacting Media and Publications on (03) 9653 2244. Canberra Office Level 3, Nature Conservation House Cnr Emu Bank and Benjamin Way Belconnen ACT 2617 PO Box 80 Belconnen ACT 2616 Telephone 02 6240 3200 Facsimile 02 6240 3399 Melbourne Office Telephone 03 9653 2100 www.pc.gov.au 28 February 2005 The Honourable Peter Costello MP Treasurer Parliament House Canberra ACT 2600 Dear Treasurer In accordance with Section 11 of the Productivity Commission Act 1998, we have pleasure in submitting to you the Commission’s final report on the Review of National Competition Policy Reforms. Yours sincerely Gary Banks Philip Weickhardt Robert Fitzgerald Chairman Commissioner Commissioner Terms of reference I, PETER COSTELLO, Treasurer, pursuant to Parts 2 and 3 of the Productivity Commission Act 1998, hereby refer the following inquiry to the Commission for inquiry and report within nine months of receipt of this reference. The Commission is to hold hearings for the purpose of the inquiry. Background 1. In 1995 the Australian, State and Territory Governments agreed to a program of competition policy reform. National Competition Policy (NCP) and related reforms provide a timely, coordinated and comprehensive approach to reform across all levels of government. There has been substantial progress in the implementation of NCP over the past eight years, including in the related reform areas of electricity, gas, road transport and water. This has delivered significant benefits to Australia. The States and Territories have shared in these gains, including through competition payments made by the Australian Government. 2. In November 2000, the Council of Australian Governments (CoAG) agreed to a further review of NCP arrangements by September 2005. 3. It is therefore timely to undertake an independent review of these arrangements to consider the extent of the benefits the reform program has delivered to date and to inform an assessment of the most worthwhile competition related reforms that could be achieved in the future, including competition related reforms which could apply beyond current NCP arrangements. Scope of Inquiry 4. The Commission is to report on: a) the impact of NCP and related reforms undertaken to date by Australian, State and Territory Governments on the Australian economy and the Australian community more broadly. To the extent possible, such assessment is to include: i. impacts on significant economic indicators such as growth and productivity, and to include significant distributional impacts, including on rural and regional Australia; and ii. its contribution to achieving other policy goals. b) at the Australian, State and Territory level, areas offering opportunities for significant gains to the Australian economy from removing impediments to efficiency and enhancing competition, including through IV TERMS OF REFERENCE a possible further legislation review and reform programme, together with the scope and expected impact of these competition related reforms. Considerations 5. In conducting this review, and in recommending changes, the Commission should take into account the desire of the Government: a) to focus new review and reform activity on areas where there is clear evidence of significant potential gains, in particular where clear gains are possible in Australia’s international competitiveness, in the efficiency of domestic markets or for Australian consumers; to ensure possible reform activity considers appropriately the adjustment and distributional implications and its contribution to achieving other policy goals. b) to take into account but not replicate significant current and recent review activity in areas such as the CoAG work on energy and water and the review of the competition provisions of the Trade Practices Act. 6. In undertaking the review, the Commission is to advertise nationally inviting submissions, hold public hearings, consult with relevant Australian Government, State and Territory agencies and other key interest groups and affected parties, and produce a report. 7. The Government will consider the Commission’s recommendations, and the Government’s response will be announced as soon as possible after the receipt of the Commission’s report. The report will inform the CoAG review due to be completed by September 2005. PETER COSTELLO Received 23 April 2004 TERMS OF V REFERENCE Contents Terms of reference IV Key Points XII Overview XIII Recommendations for a national reform agenda XLIV 1 About the inquiry 1 1.1 Background to the National Competition Policy 1 1.2 Scope of the inquiry 3 1.3 The Commission’s approach 3 1.4 Guide to the report 7 2 Progress in implementing the NCP 9 2.1 Introduction 9 2.2 Progress in NCP implementation 11 2.3 Competition payments 29 3 Australia's recent economic performance and the role of NCP 35 3.1 Introduction 36 3.2 Australia’s recent economic performance 38 3.3 Determinants of Australia’s productivity revival 42 3.4 Quantifying the economy-wide impacts of NCP 47 3.5 Conclusion 52 4 Prices, service quality and GBE performance 53 4.1 Price impacts of NCP 54 4.2 Has infrastructure service quality improved? 65 4.3 The financial performance of GBEs 73 4.4 Price and service quality impacts for other goods and services 77 4.5 Summing up 82 CONTENTS VII 5 Social, regional and environmental impacts 85 5.1 Social welfare and equity considerations 87 5.2 Employment effects 94 5.3 Regional impacts of NCP 97 5.4 Environmental considerations 118 5.5 Summing up 123 6 Lessons from NCP 125 6.1 The underpinnings of NCP 126 6.2 Some lessons from the NCP experience 128 7 The importance of continuing reform 159 7.1 The significant challenges ahead 160 7.2 How will further reform help? 163 7.3 No change is not a viable option 171 7.4 Delineation of a future reform agenda 173 8 Further infrastructure reform 177 8.1 The priority infrastructure sectors 178 8.2 Energy 180 8.3 Water 200 8.4 Freight transport 209 8.5 Passenger transport 224 8.6 Communications 233 9 The legislation review program 249 9.1 The legislation review process 250 9.2 Better gate-keeping arrangements are also required 255 9.3 Some priority legislation reviews 259 10 Other aspects of the future competition framework and regulatory 271 architecture 10.1 Some remaining trade practices issues 272 10.2 Other competition ‘framework’ issues 279 10.3 Governance arrangements 289 10.4 Oversight of monopoly service providers 295 VIII CONTENTS 11 Other areas for national reform 303 11.1 Why reform of human services? 304 11.2 What scope for competition-related reform? 306 11.3 Competition-related reform and natural resources 321 11.4 Some key areas for national coordination 323 11.5 Labour markets and tax policy reform 349 12 The way ahead 359 12.1 Why further nationally coordinated reform? 360 12.2 What agenda emerges? 362 12.3 Some priorities within the agenda 368 12.4 What sort of institutional frameworks are required? 373 A Inquiry processes and consultation 391 B National Competition Policy — reforms, institutions and 403 achievements References 427 CONTENTS IX OVERVIEW Key points • National Competition Policy (NCP) has delivered substantial benefits to the Australian community which, overall, have greatly outweighed the costs. It has: – contributed to the productivity surge that has underpinned 13 years of continuous economic growth, and associated strong growth in household incomes; – directly reduced the prices of goods and services such as electricity and milk; – stimulated business innovation, customer responsiveness and choice; and – helped meet some environmental goals, including the more efficient use of water. • Benefits from NCP have flowed to both low and high income earners, and to country as well as city Australia — though some households have been adversely affected by higher prices for particular services and some smaller regional communities have experienced employment reductions. • Though Australia’s economic performance has improved, there is both the scope and the need to do better.