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Competition Policy, Industry Policy and Deregulation of the Australian Economy
Economic Analysis &. Policy
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COMPETITION POLICY, INDUSTRY POLICY AND DEREGULATION OF THE AUSTRALIAN ECONOMY
Bill Scales Chairman Industry Commission Melboume Vic. 3000 '
The Australian economy has experienced two major waves of refonn in recent years. The first was characterised by reform of the traded goods sector and deregulatio~ of financial markets. This wave of.refonn provided the impetus for reform of the non-traded sector, particularly GBEs, transport, labour markets and other services. These refonns are continuing, indeed they must continue if Au stral i a is to mai nlain or improve its economic conditions, but those reforms are now driving reform in a third area: refonn of the framework within which economic acti v ity occurs. Among the most important aspects of this third wave wilJ be reform of Commonwealth/State relations, competition policy and regulation. Such reforms will facilitate increaSing competition throughout the Australian economy which is the key to higher productivity and growth. 1
1. INTRODUCTION Over the last year the Australian economy grew strongly. Inflation is at its lowest level in decades. Business investment - one of the most important engines of economic growth - is finally beginning to increase. However, an improved economy brings with it its own set of public policy challenges which need to be addressed to ensure that growth continues. The steps taken by the Commonwealth Government over the last decade to open Australia to international competition through lowering tariff barriers and deregulating financial markets unleashed powerful forces for change on all areas of the economy. For example. intemationalisation of the Australian economy requ~res efficient labour markets, government business enterprises, services industries 9 and even efficient governments if we are going to ha-ve efficient and dynamic export and import competing sectors~ Above and beyond efficiency in all these separate areas of the economy, an efficient and dynamic public policy framework is required within which Australian businesses can operate. Improving Australia's economic efficiency might seem like a never-ending task. In truth it is. The external forces acting upon this, economy that, as w~ remove one impediment stopping the efficient allocation of resources, it will become evident that other impediments need addressing. What has become obvious over time is that the major reforms of the mid-80s were important drivers of reform in other areas.. Lowering tariffs and floating the
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exchange rate put pressure on the traded goods sector to improve its performance. However, the traded sector cannot be competitive without an efficient non-traded
sector. Pressure quickly mounted - and has been maintained - for what we might call a second wave of reform: more efficient ~ansportt GTEs, labour markets and other services. We are still in the middle of this refonn, indeed a lot still needs to be done. However, this second wave of reform has exerted its own pressures and we are seeing some of the results of that now. A third wave of reform has started, one that is characterised by refonn of the framework within which economic' activity occurs. I'd like to look at a few aspects of this third wave of reform. In particular, I wish to talk about some of the issues arising from reform of Commonwealth/State relations, competition policy and regulation~ But first, let me provide further background on the earlier rounds of reform. In particular, I want to talk about the Uruguay Round and about GTEs and labour markets. They are areas where a lot of change has occurred but more needs to be done to consolidate' and extend the reforms promised and commenced.
2.
URUGUAY ROUND
The recently completed Uruguay Round produced results which will have important ramifications for the Australian economy. In this Roundl' as well as achieving further cuts in industrial product tariffs, the GATT broke new ground in'many areas: • For the first time it committed member countries to substantial cuts in agricultural tariffs and subsidies; • trade in services will also come under GATf-type rules for the first time;. • comprehensive rules have been created to protect intellectual property and govern disputes covering sophisticated and advanced technology; • the scope. for Governments to impose onerous conditions on inward foreign investment has been limited; and • a new World Trade Organisation has been formed, replacing what were essentiall y interi m i nstitutional arrangements for the G A1T s i nee 1947. The Industry Commission has estimated that the potential long tenn benefits, in terms of increases in real GDP in the Australian economy, will be $4.4billion, or $780 for each Australian household. Overall, output is estimated to increase by 0.7 percent't exports by 8.1 percent, imports by 6.8 percent and Australia's capital stock by 2.6 percent (source: SALTER model projections). Dynamic ga!ns from trade liberalisation would add to thes~ benefits. These dynamic gains will be very important The outcomes of the Uruguay Round will drive further structural change in the Australian economy, to which governments, industry and the community must be prepared to respond. Of course, all this assumes that the spirit, as well as the letter, of the Uruguay accords will be adhered to~ Protectionist pressures remain strong within most countries and need to be counterbalanced by a more widespread awareness within each country of the benefits from their own liberalisation.
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It is very important to recognise, however, that international and regional progress in trade liberaIisation has only been possible because countries like Australia have taken the lead in refonning their own economies.
3. GTEs The capacity of Australian enterprises to take advantage of a more liberalised world trading environment depends not just on their own dynamism and well-judged investments. The external costs that they face are crucial to their prosperi ty. GTEs are providers of a large share of inputs to industry and significant industry sectors in themselves. In 1992/93 GTEs'accounted for 10 percent ofGDP, 8' percent of the total national wage bill and 13 percent of gross fixed capital expenditure (ABS, 1994). As such, and as the Commission has stated many times in the past, the efficiency of GTEs is critical to all industries. Governments throughout the past decade have implemented a wide range of reforms in their GTEs. All jurisdictions have implemented or are considering admin istrati ve, corporatisation, competitive and/or ownershi p refonns. As a resuI1, real labour productivity in GTEs has grown at an average annual rate of 15 percent over the last six ye~s. Of great import to users is that real prices have fallen by 10 percent over the sam~ period. HoweverI' to put this into an international context, the OBeD recently noted that productivity levels in the major [Australian] GBEs ... appear to have been u about 30 percent below achievable international best practice in the early 1990s (OE;CD, 1994, p69). Commercialisation and corporatisation are important refonns and they should continue. However, it is becoming increasingly clear that they may not produce the desired results in all cases. : Public ownership of GTEs necessita·t~s goyemments carrying out a delicate balancing act. Governments are required to ensure that their GTEs are both accountable and efficient at the same time. They have to avoid the trap of letting budgetary pressures force them to use the monopoly positions of GTEs to extract excessive dividends while ensuring that pressure is kept on them to con tinuall y ~ improve their effieiency. In addition, they should aim to ensure that GTEs produce a satisfactory rate of return on the public assets invested iri them. In the past the Industry Commission, like many others, has argued that the issue of ownership of GTEs was not the most important issue to be resolved. More important has, been the emphasis on getting the market structures, management and other factors right. Creating networks to promote competition amongst and between GTEs is an important and necessary first step in the process of GTE refonn. This is not to say that, once a competitive environment is in place. ownership is unimportant As the World Bank has put it: urIbe main lessons of experience are clear: Private ownership itself makes a difference. Some state-owned enterprises have been efficient and wellmanaged for some periods, but government ownership seldom pennits U •••
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sustained good perfonnance over more than a few years~ The higher probabi Ii ty of efficient performance in private enterprise needs to be considered in choosing whether to invest public funds in State Owned Enterprises or in health, education, and other social programs." (World Bank, 1992).
