Managing government business - Australia’s new competition agreement

Parties will assess the competition impacts of their major policy decisions to ensure they do not unnecessarily restrict competition, and consider reforms to actively promote competition.

Existing Principle

Parties had to take steps to ensure new and existing legislation did not unjustifiably restrict competition

Parties were required to review existing legislation to ensure it did not restrict competition unless justified, and reform legislation that did restrict competition otherwise. Parties also had to justify any new legislation that restricted competition.

New Principle in IGA

Parties now required to review any ‘major policy decision’ for competition impacts

Parties are required to maintain processes to assess the competition impacts of major decisions that have potential material impacts on competition, including in respect of new or amended legislation, procurement frameworks, planning decisions, and cabinet decisions (if possible).

Parties required to consider reforms to actively promote competition

Under the New Agreement, Parties must also commit to monitor emerging competition concerns and take steps to create the conditions for effective competition or manage the effects of competition to ensure markets work in the interests of consumers.

What does this mean?

Potentially greater scrutiny of business practices
Businesses should be prepared for:

• increased scrutiny of government policy decisions and proposed legislation, especially provisions invoking the state legislative exemption in section 51(1) of the Competition and Consumer Act 2010 (Cth) (CCA); and
• Parties to enact potential regulatory reforms aimed at enhancing competition.

Parties will promote effective consumer participation in markets and manage the effects of limited participation, including by addressing barriers that consumers may face in making informed decisions and switching providers.

Existing Principle

No specific mechanisms to facilitate consumer empowerment

The Existing Principles focus on consumer interests but do not explicitly require the introduction of mechanisms to facilitate consumer empowerment.

New Principle in IGA

Introduction of market intervention mechanisms to address switching and consumer understanding

The New Agreement introduces a requirement for Parties to consider mechanisms to promote consumer empowerment.

Intervention could:

• address information asymmetries, high costs of accessing information or switching providers, and business practices that restrict switching. This could occur through improved disclosure requirements lowering barriers to switching and improving data portability; or
• be tailored to specific industry to promote consumer engagement and manage adverse market outcomes.

What does this mean?

Businesses should be prepared for new regulations on information disclosure (e.g. labelling), consumer data portability and requirements to remove contractual impediments to switching

Businesses should expect to see more initiatives aimed at:

• increasing transparency in their practices and improving the ease of consumer switching;
• enhancing information disclosure requirements; and
• discouraging contractual terms that make it difficult for consumers to switch.

Parties will establish appropriate regulatory frameworks and policies before a public monopoly is leased, privatised or structurally reformed through the introduction of competition, to protect against adverse outcomes.

Existing Principle

Before reforming public monopolies, Parties were required to remove responsibilities for industry regulation and consider an appropriate reform package

This Principle required Parties to undertake reviews before introducing competition into a market supplied by a public monopoly or privatising public monopolies, with a focus on separating regulatory and commercial functions.

New Principle in IGA

Principle extended to apply to leasing a public monopoly (and not just privatising or introducing competition)

The principle has remained largely unchanged but introduces certain requirements where a party proposes to lease a public monopoly.

Parties must now also consider the merits of alternative reforms

In addition to the requirement to remove any responsibilities a public monopoly has for industry regulation before privatisation (or introducing contestability), a party must also consider the merits of other reforms to the monopoly and industry that would introduce greater competition or contestability.

Parties to consider the cost of provisions in sale or lease contracts that would enable the monopoly to restrict competition as well as public interest considerations

The factors that must be taken into account when deciding on the structural reform of public monopolies are substantively the same between the Existing Principles and the New Agreement, although Parties must now also take into account:

• for a privatisation or lease, the costs of any provisions in sale or lease agreements that would enable the privatised entity to restrict competition. This requires explicit consideration of the potential costs of privatisation (illustrated for example, in the case of the compensation requirements involved in the privatisation of Port Botany and Port Kembla); and
• public interest considerations beyond effects on competition.

What does this mean?

Increased scrutiny of bilateral contractual deals with government for use of monopoly assets

Businesses contracting with public monopolies (or former public monopolies) can expect increased pricing oversight and regulation, which may limit their ability to negotiate and enter into bilateral, non-transparent pricing arrangements.

Businesses seeking to operate Government assets will face greater scrutiny

Businesses seeking to take on operation of government monopoly assets can expect greater scrutiny of proposed sale and lease arrangements; and the potential costs of those arrangements before they are approved.

Parties will ensure government business activities that compete (or could compete) with private or other providers apply competitive neutrality measures to remove any net competitive advantages arising from their public sector ownership.

Existing Principle

Similar focus although less prescriptive implementation

The competitive neutrality principles under the Existing Principles required that government businesses not enjoy net competitive advantages from public ownership.

While each State and Territory was free to determine its own agenda for implementation under the Existing Principles, for significant government business enterprises, parties needed to impose specific corporatisation models and tax, debt neutrality fees and equivalent environmental and planning regulation to the private sector.

Parties needed to ensure other agencies charged prices reflecting the full costs of providing the service.

New Principle in IGA

More prescriptive obligations in relation to competitive neutrality

The New Agreement is more prescriptive regarding Parties’ obligations to develop and maintain a competitive neutrality policy and its contents.

The debt neutrality fees Parties need to impose extend to other beneficial types of financing, not just government guarantees.  Parties are also required to encourage government entities to correct for other advantages, such as operating rent-free in government-owned buildings and accessing whole-of-government procurement arrangements.

