Competition reform is our best bet to lift the economy

The federal government response to the Harper Review is a good start, but the legislative road to competitive markets is a long one and full of pitfalls. Vested interests can always work to delay, dilute or misinform the public on the recommendations in order to avoid the end-goal of competition.

But make no mistake: Australia will be better off once the bulk of Harper’s recommendation are implemented.

Nobel laureate Paul Krugman once quipped: “productivity isn’t everything, but in the long run it’s almost everything”. With the mining boom now only the faintest of fond memories, our best chance to lift the economy is with thorough, productivity-enhancing competition reform.

The government announced it supports 39 of the 56 recommendations in full or in principle and a further five recommendations in part, leaving the remaining 12 to further review and consultation.

Essentially, there is hardly any part of the Harper review that has been summarily dismissed. And none of the rejected features have the potential to undermine the reach and scope of the competition review.

For instance, the government rightly opposes independent cost benefit analyses of free trade agreements before negotiations are concluded (Recommendation 6). Such investigative processes would usually be an expensive and fruitless task — as most of the final agreements are decided in very final stages negotiations — and duplicate several procedural safeguards already in place.

Of the  partly rejected recommendations that will have little impact in any case, they relate to the possibility of parallel importing of second-hand cars (Recommendation 13); the extraterritorial expansion of Australia’s competition law (Recommendation 26); proposed changes to the National Access Regime (Recommendation 42), preferring instead to adopt the recommendations from the 2013 Productivity Commission inquiry on the matter; and the call for part-time ACCC Commissioners (Recommendation 51).

The real challenges for a successful competition reform therefore lies in how to translate the agreed recommendations into implemented measures. For one, most of the changes require the cooperation — or are entirely under the supervision — of states and territories.

An illustrative example is planning and zoning (Recommendation 9), which falls entirely under the area of state responsibility. There are many vested interests that oppose any competitive increase in housing supply. In particular the not-in-my-backyard movement, well entrenched in our local councils and state legislative houses, which has been artificially inflating house prices and holding back further infrastructure development.

Other areas under state jurisdiction that are vital to boost competitive forces include the hotly debated ride-sharing services (Recommendation 10), full liberalisation of retail trading hours (Recommendation 12), further deregulation of the energy markets (Recommendation 19) and water reform (Recommendation 20).

These recommendations demonstrate the limitations of the federal government in trying to move ahead, and the need to convince other members of the federation to cooperate. In this respect, great expectations — and responsibility — are placed on the promised establishment of the Australian Council for Competition Policy (Recommendation 43) to replace the National Competition Council. The new body would have the mission to provide leadership and drive the implementation of the evolving competition policy agenda.

A good omen for the ACCP is the full support from the federal government to make use of competition payments in order to buttress a more cooperative spirit from states and territories (Recommendation 48). Although sometimes naively criticised for institutionalising a legal bribe system to engage states and territories to do what they should be doing regardless, history shows the vital role of monetary incentives in successfully implementing previous rounds of competition reforms.

In addition, binding federal payments based on actual implementation of reforms constitute a useful lever for state governments to politically defeat status quo defenders against a more competitive environment.

Another challenge to the implementation of the Harper Review is that, even after receiving full support from the government, some recommendations consist of overarching principles that can easily be lost during the implementation phase.

Take for example the recommendations on competition principles. The proposed new public interest test (Recommendation 1) is a laudable guiding compass: “government policy should not restrict competition unless the benefits of the restriction to the community as a whole outweigh the costs; and the objectives of the legislation or government policy can only be achieved by restricting competition”. Admirable — but easier said than done.

Despite all these challenges and difficulties, the government response is a step in the right direction. The decision to postpone highly contentious points for further discussions — e.g. the ‘Effects Test’ in section 46 of the Competition and Consumer Act (Recommendation 30) — constitutes a wise tactic to not allow a topical point to highjack all the discussions.

We should never underestimate the resilience and tendency of vested interests to water down important economic reforms that would lift our productivity. Nor should we underestimate the effort needed to properly implement the changes. But while these challenges for competition reform are great, the rewards are even greater.

Dr Patrick Carvalho is a Research Fellow at the Centre for Independent Studies.