The Industry Commission has constantly argued that, whether a GTE should remain as a government owned enterprise, or should be sold to the'public to .become part of a dynamic private sector, can only be detennined on a case-by-case basis. Our most recent inquiry experience does not lead us to change that view.. 4.
LABOUR MARKETS
In the last decade there have been some very important changes in public policy affecting Australian labour markets. During that time there has been a gradual shift away from the highly centralised wages system, characterised principally by the award structure. to a system which is beginning to incorporate options for increased flexibility at the workplace level. Labour market refonn includes evaluation ofboth demand and supply side issues, including training and skills development, for management as well as for the workforce. Award restructuring which began in the mid-1980s has facilitated workplace flexibility. Where awards previously contained long l~sts of :which types of employees were allowed to do which sort of work, without'recognition of skill levels~ most awards now have a small number of broad classifications arranged in terms of skill levels. Coupled with moves to multi-skill employees this has given employers and employees the potential to reallocate workers more flexibly within an enterpri se~ The past decade has seen extensive rationalisation of union coverage, with 'the number of federally registered unions falling from 147 in 1988 to 64 in 1993. This has helped to reduce problems arising ~rom multiple unions in a workplace. In labour market refonn the key word is flexibility ~ As in other areas of the economy, resources (in this case labour) must be free to move to their most productive uses and be free to operate in the most efficient manner. This is important, not just for industry and employers, but for employees too. In its recent inquiry into Meat processing (Ie, 1994a), the Commission found that: " ... greater flexibility ~ particularly greater use of enterprise agreementscould bring about significant productivity gains, with benefits for workers. producers processors, and some consumers~" (Ie, 1994a, pXVI) One of the means by which governments, unions and management have been attempting to improve flexibility in labour markets is through the introduction of enterprise bargaining. Each of the States and the Commonwealth now have . enterprise bargaining systems in place~ If there is to be a significant spur to productivity, enterprise bargaining needs to extend to aU sectors of the economy- Enterprise agreements have b~en largely limited to the public sector and within the private sectors are concentrated in larger workplaces and in metal related manufacturing industries. t
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Arou nd 50 percen l of wage and salary earners covered by Federal awards now have formal enterprise agreements. There are now around 2400 Federally registered enterprise agreem,ents, covering over 1.3 million employees. The spread and quality of ente,rprise agreements has been inhibited by a number of institutional features. Further progress is required. In its inquiry on Impediments to Regional IndustryAdjustment, the Commission identified three such features which, from regional perspective~ were impeding better labour market practices (Ie, 1993b): • While new arrangements ~ave" opened u~ opportunities for non·unionised workplace:s to engage in enterprise bargaini~g. the powers granted to trade unions to scm tini se and oppose Sl;lch agreements have the potenti al to co nstrain new ini tia tives. . . , • Because enterprise bargaining arrangements are still effectively linked t~ the centralised award system the scope for agreed outcomes to reflect conditions which are 'most appropriate for the workplace remains restricted.' • A safety net which establishes common ,minimum employment standards for all workers is important, not least to gain workers· commitment to productivity improving reforms~ How~ver, currently there are a multiplicity of safety nel$ ·7"over 5,000 awards specify different minimum wages and conditions applying across a range of ~rafts and occupations. Complex safety net structures that . incorporate matters beyond basic,minimum standards tend to favour those who . have jobs at the expense of employment opportunities for those seeking entry (or fe-en try) into the workforce.· . There is a number of other major'reforms of Australian labour markets which are 'being or have been conducted, apart from enterprise bargaining~ It is very important that this process continue. The key labour market r~forms to date have been precondition~ for the next wave of improvements - award restructuring and the amalgamation ofunions was a necessary preco nditio'n for the smooth in trod uction of enterprise based agreements. Enterpris~ agreements will ~ more effective in imprcivi ng productivity at the level of the firm or enterprise when they are less dependent on general award provisions. I
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5.
CAPTURING.THE BENEFITS OF CHANGE
Changing and modifying institutional structures to· ensure that Australian firms gain from the opening up of markets is inevitable. The types of pressures I have descri bed wi II see to that. But we can dis sipate ~he benefits and increase the costs of change by hindering it and slowing its progress_, If governments, industry and the community aren't prepared for change, if .we don't have efficient and dynamic frameworks within which industries can·operate~ the gains will be smaller, The types ofstructural changes and reforms described so far are pushing us into a third round ofeconomic reform: reform of the framework within which economic activity takes place. In particular the nature ConunonwealthlState relations, Competition Policy and appropriate regulation of industry. How we deal with these issues will playa large part in detennining how well we capture some of the gains that are availablet to us.
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6.
COMMONWEALTWSTATE RELATIONS The Commission has fecen tl y gi yen a great deal of thought to Commonweal thiS tate relations because our inquiry program has exposed us to some of the challenges in this area. Co-ordination anq co-operation between the different levels of Australian Government is important for industry" development because of the effect of di fferent government approaches to regulatory, service, infrastructure, assistance and taxation policies. The benefits of this co-operation and.'co-ordination are
substantial. Australia can reduce its business costs and facilitate the operation of national markets and networks by reducing overlap and inconsistency in government regulation. We can reduce the burden on taxpayers and, ultimately. improve the competitiveness of firms and the economy by integrating physical and social infrastructure across jurisdictions and improving the efficiency with which GTEs and other government agencies provide serVices. Let me give you just a few concrete examples of the types of areas where there are gains to be ma~e. In its report into Workers' Compensation (Ie, 1994c) the Co'mmission noted that, to cover all of its employees Australia-wide, BHP needs to operate at least thirteen different workers' compensation schemes. In its report into Impediments to Regional Industry Adjustment (let 1993b) the Industry Commission observed how lack of intergovernmental co-operation on roads and railways adds to the cost of infrastIucture provision. In its report into Adding Further Value to Australia's Forest Products (IC. 1993a), the Commission found that individual port charges in Australia could be more than six times higher than those in New Zealand. We also found that, in the production of paper products, power makes up between 15 and 20 percent of costs. Therefore, even ,small increases in the efficiency of delivery of power~ if translated to lower prices to producers by effective competition. can significantly increase the international competitiveness of this sector of the economy. There are opportunities to build economies of scale in our industries and develop national markets by reducing competitive and conflicting assistance arrangements between States~
7.