Parties will be required to:

• introduce a public interest exemption for government decision making to ensure government business activities cannot receive a net competitive advantage unless it can be demonstrated the benefits outweigh the costs and cannot be achieved by another less restrictive and equally beneficial approach. Parties are also required to regularly review these decisions;
• establish an independent complaints mechanism to address breaches of competitive neutrality which facilitates the undertaking of investigations at low or no cost to the complainant where appropriate and publish investigation reports into potential breaches; and
• adopt transparent and efficient funding and delivery of community service obligations.

What does this mean?

For private businesses, this principle aims to foster a fairer competitive environment where they can compete on equal terms with government-owned entities.

Transparent and efficient pricing emphasis

This is aimed at producing more predictable and fair pricing structures, reducing the risk of government entities undercutting private businesses through subsidised (or otherwise non-cost reflective) pricing.

Independent complaints mechanism may foster a more equitable business environment if used

The new independent complaints mechanism will provide businesses with an avenue to raise concerns about unfair competition.  This is aimed at addressing some of the clear criticisms about the effectiveness of previous processes.

Parties will not create or entrench barriers to buying and selling goods and services, operating businesses, and working across state and territory and international borders, where appropriate.

Existing Principle

Not a standalone principle in the Existing Principles

The Existing Principles do not explicitly focus on reducing barriers to a single national market, although they do aim to reduce barriers to competition generally.

New Principle in IGA

New Principle requiring Parties to eliminate unnecessary regulatory barriers to the movement of goods, services and workers across Australia

The New Agreement introduces new obligations on Parties to promote a single national market, including requirements to:

• avoid decisions that create or entrench material barriers that limit the movement of goods, services, and workers across jurisdictions;
• harmonise different regulatory standards to reduce compliance costs;
• establish or update efficient charging guides for government-delivered goods and services; and
• review and reform existing barriers to interstate trade.

Public interest exemption

Government decisions that create or entrench material barriers limiting the movement of goods, services or workers from other Australian jurisdictions will be permitted if it can be demonstrated that:

• the benefits of the restriction on competition to the community as a whole outweigh the costs; and
• the objectives of the decision cannot be achieved by less restrictive and as communally beneficial means.

What does this mean?

Reduced compliance costs

The harmonisation of state or territory-specific regulatory standards or requirements should reduce compliance costs for businesses supplying goods or services across Australia and internationally. It may also enable businesses to sell their products and services more freely across Australia (which may lead to new entry by businesses into different geographic regions).

Parties will promote efficient and transparent pricing for goods and services provided by government monopolies, near monopolies or government business enterprises.

Existing Principle

Parties must consider establishing independent price oversight for significant GBEs

Parties were to ‘consider’ establishing independent sources of price oversight advice where they do not exist.

The general characteristics of price oversight are similar to those required under the New Principles.

New Principle in IGA

Independent pricing oversight now required for government owned ‘significant business enterprises’

Parties must have an independent body providing prices oversight for government-owned ‘significant business enterprises’ operating monopolies or near monopolies, and to maintain efficient charging guides without exception. Pricing oversight must have efficient resource allocation as its primary objective, provide for consultation and published pricing recommendations and reasons. The pricing oversight body can make public recommendations only. Its powers fall short of imposing price regulation on government-owned monopolies.

There is no longer an exception for GBEs that are already subject to independent price oversight.

An efficient charging guide for other Govt provided goods and services

Parties are required to develop and maintain an efficient charging guide for government provided goods and services that takes into account certain factors including the direct costs of providing the service.

What does this mean?

Increased predictability and transparency for businesses

The requirement for independent prices oversight and the publication of pricing recommendations is designed to foster greater predictability and transparency in government pricing practices.

Improved access to, and competition against, government goods and services
Efficient pricing practices and independent scrutiny of prices charged by government monopolies is designed to more directly influence the pricing of government-provided products and services, and aims to give both customers and competitors more confidence in the efficient pricing of these items.

Parties will maintain, where relevant, frameworks to facilitate access to services provided by significant infrastructure (including non-physical infrastructure) facilities with natural monopoly characteristics, on reasonable terms and prices.

Existing Principle

Focus on strengthening third-party access to significant infrastructure

This Principle in the Existing Agreement established the framework for legislation implementing the third-party access regime for significant infrastructure contained in Part IIIA of the CCA. The Principle envisaged that the Commonwealth access regime would not ‘cover the field’ where a State or Territory had in place an effective access regime.

New Principle in IGA

Clarifies that the Part IIIA access regime should provide access to services provided by significant non-physical infrastructure

The Commonwealth’s obligation to maintain a general access regime extends to all significant infrastructure facilities (including non-physical infrastructure).

Focuses on the need to maintain access regimes and enhance dispute resolution processes

State Governments will need to establish and maintain access regimes (including industry-specific ones where necessary) where it is in the public interest, using a negotiate-arbitrate framework.

What does this mean?

Improved access to infrastructure

A broader test for access regulation by State Governments means that access seekers may enjoy improved opportunities for access; especially for facilities not subject to regulation under the national access regime in Part IIIA.

National Consistency

The focus on national consistency in access regimes means that businesses operating in multiple jurisdictions may benefit from a more predictable regulatory framework, making it easier to expand and operate across Australia.