Commentary 1st Apr 2000

Harper makes case for competition overhaul: experts react

The removal of restrictions on retail trading hours, pharmacies and parallel imports, and a controversial "effects test" on existing misuse of market power rules are among the many recommendations contained in the final report of the Competition Policy Review released yesterday.

Boosting competition in the health, education and community sectors has been identified as a priority by the panel, which said even small improvements in these areas would have "profound impacts on people's standard of living and quality of life".

The panel has also named planning and zoning rules, taxi regulation and product standards as areas that require an immediate regulatory review.

It says state and territory governments should subject restrictions on competition in planning and zoning rules to the public interest test. It also said regulation limiting the number of taxi licences has raised costs for consumers, and hindered the emergence of innovative passenger transport services.

The review panel led by Emeritus Professor Ian Harper, says section 46, which deals with the misuse of market power, is deficient in its current form and out of step with international approaches.

Instead it wants to prohibit conduct by firms with substantial market power that has the "purpose, effect or likely effect" of substantially lessening competition.

The report also calls for cartel provisions to be simplified, and price signalling provisions, which have applied specifically to banks, to be removed and replaced with a similar effects test.

The panel has also called for a new national competition body to replace the National Competition Council, one that would be "an independent entity and truly 'national' in scope", as well as the establishment of a pricing and utilities commission separate from the Australian Competition and Consumer Commission (ACCC).

It says collective bargaining and collective boycott arrangements should be made more flexible and easier for small business to use.

Road pricing should be made cost-reflective, according to the review, and regulations governing retail trading hours and parallel imports, and pharmacy location and ownership rules should be removed.

It says the current exception to competition law for conditions of intellectual property licences in consumer law should be repealed.

The panel says the rise of Asia and other emerging economies, Australia's ageing population and the emergence of new technologies all help make the case for competition policy reform. It says delaying policy action will make reform "more difficult and more sharply felt".

The review panel received around 600 submissions in response to its draft report, 40 per cent came from peak and advocacy bodies, around 30 per cent from individuals, around 25 per cent from business, and the remainder from governments.

We asked experts to respond.

Mr Graeme Samuel AC, Department of Economics

The proposed competition policy reforms are a re-energisation of the National Competition Policy reform package commenced in 1995 but suspended by COAG in 2004. The fundamental philosophy underlying these reforms is that the disciplines of competition should apply to all sectors of the economy unless the public interest is better served by retaining anti-competitive restrictions. But the corollary is that governments must place the interests of the public above those of private vested interests. The difficulty of course is in the detail, which the review doesn't examine.

Governments have previously shirked from implementing so many of the reforms recommended by the Harper panel because of some very strong vested interests, like the Pharmacy Guild, or in relation to restrictive retail trading hours, the pleadings of unions and small business interests in Western Australia, South Australia and Queensland. Other industries, such as taxis, are beset with financial and social complexities flowing from decades of arcane regulations that have placed the public interest at the bottom of the list of policy considerations.

In the end governments have to make up their minds – will they place the public interest first or continue to be beholden to loud and persistent vested interests? Competition should reign supreme and should be presumed to be in the public interest unless it can be demonstrated by objective independent analysis that the public interest is better served by competition restrictions.

We should also remember the technological revolution that is taking place with the digital economy. It's going to make so many anti competitive regulations of the past simply inoperable. As consumers exercise their choice, using the options available to them in the ever expanding digital and sharing economy, the regulatory mechanisms developed in past decades will prove powerless in the face of overwhelming public preference for how and with whom it deals. Do we see consumers restricting themselves to arcane restrictive trading hours in the 24/7 environment of on line trading?

Regulatory institutions

The recommendations as to the structure of the regulatory institutions are very sensible. The separation of utility regulation from the ACCC into a specialist utilities regulator reflects the fundamentally different culture from that associated with pure competition and consumer protection enforcement.

The proposed Australian Council for Competition Policy is essential to provide a continuing process of competition policy reform education and advocacy.

Competition should reign supreme and should be presumed to be in the public interest unless it can be demonstrated by objective independent analysis that the public interest is better served by competition restrictions.

Mr Graeme Samuel AC

Department of Economics

Amendments to law

The repeal of the price signalling provisions is eminently sensible. The current provisions are a mutant, resulting from a patchwork of legislative amendments enacted in 2011 which should never have been confined to banks alone but, like the other competition provisions of the law, should have applied economy wide.

Section 46 - Misuse of Market Power

This section is titled in the Harper report as "Misuse of market power". But the proposed amendments have nothing to do with "misuse" for they apply to all conduct by big business.The primary prohibition effectively threatens big business with substantial penalties if it engages in any conduct that has the purpose, effect or likely effect of substantially lessening competition. The section is a misconceived approach to satisfy the urgings of small business groups.

The suggested legislative guidance to the courts is bewildering - it asks the courts and big business to weigh the pro-competitive and anti-competitive impact of conduct, that is conduct which is subject to the charge that it is likely to substantially lessen competition. This is so stifling on the commercial activity of big business that one can only wonder how a committee that on the one hand recommends pro-competitive reforms to commerce, can then proceed to urge an significant intrusive constraint on the commercial activities of big business. It is such a fundamental contradiction in economic philosophy, that it leaves one wondering as to the motivations for this recommendation which, as the Harper panel tabulates, has been rejected in no less that ten reviews over the past four decades.

Separate pricing and utility regulator

Professor Joe Dimasi, Department of Economics

The Harper Review has sometimes been described as Hilmer Mark2. However, the two reviews differ in at least one major respect. Hilmer's focus was relatively tight and paid particular attention to the restructure and regulation of monopoly network facilities. It's fair to say that it had a substantial impact in this area. Harper's broad mandate has resulted in a report which traverses a wide range of issues with many useful recommendations.

Harper's wide brief made it difficult to look at all the issues in detail. One area of significant current controversy which escapes attention is the application of regulation to bottleneck network facilities.

Harper's recommendation to establish a multi-industry access and pricing regulator which is separate from the ACCC, is useful. Given the breadth of the ACCC's remit and the differences in skills and culture required to undertake these very different roles, that recommendation makes a lot of sense.

Harper's wide brief made it difficult to look at all the issues in detail. One area of significant current controversy which escapes attention is the application of regulation to bottleneck network facilities.

Professor Joe Dimasi

Professorial Fellow, Department of Economics

However, the way these facilities are regulated is important and requires greater attention. The regulation of utilities and bottleneck facilities today does not look much the way it was envisaged by Hilmer, an issue we'll be looking at in a forthcoming paper by the Monash Business Policy Forum.

Regulatory decisions can take up to two years and if appealed can take several more years to resolve. This soaks up large amounts of the regulator's resources.

And most importantly it results in far from socially ideal outcomes. For example, there is a widely acknowledged over-investment in poles and wires in electricity which has been significantly affected by the regulatory system. The rules and regulatory approach rather than just the regulator are the issues here.

When independent utility regulation was introduced in Australia in the 1990s, the aim was to avoid the well-understood widespread pitfalls of cost-of-service seen in the United States, as well as to learn from UK reforms which introduced regulation that provided greater incentives for the regulated business to operate efficiently.

Despite these aims it appears that we have ended up with a system that has the negative features of cost-of-service regulation without some of the improvements that we see, for example, in the US regulatory systems. Perhaps in establishing a separate pricing and access regulator, we also need to look at how we regulate.

A version of the article has appeared on The Conversation.