THE IMPORTANCE OF EFFECTIVE COMMONWEALTWSTATE RELATIONS IN MICROECONOMIC REFORM
The effective implementation of microeconomic reform can require governments to act individually orcollectively~We've seen a good number of important refonns carried out within individual jurisdictions in recent years. For example, the Co mmonwealth has continued with its progress in tari ff reforms desp i te a grea t deal of pressure to retreat. Victoria and South Australia have, or will, implement casemix funding for their hospitals. All States and the Commonwealth have made major reforms in the area ofcontracting out and competitive tendering. New South Wales implemented significant ref<;)rm of legal professions. Queensland began reforming their system of de facto coal royalties via rail charges. Many of the States have set up offices within their Governments to co-ordinate the review of legislation and regulation. The Commonwealth, of course, has the
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Office of Regulation Review within the Industry Commission~ In Working Nation (Keating, 1994) the Commonwealth set aside funds to expand the role and operations of the Office 0 f Regulation Review and estabIi sh a Couneil of Business
Representatives. The different jurisdictions are also beginning to realise the real costs of their competitive and conflicting industry assistance arrangements. In January of this year, the Victorian Premier Mr Kennett gave some indication that when pOwer contracts with Alcoa Australia's Victorian smelters were renegotiated, the $200m" subsidies provided to them would be reconsidered. These individual" refonns are important and they must continue. However, individual juris~ictions can't do everything~ By their very nature, the previously mentioned problems with regulation, of physical and social infrastructure, State taxation, assistance arrangements and community services are, in some cases; best dealt with through co-ordinated action between the Commonwealth and all of the S tates and Terri tories. To date reform of these problems has been handled through Ministerial Councils and the COAG process. Some of the steps taken so far include: The establishment of a number of cross-jurisdictional bodies such as the • Australian Securities CO"mmission, the National Road and Transport Commission and the National Food Authority, to reduce the problems associated with overlapping and inconsistencies in regulations., • Mutual recognition of pr9duct regulation and entry to regulated occupations was introduced in March 1993 by the Common weal th and all states other than Western Australia. • Closer to hornet for the Industry Commission, the Review of Commonwealth and State Service provision was estab1i~hed by the Council of Australian Governments, to help in improving accountability and efficiency in service provision. The establishment of, or agreement to establish national infrastructure networks, • ~uch as the national Rai1Fre:ight Corporation, the interstate electricity grid, and a framework for interstate gas trade, to integrate physical infrastructure are important national initiatives. Reform of GTEs through the planned implementation of the National Competition Policy will be a catalyst for further-changes in this area. Delays in addressing these matters through ~he COAG process highlight the fragility of the institutional frameworks which have been established to resolve these important issues~ Efforts to improve Commonwealth/State relations often meet resistance. The co-operative approach"to improving Commonwealth/State relations may not always be the best one. Forging a consensus position between all Governments takes ti me and prov ides opportu nili es for costly concessions. This raises a few questions: Do we need unanimous agreement by all Australian governments before reforms can proceed? Should consenting governments be able to proceed with reforms; with other governments'free to join later? How important is it to accommodate trade-offs between govenuttents on major issues? And what lessons might be drawn from international experience, for example from the t
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European Union? Some steps have been made in this regard. Many ministerial councils now require only two-third majority decisions with all govemmentsbound. Sometimes, however, the Commonwealth may simply have to take the lead in refonn. For example, in its report on Workers' Compensation (Ie, 1994c) the Commission recommended that the Commonwealth establish a national1 y available workers· compensation scheme with the aim ofu si ng competitive pressure to force the States to improve their own systems.
8.
COMPETITION POLICY
One of the issues which has been at the forefront of policy deliberations in recent times has been competition policy. In particular, the recommendations of the Hilmer Report on National Competition Policy (Independent Committee of Inquiry in to Competilion Policy in A ustrali a, I993). Increasing competition throughout the economy is a key to higher productivity and growth. The steps being taken by the Commonwealth and State Governments to implement a national competition policy are, therefore, crucial to the future economic performance of Australia. However, the process of implementing a National Competition Policy has, thus far, been painfully slow. The August COAG meeting achieved 'in general' approval by the States, Territories and Commonwealth Governments of implementation" of the National Competition Policy and a set of draft arrangements negotiated between Commonwealth and State officials is currently open to public comment. However, there was disagreement on some important 'particulars'. Consultation and consensus is certainly necessary. It is desirable that all the stakeholders in the process agree with what they are being asked to do. However, the tong consultation process has a major disadvantage; it presents opportunities for the integrity of the package to be compromised. On the more positive side, it gives each State or Territory the rare opportunity to make a significant contribution to the economic development of a nation, not just the econo~c development of their jurisdiction. There are also some issues which have to be carefully considered in setting up the framework for national competition policy. Allowing individual jurisdictions to exempt activities from competition, except under the strictest conditions; reducing the independent inquiry function of the proposed National Competition Council; or reducing the openness and transparency of that Council, all go against the original intentions of the reform package and reduce the benefits to be gained. At the moment it is not clear that the draft competition> policy addresses these issues. . It is important to minimise the extent to which the spirit of competition policy falls prey to unnecessary legalism. There are numerous opportunities fnr play~rs in the process to dissipate the benefits of the policy by strategic use of the courts. A particular example I have in mind here is the comprehensive rights of appeal to the Trade Practices Tribunal in the draft Competition legislation over disputes for access to essential facilities for new competitors in infrastructure networks.
