Transcript Title goes here – this sample illustrates a two

Competition Reforms and Australia’s
Infrastructure Performance
ACCC Regulatory Conference 2007
Greg Houston
Director, NERA Australia
27 July 2007
Ten Principles of Economics Translated
2
The Bad Old Days

From the 1930s to 1974 anticompetitive conduct & structures were
widespread in Australian business

The Trade Practices Act 1965 prohibited only collusive tendering and
bidding, but

–
to avoid legal sanctions a company needed simply to register an
anticompetitive agreement, and
–
by 1974 there were more than 14,000 such agreements on a
secret register – 3,000 of which covered horizontal agreements
The Trade Practices Act 1974 changed all this
–
it prohibited horizontal and vertical restraints that would SLC
–
it banned outright certain conduct such as price fixing
–
it introduced a merger clearance regime
3
The Pursuit of Growth

The 1993 Hilmer report was the first comprehensive review of the TPA and
in particular of
–
structural inefficiencies in markets, and
–
the need for a concerted national competition policy

The review took place when Australia’s economic performance had been
poor for some 30-years

The subsequent Competition Principles Agreement (CPA) included

–
reform of regulation that restricted competition
–
reform of the structure for public monopolies, and
–
provision for third-party access to essential infrastructure
The objective
Greater competition  Improved productivity  Economic growth
4
The Pursuit of Growth
‘Implementing this policy is the most important single development
in micro-economic reform in recent years. Ultimately, the ability of
the economy to grow, to provide jobs and an improved standard of
living, depends on how well the productive potential of the
economy is employed and enhanced. … The payoff … for ordinary
Australians is very real. It paves the way for cheaper prices, more
growth and more jobs.’
Crowley, R. (Minister for Community Services) Senate Hansard, 1995
5
Major Developments Post-reform

Most of the reforms initially agreed to are now in place
–
electricity monopolies broken up
–
telecommunications market opened to full competition
–
nationally integrated and competitive gas industry introduced
–
separation of many government-owned railway businesses
–
price monitoring at most Australian airports
–
national water sector initiative

But regulation of infrastructure industries continues to evolve

Wide-ranging reviews are underway of the energy, water and rail
sectors with a comprehensive review of telecommunications
scheduled for 2009
6
The Task
“Reform has been going on long enough for the results to be evaluated.
This has not been done very thoroughly, though it should be a priority.
There has been a tendency to submit one industry to reform, and then
move on to the next industry, without much assessment of the results.
In some cases, the gains appear to have been less than anticipated.”
Forsyth (1998)
Key Question: How to assess the results?

How much impact have competition reforms had on Australia’s
infrastructure performance?

How to decide which metrics should be used and when?
Quick Answer: Not Easily!
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What is being Compared?


The ‘counterfactual problem’:
–
a simple temporal analysis doesn’t account for what might have
happened over time absent reform
–
observed may have arisen anyway and may have been better (or worse)
had a different reform been undertaken
Bounds of the counterfactual:
But for the reforms…
‘Nothing’ would have
happened, eg, Allen
Consulting Group (2004)

‘Some’ impacts would have
occurred – a ‘unique
counterfactual’, eg, PC (2004)
‘Everything’ would have
happened anyway,
eg, Quiggin (1998)
‘Unique counterfactuals’ are inevitably subjective
8
Ultimate Purpose: Economic Growth

The overarching theme of Hilmer was that the poor productivity
performance of infrastructure industries was limiting growth

The former Industry Commission (now the Productivity Commission)
estimated that the reforms could in the long-run boost real GDP by
5.5% or $23 billion a year (in 1993-94 dollars)
So…

The ideal, ‘first-best’ measure of the success of competition policy
reforms would be their quantitative impact on real GDP
What has happened to real GDP since the early 1990s?
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Growth in Real GDP
110.0
105.0
100.0
Australia’s
But can this
economic
strong performance
growth performance
has been
be
extremely
attributedstrong
to competition
since the reforms?
reforms
Index Value
95.0
34% Increase
in Real GDP
90.0
85.0
Hilmer
Competition
Committee Principles
Report
Agreement
80.0
75.0
70.0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
10
GE Models: An Indication, Not an Answer

Can general equilibrium (GE) models be used to attribute some or all of this
growth to the reforms as distinct from other factors?
NO

GE models can provide a very useful indication of the direction and broad
magnitude of change, but they cannot provide an answer on their own
“Obviously, it is not possible to draw an explicit link between specific reforms
and the recent improvements in Australia’s economic performance. Time lags
between reform implementation and impact, the complementary nature of many
reform initiatives, the concentration of adjustment costs in the near term and the
influence of various other economic policies and developments (such as
population growth and movements in the terms of trade) mean that care and
judgement are required in reaching conclusions on causality”
Productivity Commission (2005)
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Narrowing In: Improved Productivity

Productivity is a widely accepted contributor to economic growth
“Productivity is almost the only thing that matters”
Paul Krugman (1998)

The focus of Hilmer was on spurring improvements in the productivity
performance of infrastructure industries

Temporal productivity comparisons are commonplace in economics literature
and in Australia (Dawkins & Rogers (1998))

Of course, such analyses are only as good as the available data
“A major omission in Australia’s reform process is that we have not implemented
data supply and collection mechanisms to ensure that we can evaluate the success
of those reforms later. One criticism I would make of the Victorian reforms is that
there are now significant problems obtaining data from some of the privatised
electricity utilities. In future, we need to build supplying data in as a prerequisite for
the restructured industry.”
Lawrence (1998)
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Data Constraints

