12 April 2011

The Critical Role of Competition Policy, Address to Regulatory Reform Conference

Thank for that warm welcome and introduction.

I am pleased to have the opportunity to speak at this conference today, as the Parliamentary Secretary with responsibility for competition policy.

Competition policy plays a critical role in regulatory reform and indeed overall economic performance in our economy.

It has been an important driver in transforming Australia into a diverse economy characterised by knowledge-based industries, technological advancement and a strong financial services sector.

For many of us, access to the diverse range of goods and services that we need and desire in order to sustain a high standard of living, is something that we have come to take for granted.

Today, I want to speak about what competition policy means for consumers and the Australian economy and just how important competition policy has been for improving our standard of living.

The History of Competition Policy Reform

I would like to begin with a brief history of competition policy reform in Australia.

While there will always be a nostalgia from some for a return to the policy responses of the past, it is important to recognise that the impetus for introducing a national competition policy in Australia was an environment characterised by declining economic performance and a need to improve Australian living standards.

It became increasingly apparent from the mid-1960s that longstanding government policies and institutional arrangements, such as protectionist policies, centralised industrial relations and government ownership and control of economic infrastructure, were imposing real costs on the community and holding back growth in our living standards.

Concerns about the effects of these policies intensified in the 1970s and 1980s, as growth in living standards declined and prospects for recovery looked grim.

During the 1970s and 1980s, output growth in Australia slowed, inflation and unemployment rose, and productivity growth was considered low by international standards.

While external developments, such as the rapid rise in oil prices, contributed to this economic state, high trade barriers and various regulatory and institutional restrictions on competition in the domestic market led to significant inefficiencies across the economy.

From the early 1980s, Australian governments, particularly the Hawke and Keating Governments, embarked on a program of extensive economic reform to re-ignite growth in output and lift our living standards.

As reforms progressed, however, it became increasingly clear that the lack of competition in significant parts of the economy was impeding performance across the economy and constraining the scope to create national markets for infrastructure and other services.

In April 1995, under the leadership of the Keating Government, the Commonwealth, State and Territory Governments committed to delivering a wide-ranging National Competition Policy, which drew on a blueprint of an earlier inquiry, the Hilmer Review.

These reforms - known as the NCP reforms - covered a wide range of areas. These areas included: the national application of competition policy laws; the application of competitive neutrality policy to significant government businesses; the structural and pricing reform of many public monopolies; the legislative review of existing competition restrictions; measures to ensure legislatively backed third party access to essential infrastructure services; and specific reforms in the energy, road transport and water sectors.

An important feature of the NCP framework was the competition payments made by the Australian Government to the States and Territories for satisfactory progress in implementing their reform commitments.

Funds totalling about $5.7 billion were allocated for competition payments over the period 1997-98 to 2005-06.

NCP Reforms and Productivity Growth

The overall success of the NCP reforms has been well documented.

In 2005 the Productivity Commission found that NCP and related reforms directly contributed to significant productivity gains and price reductions in key infrastructure sectors during the 1990s - such as electricity, gas, urban water, telecommunications, urban transport, ports and rail freight. The Productivity Commission estimated that these reforms increased Australia's real GDP by around 2.5 per cent or $20 billion in 2005-06 dollars - a truly significant figure.

A study by the International Monetary Fund has provided evidence that intensified competition through these reforms has driven the more efficient use of resources through new work practices and encouraged the more rapid uptake of new technologies.

Importantly, the benefits of NCP and related reforms have been spread across the community, including rural and regional Australia. The Productivity Commission's modelling of productivity and price reductions in key infrastructure sectors during the 1990s suggests a consequent increase in regional output and thus income in all but one of the 57 regions across Australia.

The reforms have also generated ongoing benefits. In particular, greater market competition and microeconomic flexibility have permanently improved the operating environment of businesses, promoting the ongoing search for and diffusion of more productive processes and better products.

Productivity growth is a key determinant of living standards in the long run and it has contributed significantly to Australia's GDP per capita growth over the past three decades.

It is critical therefore that the Government continue to pursue productivity enhancing reforms to sustain strong economic growth, particularly in the context of long-term challenges that will place pressure on Australia's living standards over time.

These pressures include an ageing and growing population, escalating pressures on the health system and an environment vulnerable to climate change and an economy that will need to undergo a transformation to respond to such pressures.

In the midst of such challenges, it is clear that we cannot afford to be complacent about reform.

The NCP has been seen by some as controversial since its introduction in the 1990s by the Keating Government. But its net benefits are evident - Australians are wealthier, our economy is bigger and more efficient and it has shown itself capable of withstanding the most serious of economic shocks in recent years.

Despite these achievements, the challenge of maintaining a commitment to a robust, economy-wide approach to competition policy is significant.

I can understand this.

Competition, by its very nature, can be confronting. With competition, comes the risk that some day, a competitor will take your customers and erode your market share. While consumers benefit from competition, they also find difficult the notion that, in a competitive market, not everyone can be a winner.