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9. APPROPRIATE REGULATION Discussion of the COAG process and the Natio~al Competition policy leads 'me into an~ther major area ofrefonn ofthe framework wi thin which economic activity takes place. Namely. government regulation. I say that discussion of COAG and Hilmer leads me if:lto this topic because aU governments have a role in refonning regulation and, in fact, argue its' importance. As the Austral~aneconomy has become mo~ open and as deregulation and the introduction ofmarket forces in many areas of the economy has proceeded, the need for highly prescriptive government regulation of particular areas of economic activity has become less clear. As I stated before, Govem~ents are beginning to realise the costs of heavyhanded regulation and are trying to do something about it. New South Wales is one State which runs on the board in this issue. The New South Wales pricing tribunal has been prepared to look at the wider issues of efficiency and crosssubsidies in determining prices· for New South Wales Government owned monopolies, rather than limiting itself to a narrow focus on profits and costs. Pricing oversight is a specific area raised in the Hilmer report. The Hilmer report recommended a review of declarations under the Prices Surveillance Act The Industry Commission will shortly be making a submission to that review, which is now being conducted by the PSA, but there are a few comments I would like to make here. Allow me to preface my remarks by saying that the Industry Commission has supported a role for prices surveillance or monitoring in a number of the public utility or natural monopoly areas into which it has inquired. However, the structural changes in the Australian economy that I have detailed here today have completely changed the competitive pressures which act upon many markets. The Australian economy is much more open and competitive than it was in 1983 when the Prices Surveillance Act was written. For example, there is an expectation of low inflation in the immediate future. In a period of low inflation, ie. when the average level of price increase is low, relative price changes are much more noticeable and consumers thel1lselves have more immediate notification of price increases. It is timely to raise the question of exactly what role prices surveillance should now have. Prices surveillance is intended to counter the effects of market power. by limiting the ability of finns to raise prices above competiti ve levels. In this role it can have important efficiency advantages.. In a Dumber of recent inquiries the Industry Commission has recommended that prices surveillance or monitoring be carried out. We have supported prices surveillance of Australia Post, the CAA, the FAC and some port services. Unfortunately prices surveillance, while being , potentially popular and even seductive, is not without its costs. In the short term prices surveillance imposes obvious.costs of data collection and compliance. However, in the Industry Commission inquiry into Raw Materials Pricing/or Domestic Use (Ie, 1992) the Commission found that surveillance may also undennine new investment by restricting the ability of firms to maintain a viable rate of profit through flexible pricing over peaks and troughs in demand.
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Indeed. just this month Amott's cited continued price surveillance as a reason for cancelling major new investment plans. Without wanting to enter into the debate abou t the validi ty of th is claim, it is not surprisi ng that private sector finns considering new investment would think seriously abQut whether to proceed if there was any doubt about its ability to plan strategically the expected return on that investment. Priceplanning is tical when considering potential return on in vestment No fi nn wouId Iigh tI y in vest in a marke~ or extend its i n vestmen~ in a market" where it may find itselfhead to head in public debate with a government pricing regulator.. For most firms it is a public debate where - in the era of the thirty second grab they're bound to lose.. In addition. in its inquiry on Petroleum Products (lC 1994b) the Commission noted the possibility that prices surveillance could actually facilitate tacit collusion by providing a benchmark to which prices return after a period of discounting.. Prices surveillance which is based on cost of production calculations can also provide an incentive for cost-padding. The longer-term effects of price surveillance are less obvious but possibly more important. Prices surveillance can stifle innovation in markets by not allowing firms to reap the benefits of new efficiencies, techniques or prodUClf). Dynamic effects of public policies are extremely important. It is possible that by imposing price restraint on some markets we are having the perverse effect of making them less competitive. If new entrants are not attracted into a market by the potential returns. then the incumbents ha~e less incentive to act in an efficient . manner. In being overly vigorous in prices oversigh~ we may rob the market of important signals and the possibility of contestability.. In our view, due to its short and long tenn costs, prices surveillance is a tool that should be used sparingly in the
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Before any d~ision to impose prices surveillance is made. regulators should t~ a number of questions: • is import penetration persistently low? • does the dominant market player have an overwhelming market share? • is that dominant player without a major rival? • are there significant entry baniers? If the answer to one of these questions is no, then in our view it is very hard to justify prices surveillance or prices monitoring. Furthennore, markets change. economic conditions change and institutional structures change. Therefore we consider that all markets and products covered by price oversight should be regularly reviewed against principles which desirably. have been nationally agreed. Importantly, such reviews should nol be carried out by the prices oversight au thon ty itself.
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10. CONCLUDING REMARKS Since the early 1980s there has been significant change in the operation of the Australian economy. Tariff refo~ deregulation of financial markets and floating of the exchange rate opened Australia to the winds of international competition. They also provided the impetus for reform of industries and governritent.. These
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refonns are still continuing, indeed they must continue, and they are paying dividends in terms of growth and lower levels of inflation. We. cannot afford to weaken in the face of the difficulties before us, The benefits from pressing on are too great to ignore. Reforming the framework \1(ithin which our economic activity takes place is now beginning to take shape.. The new openness of the Australian economy means that we must have efficient intergovernmental relations, competition policy and regulatory systems if we are to reap the benefits of reform. Change is inevitable, but if governments, inc!ustry and the community are adequately prepared for it, and if we have the right frameworks established, we will be well placed to grow at rates capable of absorbing unacceptably high levels of unemployment We will also be well placed to make the most of Australia's existing infrastructure and create the appropriate environment for a wave of productive and exciting investments for the 21st Century. '
REFERENCES Australian Bureau of Statistics (1994), Australian National Income Expenditure and Product, ABS, Canberra.
Accounts~"
National
Independent Committee of Inquiry into National Competition Policy in Australia, (1993), National Competition Policy.· Report by the Independent Committee of Inquiry into National Competition Policy in Australia, AGPS, Canberra. Industry Commission (1992), Raw Material·Pricing for Domestic "N9. 21; AGPS, Canberra. .
Use, Report
Indus try Commission ( 1993a), Adding Fu rther Value to Australia 's Forest Products, Report No. 32, AGPS, Canberra.
Industry Commission (1993b), Impediments to Regional Industry Adjustment, Report No. 35, AGPS, Canberrae . Industry Commission (1994a), Meat Processing, Report No. 38, AGPS. Canberra. Industry Commission (1994b), Petroleum Products, Report No. 32, AGPS, Canberra. .
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Industry Commission (1994c), Workers' Compensation inAustralia. Report No. 36. AGPS, ·Canberra. ,
.
Keating MP, the Honourable PJ. (1994), Working Nation, AGPS, Canberra. OECD (1994), OEeD Economic Surveys, 1993-94, Australia, OECD, Paris. World Bank (1'992), Privatisation: The 'Lessons of Experien~e, World Bank, Washington.
