Australia is currently leading the world’s “Group of 20” economies (the G20) at a critical stage in the evolution of the world economy. In that context, Australia is taking the opportunity to make its mark on the future direction of global economic policy. A Communiqué brokered by Australia in February 2014 at the G20 meeting in Sydney specifically mentions the promotion of competition to realise productivity gains.

The Australian context to the Communiqué is important. The centre-right coalition Government in Australia (the Coalition) is currently undertaking an ambitious “root and branch” review of Australian competition law and policy, known as the “Harper Review”. That initiative gave effect to a commitment in the 2013 Australian federal election that the Coalition would seek to boost Australia’s declining levels of productivity. Domestic developments in Australia in that review may well influence the path of economic reform across the world in the 21st Century.

Context of the review

It has been some 20 years since Australian competition policy was last comprehensively reviewed. The so-called “Hilmer Review” into National Competition Policy, chaired by Professor Frederick Hilmer, had a profound impact on the Australian economy. In 2006, Australia was one of the most deregulated economies in the western world. Australia’s competition policy reforms led the world at the time and delivered Australia some of the strongest growth rates in the OECD.

As other nations followed Australia and implemented similar competition policy reforms, Australia’s competitive advantage eroded. Recognition of this and concern at recent declines in Australia’s productivity levels has led to a renewed focus on the importance of competition policy. Many Australian commentators, including Professor Hilmer himself, have called for a new or invigorated approach. Peter Harris, Chairman of the well-respected Productivity Commission in Australia, identified in a speech in November 2013 that the alternative was a “low growth scenario” for Australia.

Scope of the review

The scope of the Harper Review in Australia is ambitious and extends well beyond a review of Australia’s competition laws. In January 2014, one of Australia’s leading journalists described the draft terms of reference as “extraordinarily wide”. The review encompasses general competition policy and market regulation with a view to more sweeping structural reform.

As with the G20 Communiqué, the root and branch review is focused on productivity growth by promoting competition. The primary objective of the review is to recommend reforms to achieve competitive and productive markets throughout the Australian economy.  These reforms must be directed at removing impediments to competition that are not in the public interest. There are four key areas of focus:

  • Removal of excessive Governmental regulation;
  • Prevention of anti-competitive behaviour;
  • Improvements to regulatory institutions; and
  • Reduced Government involvement in competitive markets.

Sectoral deregulation and reform

Importantly, the Harper Review could provide a blueprint for a next wave of sectoral deregulation and reform. The G20 has emphasised productivity growth. Poor regulation acts as a drag on the economy by reducing flexibility and innovation, increasing cost, and impeding such growth. The review has been tasked to recommend removal of impediments to competition to enable such growth, including via a process of deregulation. New regulation may also be subject to greater screening via regulation review.

Historically, there has been a clear appetite within all levels of Australian government to remove superfluous regulation, particularly where regulation is impeding productivity. The “National Partnership Agreement to Develop a Seamless National Economy” in 2008, for example, involved a set of 45 reforms by the Council of Australian Governments (COAG) for that specific purpose. The review is likely to recommend enhancements to the regulation review process and to identify a set of recommendations for further deregulation and reform.

Institutional reform

The review may recommend institutional reforms. While some have speculated on reform of the Australian Competition and Consumer Commission (the ACCC), the ACCC remains one of the most highly regarded competition agencies in the world. A more likely outcome will be to recommend fixes for some important ACCC processes, including Australia’s formal merger review process (which remains unused after eight years).

Beyond the ACCC, however, Australia’s competition policy institutions do require reinvigoration. Some have proposed a high-powered policy review and development entity to independently advise government. The new entity would have regulation review powers. Any such reform could involve an enhanced role for Australia’s National Competition Council, the expansion of the Australian Productivity Commission, or even the integration of these entities.

Competition law reform

There is welcome scope to fine tune Australia’s competition laws. A substantive redraft is unlikely - Australia’s competition laws remain some of the best in the world. From 1974, Australia adopted a unique approach that blended the best elements of the competition laws from the United Kingdom and the United States. Australian competition laws are widely regarded as highly effective and consistent with international best practice.

