National Competition Policy: Boon or Bane?

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1 National Competition Policy: Boon or Bane? By Rob Albon (Senior Economic Adviser in the regulatory area of the Australian Competition and Consumer Commission) National competition policy (NCP) defined here to mean the whole of utility reform since the late 1980s and not just the Hilmer reforms of the mid-1990s has been given widely differing scores by those making judgements. On the one hand, it is seen by some as a bête noir that has been associated with a number of real or imagined economic ailments, most notably the perceived malaise in regional Australia, virtually any increase in price associated with utility services, and (most recently) the failures (with the associated direct job losses) of Ansett and OneTel. On the other hand, the period since competition policy has been associated with unprecedented productivity growth, both in the utility areas such as telecommunications, energy, water and transport infrastructure and across the economy as a whole. Further, the specific ailments identified by the critics all have other more plausible explanations. In particular, the failure of OneTel and Ansett has explanations lying well away from competition policy. To put this issue in perspective it is necessary first to take a step back in time and to outline the reasons why successive governments have pursued competition policy. Why Utilities had to be Reformed The organisation of utility industries prior to the reforms usually involved operation within a government department under bureaucratic conditions, protection from competition through statutory monopoly, and vertical integration. While this had the virtue of preventing all possibility of wasteful competition, it did not prove to be a good organisational structure for efficient operation. It provided poor incentives to pursue efficiencies, imposed severe restrictions on managerial decision-making and gave ample opportunities for covert political interference. These attributes were manifested in excessive costs of production (low productivity), poorly structured prices and lack of responsiveness to consumers. The accumulation of evidence of inadequate performance became a catalyst for change. The Prime Minister of the first half of the 1990s, Paul Keating, in his 1992 One Nation statement, explained his government s microeconomic reform program (with its heavy emphasis on utility reform) in this way: When this Government came into office the problem of inefficient performance was endemic in areas shielded from competition including domestic aviation, electricity supply, shipping, railways, and telecommunications. The effect was higher costs, poor service and inefficient allocation of resources in the economy. As in all developed economies, these industries provide vital inputs to all our major export and import competing sectors. Australia was placed at a considerable

2 disadvantage in competing against imports at home and in export markets. The more ad hoc reforms described by Mr Keating were supplemented later with NCP that broadened the coverage to other industries and to include the States. Overall, the utility reform process can be characterised as involving three stages corporatisation, greater exposure to competition and privatisation. The first stage involves simulating as far as possible the conditions of private ownership within a government-owned monopoly enterprise. Second stage reform involves opening up some or all of the utility s markets to competition. However, the vivifying effects of competition have to be traded off against the possibility of allowing wasteful entry. The owners of naturally monopolistic facilities like the local access network in telecommunications and the national transmission grid in electricity are often obliged to provide regulated access to these essential facilities to downstream competitors offering services (such as long-distance telephone services) produced by combining the essential facility with its own production components. While sometimes seen as lying outside of competition policy, privatisation is the third and final stage of utility reform. Privatisation includes contracting out and franchising as well as partial or complete transfer of ownership. In interpreting and assessing the reforms it should be kept in mind that they have seldom been implemented in a pure form. While a more efficient (more productive) economy is good for a government s standing and support, there are those that incur or perceive losses from utility reform and who exert political pressures against change. Therefore governments at both the Commonwealth and State levels have encountered resistance to the adoption of pure reforms and have tended to compromise on them. This has been particularly evident where it has been seen to conflict with other objectives such as influencing the level and composition of employment, the maintenance of implicit subsidies through the pricing structure and the oversight of investment decisions as part of regional policy or strategic industry policy. Evaluating Reform The reforms of the utility industries should be evaluated on the basis of the standard economic criteria, encompassing all of the effects and over a period of time long enough to compare the current situation with that prior to the commencement of reform. In particular it is necessary to examine what has happened to productivity, price levels, price structures and service quality. These changes have to be assessed in the light of the counterfactual what would have happened in the absence of competition policy. Productivity improvement accelerated in all the utility areas, mirroring and underpinning the improvements in economy-wide productivity. The quite staggering improvement in overall productivity has been carefully analysed in a number of Productivity Commission publications available on its website.