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COMPETITION POLICY, INDUSTRY POLICY AND DEREGULATION OF THE AUSTRALIAN ECONOMY
Bill Scales Chairman Industry Commission Melboume Vic. 3000 '
The Australian economy has experienced two major waves of refonn in recent years. The first was characterised by reform of the traded goods sector and deregulatio~ of financial markets. This wave of.refonn provided the impetus for reform of the non-traded sector, particularly GBEs, transport, labour markets and other services. These refonns are continuing, indeed they must continue if Au stral i a is to mai nlain or improve its economic conditions, but those reforms are now driving reform in a third area: refonn of the framework within which economic acti v ity occurs. Among the most important aspects of this third wave wilJ be reform of Commonwealth/State relations, competition policy and regulation. Such reforms will facilitate increaSing competition throughout the Australian economy which is the key to higher productivity and growth. 1
1. INTRODUCTION Over the last year the Australian economy grew strongly. Inflation is at its lowest level in decades. Business investment - one of the most important engines of economic growth - is finally beginning to increase. However, an improved economy brings with it its own set of public policy challenges which need to be addressed to ensure that growth continues. The steps taken by the Commonwealth Government over the last decade to open Australia to international competition through lowering tariff barriers and deregulating financial markets unleashed powerful forces for change on all areas of the economy. For example. intemationalisation of the Australian economy requ~res efficient labour markets, government business enterprises, services industries 9 and even efficient governments if we are going to ha-ve efficient and dynamic export and import competing sectors~ Above and beyond efficiency in all these separate areas of the economy, an efficient and dynamic public policy framework is required within which Australian businesses can operate. Improving Australia's economic efficiency might seem like a never-ending task. In truth it is. The external forces acting upon this, economy that, as w~ remove one impediment stopping the efficient allocation of resources, it will become evident that other impediments need addressing. What has become obvious over time is that the major reforms of the mid-80s were important drivers of reform in other areas.. Lowering tariffs and floating the
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exchange rate put pressure on the traded goods sector to improve its performance. However, the traded sector cannot be competitive without an efficient non-traded
sector. Pressure quickly mounted - and has been maintained - for what we might call a second wave of reform: more efficient ~ansportt GTEs, labour markets and other services. We are still in the middle of this refonn, indeed a lot still needs to be done. However, this second wave of reform has exerted its own pressures and we are seeing some of the results of that now. A third wave of reform has started, one that is characterised by refonn of the framework within which economic' activity occurs. I'd like to look at a few aspects of this third wave of reform. In particular, I wish to talk about some of the issues arising from reform of Commonwealth/State relations, competition policy and regulation~ But first, let me provide further background on the earlier rounds of reform. In particular, I want to talk about the Uruguay Round and about GTEs and labour markets. They are areas where a lot of change has occurred but more needs to be done to consolidate' and extend the reforms promised and commenced.
2.
URUGUAY ROUND
The recently completed Uruguay Round produced results which will have important ramifications for the Australian economy. In this Roundl' as well as achieving further cuts in industrial product tariffs, the GATT broke new ground in'many areas: • For the first time it committed member countries to substantial cuts in agricultural tariffs and subsidies; • trade in services will also come under GATf-type rules for the first time;. • comprehensive rules have been created to protect intellectual property and govern disputes covering sophisticated and advanced technology; • the scope. for Governments to impose onerous conditions on inward foreign investment has been limited; and • a new World Trade Organisation has been formed, replacing what were essentiall y interi m i nstitutional arrangements for the G A1T s i nee 1947. The Industry Commission has estimated that the potential long tenn benefits, in terms of increases in real GDP in the Australian economy, will be $4.4billion, or $780 for each Australian household. Overall, output is estimated to increase by 0.7 percent't exports by 8.1 percent, imports by 6.8 percent and Australia's capital stock by 2.6 percent (source: SALTER model projections). Dynamic ga!ns from trade liberalisation would add to thes~ benefits. These dynamic gains will be very important The outcomes of the Uruguay Round will drive further structural change in the Australian economy, to which governments, industry and the community must be prepared to respond. Of course, all this assumes that the spirit, as well as the letter, of the Uruguay accords will be adhered to~ Protectionist pressures remain strong within most countries and need to be counterbalanced by a more widespread awareness within each country of the benefits from their own liberalisation.
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It is very important to recognise, however, that international and regional progress in trade liberaIisation has only been possible because countries like Australia have taken the lead in refonning their own economies.
3. GTEs The capacity of Australian enterprises to take advantage of a more liberalised world trading environment depends not just on their own dynamism and well-judged investments. The external costs that they face are crucial to their prosperi ty. GTEs are providers of a large share of inputs to industry and significant industry sectors in themselves. In 1992/93 GTEs'accounted for 10 percent ofGDP, 8' percent of the total national wage bill and 13 percent of gross fixed capital expenditure (ABS, 1994). As such, and as the Commission has stated many times in the past, the efficiency of GTEs is critical to all industries. Governments throughout the past decade have implemented a wide range of reforms in their GTEs. All jurisdictions have implemented or are considering admin istrati ve, corporatisation, competitive and/or ownershi p refonns. As a resuI1, real labour productivity in GTEs has grown at an average annual rate of 15 percent over the last six ye~s. Of great import to users is that real prices have fallen by 10 percent over the sam~ period. HoweverI' to put this into an international context, the OBeD recently noted that productivity levels in the major [Australian] GBEs ... appear to have been u about 30 percent below achievable international best practice in the early 1990s (OE;CD, 1994, p69). Commercialisation and corporatisation are important refonns and they should continue. However, it is becoming increasingly clear that they may not produce the desired results in all cases. : Public ownership of GTEs necessita·t~s goyemments carrying out a delicate balancing act. Governments are required to ensure that their GTEs are both accountable and efficient at the same time. They have to avoid the trap of letting budgetary pressures force them to use the monopoly positions of GTEs to extract excessive dividends while ensuring that pressure is kept on them to con tinuall y ~ improve their effieiency. In addition, they should aim to ensure that GTEs produce a satisfactory rate of return on the public assets invested iri them. In the past the Industry Commission, like many others, has argued that the issue of ownership of GTEs was not the most important issue to be resolved. More important has, been the emphasis on getting the market structures, management and other factors right. Creating networks to promote competition amongst and between GTEs is an important and necessary first step in the process of GTE refonn. This is not to say that, once a competitive environment is in place. ownership is unimportant As the World Bank has put it: urIbe main lessons of experience are clear: Private ownership itself makes a difference. Some state-owned enterprises have been efficient and wellmanaged for some periods, but government ownership seldom pennits U •••
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sustained good perfonnance over more than a few years~ The higher probabi Ii ty of efficient performance in private enterprise needs to be considered in choosing whether to invest public funds in State Owned Enterprises or in health, education, and other social programs." (World Bank, 1992).