And the benefits of reform are often spread widely, while the costs are usually concentrated. There are those who, for their own reasons, will argue for special treatment, regardless of the distortions these create or perpetuate, and the longer term negative impacts on consumers and the economy more broadly.

As a result, we face a continual challenge in articulating the role of competition policy and demonstrating its benefits to the broader Australian community.

Competition Reform and Industry Changes

Many industries have changed dramatically as a result of NCP reforms.

The shape of many industries in Australia has changed as capital and labour were freed up to flow to areas where they could be more productive and more profitable. New industries were created, and with them new jobs.

This has, at least in part, contributed to a dramatic fall in the unemployment rate in Australia over time - an unemployment rate that peaked around 10 per cent in the 1980s recession and around 11 per cent in the 1990s recession, and is now under 5 per cent - a rate that many people in 1983 would have thought was unattainable.

The reforms delivered a range of other benefits as well. We are a far more open economy now. Many Australian firms have grown rapidly as they gained access to vast global markets as a result of trade liberalisation. The range of goods now available for Australian consumers to choose from is immense, often at even lower prices than before.

The forces of competition create pressure on businesses to be efficient and provide incentives to be innovative in producing goods and services valued by consumers. They also reward effort, risk-taking and entrepreneurship.

It is in the interests of all consumers, and indeed the economy as a whole, that businesses are under competitive pressure. Competitive markets drive efficiency, exert downward pressure on prices and lead to greater choice for consumers. That is why Labor Governments stand for competition, because competition means lower prices and more choice for consumers.

Competition forces businesses to be efficient, resilient and innovative, better enabling them to respond to consumer demands and employ people through the good times and the bad.

Transitional costs have been inevitable, but Australian governments have supported the transition, with structural adjustment programs offering financial assistance to businesses, helping them to adapt to deregulated markets or exit the industry.

Competition in the dairy industry has of course been the subject of recent debate, and it is worth taking a look at the history of reforms in this area.

Until 2000, the dairy industry in Australia was highly regulated, with State authorities being responsible for setting the farm-gate price for fresh drinking milk. This stifled innovation and kept prices artificially high for consumers.

NCP reforms in the dairy industry, which were carried through by the Howard Government, led to substantial changes in the shape and nature of the industry, and Australia's dairy farmers now operate in a deregulated market.

For some, the changes meant that they exited the industry. The Dairy Industry Adjustment Program, considered to be the largest structural adjustment package ever provided to an Australian agricultural industry and funded by an 11 cent-a-litre levy on milk, helped to ease the transition, dispensing more than $1.7 billion in payments to more than 30,000 dairy producers over the eight years of the program's operation.

Ultimately, this was an important reform that drove producers to become more efficient and productive. We now have a reported increase in milk production per cow accompanied by a proliferation of drinking milk and dairy product choices, and producers and processors are taking advantage of the opportunities presented to them by the demand in growing export markets.

For consumers, the result of deregulation has seen lower prices and new products come to market.

Much of the recent attention has been focused on the arguments put forward by a number of stakeholders that claim that NCP reforms in the dairy industry have gone too far, and that recent cuts in the price of generic milk are now threatening the future of the industry in Australia.

But this debate cannot be had without also having a discussion about developments in the supermarket sector. The Australian supermarket sector is representative of many of the challenges and opportunities that emerge from a competitive and free market.

In my living memory, the debate around competition in the supermarket sector has always been characterised by concerns about prices being too high. It is, in my view, ironic that we are now having a public debate about prices being too low.

While I understand that people are concerned about significant market concentration in the sector, it should be noted that recent developments in the supermarket sector demonstrate that aggressive competition can occur and is occurring.

At a time when there is much political commentary around concerns over the cost of living, it is this competition that has provided people with new choices and has delivered a more diverse range of products at lower prices.

In recent times, we have seen that the major supermarket chains have begun to compete aggressively against each other. They are now competing on almost every platform imaginable: price, product range, service, quality and convenience.

The inescapable fact is that much of this has been driven by consumer demand. Whether we like to admit it or not, consumers have voted with their feet by choosing to shop in large numbers at the major supermarket chains.

To stay competitive, players in the market have to adapt and change to anticipate and meet consumer demand.

This demand isn't always just about price, although that is clearly an important factor. For some, particularly those who are struggling to cope with cost of living pressures, price will often be the most important factor.

In the supermarket sector, however, we now have a greater diversity of products to choose from, longer opening hours and even new technologies, like the smart trolleys being trialled in some independent stores that can help you find the items on your shopping list and give you a running total of your grocery bill.

The power of competition is that it drives innovation. And for all of the market share that the major supermarkets have achieved, consumer demand has also helped to drive the recent surge in convenience stores, where prices are generally higher but there is easier access to the store without having to run the gauntlet of the shopping malls or their car parks.

We are also witnessing a resurgence in farmers markets and farm-direct selling, reflecting a desire by many consumers to deal more directly with the producers of their food and buy produce that they know is fresh.