3 Price levels have come down although in some cases extraneous influences (like increases in world prices of inputs) may have offset these reductions. Further, in some cases, prices had to be increased because they had previously been held below levels necessary to achieve cost recovery. That prices have fallen more rapidly than they would have otherwise does not appear to be controversial. undermined by competitive and commercial pressures, and two-part pricing structures (combining a flag fall or standing charge with a charge per unit of use) have replaced one-part ones, sometimes giving the impression of price increases on one of the parts. While these changes in pricing structure have broadly been in the direction of greater efficiency, some users have perceived losses from these changes. Seemingly too much emphasis has been placed on these losses as against the overwhelming benefits. Quality has been controversial, but a sober appraisal is encouraging. Interestingly, one of the key elements of the reforms has been substantial widening and deepening of quality measurement. Not only has this increased awareness of quality (including bad service performance), but it also means that it is difficult or impossible to make comparisons of quality before and after the reforms. While it is not possible to go into the details here, the evidence is that the reforms have been very successful when evaluated over the full length of the reform program and taking into account all of the effects. However, by focusing on the losses (and disregarding the benefits) it is possible to present them in a poor light. When Firms Fail Under the old government monopoly arrangements it was virtually impossible for explicit failure to occur. However, competition policy allows new entrants and imposes market disciplines on new and existing providers, meaning that failure is possible. OneTel and Ansett are recent examples of corporate failure in industries affected by competition policy. While OneTel was clearly a product of competition policy, it is far less clearly a casualty of it. The reasons proffered for its failure include major investment in 3G spectrum that ended up being worth hundreds of millions dollars less than what was paid for them; imprudent pricing practices that priced some services at below the cost of their acquisition; use of an ineffective billing system that billed some customers twice even though they had paid while others were not billed at all (the disproportionate number of complaints about OneTel was revealed in Telecommunications Industry Ombudsman 2001); and the implementation of an inadequate internal organisational structure with an unclear chain of command and lack of accountability. It has also been suggested that there may have been an over-emphasis on the powers of Feng Shui.

4 The case of Ansett is even more complex. The domestic airline industry was subject to a limited form of competition policy long before anyone called it that. However, the two incumbents were shielded from international competitors and had advantages with respect to terminal access and landing slots. Perhaps the duopoly was (or at least felt) too safe as the two incumbents were able to see off a host of would-be rivals. While the information is still being gathered and analysed, perhaps Ansett enjoyed the protection more than its rival. For twenty years the companies that owned Ansett brought no direct expertise in running airlines, which may, inter alia, have resulted in an inappropriate fleet composition with too many different types of aircraft leading to expensive maintenance and staffing. At the same time its rival was strengthened by the amalgamation between Australian Airlines and the original Qantas. When Ansett was finally bought by an airline, it happened to be one with troubles of its own, and there appeared to be some resistance to allowing Singapore Airlines to take a greater role in the ownership, funding and running of Ansett. While the advent of Impulse and Virgin Blue may have affected the timing of Ansett s demise, other issues appear to have been much more influential. Conclusions The changes to the organisation of the utility industries since the late 1980s have been revolutionary, moving from an organisational structure more in keeping with a centrally planned economy to one using incentives and market forces to achieve results. In the light of such a massive change of approach and some impurity in the reform program it is not surprising that there has been some turmoil. It is beyond any reasonable doubt that the gains to the economy from competition policy have been substantial. When evaluated on the basis of standard economic criteria taking into account all the effects, it is clear that the reforms have been very successful, including being an essential underpinning of the record economy-wide productivity improvements of the 1990s. So why the bad news about competition policy? And what should we keep in mind when evaluating it? First, it has to be remembered just how poorly performed were the utility industries before these reforms and what they would have been like without them. Those who cannot see any advantages (or argue that the beneficial effects would have happened anyway) probably need to take a trip back in time to be reminded of how poorly the utility industries performed and how ill-equipped they were to improve given their government monopoly organisational structure. Second, the nature of the political process is that short-term and more concentrated effects are given greater weighting than longer-term and more dispersed ones, and the preoccupation of the media is traditionally with short-term (often

5 literally day-to-day ) issues. These forces have meant that the long-term gains from the reforms have been given little weight, and in some cases completely overlooked. Third, looking directly at OneTel and Ansett, the first is clearly a product but not clearly a casualty of competition policy, while in the latter case there are other more compelling reasons why it failed than the effects of unleashing a degree of competition. REFERENCES Telecommunications Industry Ombudsman (2001) Annual Report, available online at Source: 11/22/2001