The Industry Commission has constantly argued that, whether a GTE should remain as a government owned enterprise, or should be sold to the'public to .become part of a dynamic private sector, can only be detennined on a case-by-case basis. Our most recent inquiry experience does not lead us to change that view.. 4.
LABOUR MARKETS
In the last decade there have been some very important changes in public policy affecting Australian labour markets. During that time there has been a gradual shift away from the highly centralised wages system, characterised principally by the award structure. to a system which is beginning to incorporate options for increased flexibility at the workplace level. Labour market refonn includes evaluation ofboth demand and supply side issues, including training and skills development, for management as well as for the workforce. Award restructuring which began in the mid-1980s has facilitated workplace flexibility. Where awards previously contained long l~sts of :which types of employees were allowed to do which sort of work, without'recognition of skill levels~ most awards now have a small number of broad classifications arranged in terms of skill levels. Coupled with moves to multi-skill employees this has given employers and employees the potential to reallocate workers more flexibly within an enterpri se~ The past decade has seen extensive rationalisation of union coverage, with 'the number of federally registered unions falling from 147 in 1988 to 64 in 1993. This has helped to reduce problems arising ~rom multiple unions in a workplace. In labour market refonn the key word is flexibility ~ As in other areas of the economy, resources (in this case labour) must be free to move to their most productive uses and be free to operate in the most efficient manner. This is important, not just for industry and employers, but for employees too. In its recent inquiry into Meat processing (Ie, 1994a), the Commission found that: " ... greater flexibility ~ particularly greater use of enterprise agreementscould bring about significant productivity gains, with benefits for workers. producers processors, and some consumers~" (Ie, 1994a, pXVI) One of the means by which governments, unions and management have been attempting to improve flexibility in labour markets is through the introduction of enterprise bargaining. Each of the States and the Commonwealth now have . enterprise bargaining systems in place~ If there is to be a significant spur to productivity, enterprise bargaining needs to extend to aU sectors of the economy- Enterprise agreements have b~en largely limited to the public sector and within the private sectors are concentrated in larger workplaces and in metal related manufacturing industries. t
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Arou nd 50 percen l of wage and salary earners covered by Federal awards now have formal enterprise agreements. There are now around 2400 Federally registered enterprise agreem,ents, covering over 1.3 million employees. The spread and quality of ente,rprise agreements has been inhibited by a number of institutional features. Further progress is required. In its inquiry on Impediments to Regional IndustryAdjustment, the Commission identified three such features which, from regional perspective~ were impeding better labour market practices (Ie, 1993b): • While new arrangements ~ave" opened u~ opportunities for non·unionised workplace:s to engage in enterprise bargaini~g. the powers granted to trade unions to scm tini se and oppose Sl;lch agreements have the potenti al to co nstrain new ini tia tives. . . , • Because enterprise bargaining arrangements are still effectively linked t~ the centralised award system the scope for agreed outcomes to reflect conditions which are 'most appropriate for the workplace remains restricted.' • A safety net which establishes common ,minimum employment standards for all workers is important, not least to gain workers· commitment to productivity improving reforms~ How~ver, currently there are a multiplicity of safety nel$ ·7"over 5,000 awards specify different minimum wages and conditions applying across a range of ~rafts and occupations. Complex safety net structures that . incorporate matters beyond basic,minimum standards tend to favour those who . have jobs at the expense of employment opportunities for those seeking entry (or fe-en try) into the workforce.· . There is a number of other major'reforms of Australian labour markets which are 'being or have been conducted, apart from enterprise bargaining~ It is very important that this process continue. The key labour market r~forms to date have been precondition~ for the next wave of improvements - award restructuring and the amalgamation ofunions was a necessary preco nditio'n for the smooth in trod uction of enterprise based agreements. Enterpris~ agreements will ~ more effective in imprcivi ng productivity at the level of the firm or enterprise when they are less dependent on general award provisions. I
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CAPTURING.THE BENEFITS OF CHANGE
Changing and modifying institutional structures to· ensure that Australian firms gain from the opening up of markets is inevitable. The types of pressures I have descri bed wi II see to that. But we can dis sipate ~he benefits and increase the costs of change by hindering it and slowing its progress_, If governments, industry and the community aren't prepared for change, if .we don't have efficient and dynamic frameworks within which industries can·operate~ the gains will be smaller, The types ofstructural changes and reforms described so far are pushing us into a third round ofeconomic reform: reform of the framework within which economic activity takes place. In particular the nature ConunonwealthlState relations, Competition Policy and appropriate regulation of industry. How we deal with these issues will playa large part in detennining how well we capture some of the gains that are availablet to us.
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6.
COMMONWEALTWSTATE RELATIONS The Commission has fecen tl y gi yen a great deal of thought to Commonweal thiS tate relations because our inquiry program has exposed us to some of the challenges in this area. Co-ordination anq co-operation between the different levels of Australian Government is important for industry" development because of the effect of di fferent government approaches to regulatory, service, infrastructure, assistance and taxation policies. The benefits of this co-operation and.'co-ordination are
substantial. Australia can reduce its business costs and facilitate the operation of national markets and networks by reducing overlap and inconsistency in government regulation. We can reduce the burden on taxpayers and, ultimately. improve the competitiveness of firms and the economy by integrating physical and social infrastructure across jurisdictions and improving the efficiency with which GTEs and other government agencies provide serVices. Let me give you just a few concrete examples of the types of areas where there are gains to be ma~e. In its report into Workers' Compensation (Ie, 1994c) the Co'mmission noted that, to cover all of its employees Australia-wide, BHP needs to operate at least thirteen different workers' compensation schemes. In its report into Impediments to Regional Industry Adjustment (let 1993b) the Industry Commission observed how lack of intergovernmental co-operation on roads and railways adds to the cost of infrastIucture provision. In its report into Adding Further Value to Australia's Forest Products (IC. 1993a), the Commission found that individual port charges in Australia could be more than six times higher than those in New Zealand. We also found that, in the production of paper products, power makes up between 15 and 20 percent of costs. Therefore, even ,small increases in the efficiency of delivery of power~ if translated to lower prices to producers by effective competition. can significantly increase the international competitiveness of this sector of the economy. There are opportunities to build economies of scale in our industries and develop national markets by reducing competitive and conflicting assistance arrangements between States~
7.