However, the review is likely to address provisions that regularly attract criticism. Notable provisions that may be amended include Australia’s much-criticised “Birdsville” (below-cost pricing) amendments linked to market share, Australia’s unique price signalling provisions, which only apply to the banking sector, Australia’s arcane third-line forcing provisions, and Australia’s inconsistent joint venture defences. The review may also revisit recommendations from previous policy reviews, including the nature of exemptions for intellectual property and liner shipping.

Some reform proposals in the public domain have already proved controversial. The ACCC has called for the extension of the price signalling provisions in the banking sector so that they apply universally. Senator Nick Xenophon has tabled private member’s legislation giving the ACCC the ability to ask a court to break up powerful firms that abuse their market power.

Sectoral reform

Australian companies may push for greater protections against knee-jerk sectoral regulation. A number of industry sectors have been singled out for specific attention in the review, namely shipping, e-commerce, groceries, utilities, automotive fuel (e.g. petrol and diesel), technology, and natural monopoly infrastructure. Some of these sectors mirror the ACCC’s current areas of focus, as identified by ACCC Chairman and CEO Rod Sims in a speech in February 2014. Technology and e-commerce, for example, is a current key focus for the ACCC, including given the disruptive effect of the Internet on traditional business models.

Infrastructure is a key area of G20 focus and this is similarly reflected in the Harper Review. As the Productivity Commission has just completed a detailed review of Australia’s national infrastructure access regime, it is unlikely that the review will reopen the need for reform of that regime. However, that regime is but one component of the regulation of Australian infrastructure. The review may recommend improvements to State-based price surveillance (particularly of natural monopoly infrastructure) and state-based access regulation.

The competition issues relating to groceries, utilities, and automotive fuels in Australia are perennial and tend to be unique to those particular sectors. Given the likely limited resourcing and timetable of the review, we suspect that such detail will be left to sector-specific inquiries. Yet the review may seek to guide future policy-making and sectoral regulation. A more harmonised, principled and predictable approach may reduce the risk of ad hoc government intervention. The review has the ability to define the circumstances and parameters within which any sectoral regulation should be applied.

Role of Government

Interestingly, reforms may occur to the regulatory model for government businesses. The Harper review is required, for example, to address the question whether public businesses promote competition and productivity. An underlying concern is that excessive involvement of government businesses can “crowd-out” private sector investment. Moreover, there is an inherent conflict of interest where the government has the ability to set the regulatory structure for its own businesses.

The terms of reference indicate that the Harper Review should focus on four sets of issues:

  • Whether government funding should be separated from service provision;
  • The potential for greater privatisation and corporatisation of government businesses;
  • The appropriateness of price regulation in non-competitive markets; and
  • The continued application of competitive neutrality policies.

The inclusion of these issues indicates that the review could potentially cover reforms in economic sectors that have traditionally been the domain of government, including healthcare. The use of the word “privatisation” in the terms of reference has already attracted disproportionate media comment in Australia.

Protection of small business

Last, the review could recommend reforms to address the concerns of small business. The genesis of the review is in the small business political portfolio. The review is being administered by the Minister for Small Business in Australia. Some have speculated that this will lead to the extension of Australia’s unfair contract prohibitions and unconscionable conduct prohibitions to protect small business. However, any such extension would need to be balanced against the increased regulatory burden overall.

Political jockeying on all these issues is already occurring. Private legislation has recently been proposed that would give the ACCC powers to seek divestiture in a context similar to the United States’ “trust busting” powers for monopolisation.

Conclusions

One does not envy the task of the review panel. It will be required to maintain balance while walking a difficult political tight rope, under tight deadlines, under an international G20 spotlight, and in swirling political cross winds. Yet the final recommendations of the review are likely to be taken seriously by those in Canberra. The review provides a once-in-a-generation opportunity to improve Australia’s competition and regulatory framework.

Historically, Australia’s competition policy reforms led the world and delivered Australia some of the strongest growth rates in the OECD. As leader of the G20, the Harper Review provides a real opportunity for Australia to demonstrate global economic leadership and reap the corresponding economic rewards. A new wave of regulatory reform in Australia could potentially influence the direction of regulatory reform across the world in the 21st century.

Submissions on the Harper Review discussion paper were due by 10 June 2014.