It is the role of legislators to try and define the boundaries of our competitive framework. I have noted that in some recent commentary, some stakeholders have begun to argue for a winding back of the clock on reforms in competition law.

Whilst I can understand the sentiment behind these arguments and agree that we should always be vigilant to maintain the effectiveness of our competition laws, we will not countenance a return to a policy framework that fails to meet the threshold test of delivering more choice and lower prices for consumers.

International Competitiveness

If we look at the evidence of the economy-wide benefits of competition, we see that it generates a robust economy that offers greater overall employment, lower prices for goods and services, and greater consumption choices for all Australians.

Competition means a flexible economy, which is essential if we want to maintain Australia's current prosperity as a small, open economy in a changing and increasingly globalised world.

It is precisely this robustness and flexibility that also saw Australia emerge strongly from the global financial crisis.

Competition does not just affect local businesses operating across Australian states and territories; it also impacts on Australian businesses that compete in the international economy. Competition can be a catalyst that enables businesses to grow internationally-not just domestically.

For competition to be effective, it is important to ensure that there are low barriers to entry - including no unnecessary regulatory restrictions - which ensures that no single firm or group of firms is entitled to feel too comfortable, or protected from the prospect of a competitive challenge.

Barriers to exit also need to be low, to facilitate industry departures or adjustments, so that displaced competitors don't face crippling costs associated with shifting their resources to more productive and profitable uses.

A common misconception that persists to this day is that Australia can survive as an isolated, self-sufficient and independent economy. This could not be further from the truth; on the contrary, our standard of living in Australia is closely linked to trade, both in terms of our high value export sectors and our openness to imports.

In an increasingly globalised world, where countries rely more and more on their specialised areas of comparative advantage, Australia cannot afford to be left behind. This is why any move to limit or wind back competition will have enormous implications for Australia's competitiveness in the international economy.

It is often difficult to recognise significant changes until after the fact. Almost before our eyes we are all experiencing the transformational power of the internet. For some businesses, doors are closing - for others, doors are opening. While some will struggle, many others will thrive as they cast off the shackles of growing input costs such as high rents, and take advantage of opportunities that go far beyond foot traffic in a single shopping centre to national and international opportunities offered by e-tailing and e-commerce.

We must keep in mind, however, that the need to lift productivity and improve our international competitiveness is not unique to Australia. Many countries have responded to this challenge effectively through their own reforms to encourage greater competition and better enable their local industries to take advantage of opportunities.

For example, since 1984, successive New Zealand governments have undertaken reforms designed to make the country's agricultural sector more competitive and phase out the heavy protectionist policies and subsidies that were holding back the agricultural industry as a significant export sector.

While most reform of the agriculture sector was completed during the mid-1980s, general economic reform continued in many forms throughout the 1990s. Two major outcomes of the agricultural reforms were productivity growth in individual sectors (for example, dairy, beef, sheep) and resource reallocation to high productivity sectors.

The rate of total factor productivity growth has nearly doubled from 1.5 per cent in the high subsidy period pre-1984 to 2.5per cent in the post 1984-era. In particular, land productivity increased by approximately 85 per cent since the introduction of agricultural reforms in 1984.

New Zealand's experience of competition reform shows that agricultural market regulation and support does not lead to sustainable farm and rural incomes. Rather, when a government insulates its agricultural sector from trends in the international market, inefficiencies and reduced competitiveness are likely to occur.

New Zealand's macroeconomic climate is now much more stable than it was in the 1980s and the agriculture sector operates in a freer market environment that contributes to growth in productivity and incomes.

And Australia too has continued its reforms.

Our most recent microeconomic reform is the National Partnership Agreement to deliver a Seamless National Economy.

This agreement between the Commonwealth, State and Territory governments has led to an important reform agenda to remove regulatory barriers to business and harmonise regulations across State borders. It also includes important competition policy reforms.

In December 2007, the Council of Australian Governments (COAG) set up the Business Regulation and Competition Working Group (BRCWG), to oversee and facilitate the delivery of the regulatory and competition policy reforms.

The BRCWG Competition Subcommittee, which I chair, offers advice on the direction and progress of competition related reforms.


Australia is now at a new crossroads.

While much has been achieved and gained through competition policy, we cannot afford to be complacent.

More than ever, Australia needs to be competitive, in a time marked by new challenges such as climate change and an ageing population.

New debates on competition are often the same old debates - waged by the groups who benefit from regulated markets and protectionist policies at the expense of rising living standards in the future.

Competition is never easy. There will always be demands to protect industries, to regulate, to move backwards in response to pressure from special interests groups. But governments must govern for us all, not the few, and must address head-on claims that competition policy changes are bad for the economy and for consumers. In fact, history shows us that the opposite is invariably the case.

We must strongly defend the decades of reform, defend Australia's achievements in microeconomic reform and continue to argue for the principles of competition which are ultimately both pro-consumer, pro-business and pro-growth.

In order to maintain and improve our high standard of living into the future, we have to remain flexible, productive and competitive.