THE IMPORTANCE OF EFFECTIVE COMMONWEALTWSTATE RELATIONS IN MICROECONOMIC REFORM
The effective implementation of microeconomic reform can require governments to act individually orcollectively~We've seen a good number of important refonns carried out within individual jurisdictions in recent years. For example, the Co mmonwealth has continued with its progress in tari ff reforms desp i te a grea t deal of pressure to retreat. Victoria and South Australia have, or will, implement casemix funding for their hospitals. All States and the Commonwealth have made major reforms in the area ofcontracting out and competitive tendering. New South Wales implemented significant ref<;)rm of legal professions. Queensland began reforming their system of de facto coal royalties via rail charges. Many of the States have set up offices within their Governments to co-ordinate the review of legislation and regulation. The Commonwealth, of course, has the
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Office of Regulation Review within the Industry Commission~ In Working Nation (Keating, 1994) the Commonwealth set aside funds to expand the role and operations of the Office 0 f Regulation Review and estabIi sh a Couneil of Business
Representatives. The different jurisdictions are also beginning to realise the real costs of their competitive and conflicting industry assistance arrangements. In January of this year, the Victorian Premier Mr Kennett gave some indication that when pOwer contracts with Alcoa Australia's Victorian smelters were renegotiated, the $200m" subsidies provided to them would be reconsidered. These individual" refonns are important and they must continue. However, individual juris~ictions can't do everything~ By their very nature, the previously mentioned problems with regulation, of physical and social infrastructure, State taxation, assistance arrangements and community services are, in some cases; best dealt with through co-ordinated action between the Commonwealth and all of the S tates and Terri tories. To date reform of these problems has been handled through Ministerial Councils and the COAG process. Some of the steps taken so far include: The establishment of a number of cross-jurisdictional bodies such as the • Australian Securities CO"mmission, the National Road and Transport Commission and the National Food Authority, to reduce the problems associated with overlapping and inconsistencies in regulations., • Mutual recognition of pr9duct regulation and entry to regulated occupations was introduced in March 1993 by the Common weal th and all states other than Western Australia. • Closer to hornet for the Industry Commission, the Review of Commonwealth and State Service provision was estab1i~hed by the Council of Australian Governments, to help in improving accountability and efficiency in service provision. The establishment of, or agreement to establish national infrastructure networks, • ~uch as the national Rai1Fre:ight Corporation, the interstate electricity grid, and a framework for interstate gas trade, to integrate physical infrastructure are important national initiatives. Reform of GTEs through the planned implementation of the National Competition Policy will be a catalyst for further-changes in this area. Delays in addressing these matters through ~he COAG process highlight the fragility of the institutional frameworks which have been established to resolve these important issues~ Efforts to improve Commonwealth/State relations often meet resistance. The co-operative approach"to improving Commonwealth/State relations may not always be the best one. Forging a consensus position between all Governments takes ti me and prov ides opportu nili es for costly concessions. This raises a few questions: Do we need unanimous agreement by all Australian governments before reforms can proceed? Should consenting governments be able to proceed with reforms; with other governments'free to join later? How important is it to accommodate trade-offs between govenuttents on major issues? And what lessons might be drawn from international experience, for example from the t
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European Union? Some steps have been made in this regard. Many ministerial councils now require only two-third majority decisions with all govemmentsbound. Sometimes, however, the Commonwealth may simply have to take the lead in refonn. For example, in its report on Workers' Compensation (Ie, 1994c) the Commission recommended that the Commonwealth establish a national1 y available workers· compensation scheme with the aim ofu si ng competitive pressure to force the States to improve their own systems.
8.
COMPETITION POLICY
One of the issues which has been at the forefront of policy deliberations in recent times has been competition policy. In particular, the recommendations of the Hilmer Report on National Competition Policy (Independent Committee of Inquiry in to Competilion Policy in A ustrali a, I993). Increasing competition throughout the economy is a key to higher productivity and growth. The steps being taken by the Commonwealth and State Governments to implement a national competition policy are, therefore, crucial to the future economic performance of Australia. However, the process of implementing a National Competition Policy has, thus far, been painfully slow. The August COAG meeting achieved 'in general' approval by the States, Territories and Commonwealth Governments of implementation" of the National Competition Policy and a set of draft arrangements negotiated between Commonwealth and State officials is currently open to public comment. However, there was disagreement on some important 'particulars'. Consultation and consensus is certainly necessary. It is desirable that all the stakeholders in the process agree with what they are being asked to do. However, the tong consultation process has a major disadvantage; it presents opportunities for the integrity of the package to be compromised. On the more positive side, it gives each State or Territory the rare opportunity to make a significant contribution to the economic development of a nation, not just the econo~c development of their jurisdiction. There are also some issues which have to be carefully considered in setting up the framework for national competition policy. Allowing individual jurisdictions to exempt activities from competition, except under the strictest conditions; reducing the independent inquiry function of the proposed National Competition Council; or reducing the openness and transparency of that Council, all go against the original intentions of the reform package and reduce the benefits to be gained. At the moment it is not clear that the draft competition> policy addresses these issues. . It is important to minimise the extent to which the spirit of competition policy falls prey to unnecessary legalism. There are numerous opportunities fnr play~rs in the process to dissipate the benefits of the policy by strategic use of the courts. A particular example I have in mind here is the comprehensive rights of appeal to the Trade Practices Tribunal in the draft Competition legislation over disputes for access to essential facilities for new competitors in infrastructure networks.
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9. APPROPRIATE REGULATION Discussion of the COAG process and the Natio~al Competition policy leads 'me into an~ther major area ofrefonn ofthe framework wi thin which economic activity takes place. Namely. government regulation. I say that discussion of COAG and Hilmer leads me if:lto this topic because aU governments have a role in refonning regulation and, in fact, argue its' importance. As the Austral~aneconomy has become mo~ open and as deregulation and the introduction ofmarket forces in many areas of the economy has proceeded, the need for highly prescriptive government regulation of particular areas of economic activity has become less clear. As I stated before, Govem~ents are beginning to realise the costs of heavyhanded regulation and are trying to do something about it. New South Wales is one State which runs on the board in this issue. The New South Wales pricing tribunal has been prepared to look at the wider issues of efficiency and crosssubsidies in determining prices· for New South Wales Government owned monopolies, rather than limiting itself to a narrow focus on profits and costs. Pricing oversight is a specific area raised in the Hilmer report. The Hilmer report recommended a review of declarations under the Prices Surveillance Act The Industry Commission will shortly be making a submission to that review, which is now being conducted by the PSA, but there are a few comments I would like to make here. Allow me to preface my remarks by saying that the Industry Commission has supported a role for prices surveillance or monitoring in a number of the public utility or natural monopoly areas into which it has inquired. However, the structural changes in the Australian economy that I have detailed here today have completely changed the competitive pressures which act upon many markets. The Australian economy is much more open and competitive than it was in 1983 when the Prices Surveillance Act was written. For example, there is an expectation of low inflation in the immediate future. In a period of low inflation, ie. when the average level of price increase is low, relative price changes are much more noticeable and consumers thel1lselves have more immediate notification of price increases. It is timely to raise the question of exactly what role prices surveillance should now have. Prices surveillance is intended to counter the effects of market power. by limiting the ability of finns to raise prices above competiti ve levels. In this role it can have important efficiency advantages.. In a Dumber of recent inquiries the Industry Commission has recommended that prices surveillance or monitoring be carried out. We have supported prices surveillance of Australia Post, the CAA, the FAC and some port services. Unfortunately prices surveillance, while being , potentially popular and even seductive, is not without its costs. In the short term prices surveillance imposes obvious.costs of data collection and compliance. However, in the Industry Commission inquiry into Raw Materials Pricing/or Domestic Use (Ie, 1992) the Commission found that surveillance may also undennine new investment by restricting the ability of firms to maintain a viable rate of profit through flexible pricing over peaks and troughs in demand.
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Indeed. just this month Amott's cited continued price surveillance as a reason for cancelling major new investment plans. Without wanting to enter into the debate abou t the validi ty of th is claim, it is not surprisi ng that private sector finns considering new investment would think seriously abQut whether to proceed if there was any doubt about its ability to plan strategically the expected return on that investment. Priceplanning is tical when considering potential return on in vestment No fi nn wouId Iigh tI y in vest in a marke~ or extend its i n vestmen~ in a market" where it may find itselfhead to head in public debate with a government pricing regulator.. For most firms it is a public debate where - in the era of the thirty second grab they're bound to lose.. In addition. in its inquiry on Petroleum Products (lC 1994b) the Commission noted the possibility that prices surveillance could actually facilitate tacit collusion by providing a benchmark to which prices return after a period of discounting.. Prices surveillance which is based on cost of production calculations can also provide an incentive for cost-padding. The longer-term effects of price surveillance are less obvious but possibly more important. Prices surveillance can stifle innovation in markets by not allowing firms to reap the benefits of new efficiencies, techniques or prodUClf). Dynamic effects of public policies are extremely important. It is possible that by imposing price restraint on some markets we are having the perverse effect of making them less competitive. If new entrants are not attracted into a market by the potential returns. then the incumbents ha~e less incentive to act in an efficient . manner. In being overly vigorous in prices oversigh~ we may rob the market of important signals and the possibility of contestability.. In our view, due to its short and long tenn costs, prices surveillance is a tool that should be used sparingly in the
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Before any d~ision to impose prices surveillance is made. regulators should t~ a number of questions: • is import penetration persistently low? • does the dominant market player have an overwhelming market share? • is that dominant player without a major rival? • are there significant entry baniers? If the answer to one of these questions is no, then in our view it is very hard to justify prices surveillance or prices monitoring. Furthennore, markets change. economic conditions change and institutional structures change. Therefore we consider that all markets and products covered by price oversight should be regularly reviewed against principles which desirably. have been nationally agreed. Importantly, such reviews should nol be carried out by the prices oversight au thon ty itself.
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10. CONCLUDING REMARKS Since the early 1980s there has been significant change in the operation of the Australian economy. Tariff refo~ deregulation of financial markets and floating of the exchange rate opened Australia to the winds of international competition. They also provided the impetus for reform of industries and governritent.. These
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refonns are still continuing, indeed they must continue, and they are paying dividends in terms of growth and lower levels of inflation. We. cannot afford to weaken in the face of the difficulties before us, The benefits from pressing on are too great to ignore. Reforming the framework \1(ithin which our economic activity takes place is now beginning to take shape.. The new openness of the Australian economy means that we must have efficient intergovernmental relations, competition policy and regulatory systems if we are to reap the benefits of reform. Change is inevitable, but if governments, inc!ustry and the community are adequately prepared for it, and if we have the right frameworks established, we will be well placed to grow at rates capable of absorbing unacceptably high levels of unemployment We will also be well placed to make the most of Australia's existing infrastructure and create the appropriate environment for a wave of productive and exciting investments for the 21st Century. '
REFERENCES Australian Bureau of Statistics (1994), Australian National Income Expenditure and Product, ABS, Canberra.
Accounts~"
National
Independent Committee of Inquiry into National Competition Policy in Australia, (1993), National Competition Policy.· Report by the Independent Committee of Inquiry into National Competition Policy in Australia, AGPS, Canberra. Industry Commission (1992), Raw Material·Pricing for Domestic "N9. 21; AGPS, Canberra. .
Use, Report
Indus try Commission ( 1993a), Adding Fu rther Value to Australia 's Forest Products, Report No. 32, AGPS, Canberra.
Industry Commission (1993b), Impediments to Regional Industry Adjustment, Report No. 35, AGPS, Canberrae . Industry Commission (1994a), Meat Processing, Report No. 38, AGPS. Canberra. Industry Commission (1994b), Petroleum Products, Report No. 32, AGPS, Canberra. .
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Industry Commission (1994c), Workers' Compensation inAustralia. Report No. 36. AGPS, ·Canberra. ,
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Keating MP, the Honourable PJ. (1994), Working Nation, AGPS, Canberra. OECD (1994), OEeD Economic Surveys, 1993-94, Australia, OECD, Paris. World Bank (1'992), Privatisation: The 'Lessons of Experien~e, World Bank, Washington.