Australia’s approach to data collection could be vastly improved
“Our analysis has highlighted a number of data related issues that warrant
further attention before the results of a study such as this could be considered
for use in aiding the decision making process in the price regulation of water
supply businesses. In particular the available data on capital needs
improvement”
Coelli & Walding (2005)

To best assess how successful reforms have been, some thought should go
into how that success might be measured beforehand
BUT

Even if data were available, would an analysis of sector-specific productivity
give a definitive answer?
NO
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Major Productivity Determinants
Fundamental Influences
• Political environment
• Institutions
• Social capability
Underlying Factors
• Competition
• Openness
• Demand & supply



Again it is difficult to attribute
trends to particular factors
Like GE analyses, sectoral
productivity
analyses
can give a
Cross-sectional
comparisons
broad
indication
ofintroduce
success, but
may help
but they
cannot
give an answer
their
further assumptions,
eg,onthat
own
rates of technological change
are ‘borderless’
Immediate Causes
• Technological advance
• Accumulation of human capital
• Accumulation of physical capital
• Scale, scope & specialisation • Resource allocation
• Plant/firm turnover in industries
• Firm organisation
• Work arrangements
• Management practices
Productivity
Improvement
14
Moral: If Broad Measures are used in Isolation…
Finding a ‘culprit’ is difficult
15
Narrowing Further: Specific Partial Measures

Partial indicators may offer the best measures of success

But they carry important qualifications since they are only a sub-set of
economic activity

Irrespective of the partial indicator its suitability will depend on:

–
whether reform was to regulate a natural monopoly segment or
introduce contestability
–
the industry in question, eg, above-rail versus retail energy
–
the stage of market development
–
the nature of any regulatory regimes in place
Key challenge is to identify partial measures of most relevance and how
they should be interpreted in conjunction with other indicators
So what are the various ‘pieces of the puzzle’?
16
Narrowing Further: Specific Partial Measures
Prices
Quality
Costs
17
Prices – Costs - Quality

Price / cost reductions (increases) not good (bad) per se; also have
to consider:
–
quality, ie, is it deteriorating?
–
investment, ie, do prices deliver a reasonable return?
–
innovation in product offerings
–
time-frame - long-term more important than the short-term
Price/Cost Reduction
Established, relatively
homogeneous product
market with regulatory
quality safeguards
Emerging,
heterogeneous product
market without regulatory
quality safeguards
Reasonably good indication
?
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Specific Partial Measures
Prices
Quality
Costs
Investment
19
Investment

One aim of competition policy reforms is to facilitate the right amount of
infrastructure investment in the right place at the right time

But assessing the efficiency of investment is extremely complex – no case is
‘clear cut’, eg, Telstra broadband investment

Ex-ante prudent investment guidelines help but are no guarantee

Short-cut: if assessing ex-post can we assume over-investment is better
than under-investment, ie, more is better?
NO!

Over-investment means that resources dedicated to overbuilding an asset
could have been better utilised elsewhere, eg, more hospitals, or coal
terminals!

Remember, the purpose of incentive regulation was in large part to address
‘gold-plating’
20
Specific Partial Measures
Prices
Quality
Costs
Investment
PFP
21
Partial Factor Productivity (PFP)

Less data intensive than sector-level TFP but same qualifications
continue to apply re attribution

Provides a useful indication but key drawback is that PFP measures
provide an incomplete picture of economic activity

Improvements in one area can be offset elsewhere

It is important to avoid focusing too narrowly on a small number of
PFP measures
22
Specific Partial Measures
Prices
Quality
Costs
Investment
PFP
‘SCP’
23
Further Indicators of Effective Competition

A number of further indicators are useful in assessing the success of
reforms intended to improve the contestability of markets
Structure



Number of customers and suppliers
History of entry, exit and consolidation
Market shares and concentration
Barriers to entry, exit and expansion
Performance
Conduct
 Demand-side, eg, customer switching

 Supply-side, eg, aggressive marketing

Prices, costs, quality, investment, PFP
Innovative product offerings
24
Moral: If Narrow Measures are used in Isolation…
Key factors may go unnoticed
25
Bringing it all Together
Macroeconomic Growth
Improved Aggregate TFP
Improved Sectoral Productivity
• Temporal comparisons
• Cross-jurisdictional comparisons
Partial Indicators
Natural Monopoly and Contestable Markets
• Prices reflecting efficient costs and service quality
• Efficient investment in capital infrastructure
• Improved PFP
Contestable Markets
• Market structure, eg, entry barriers
• Market conduct, eg, customer switching
• Market performance, eg, product innovation
Underlying Immeasurable Factors
•
•
•
•
Technological advance
Social capability
Political environment
Myriad other factors
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Key Lessons


Assessing the success of competition reforms is a challenging
exercise!
–
unambiguous indicators of success do not exist – beware of
sound-bites!
–
one cannot look too broadly or too narrowly
–
short cuts aren’t possible – a broad suite of indicators should be
examined
–
each indictor constitutes a ‘symptom’ of successful reform, the
more of which that are present the more confident the diagnosis
Before reforms are implemented, more thought should be given to
how success might be measured and relevant data collected
27
Contact Us
Greg Houston
Director
NERA Australia
+61 2 8864 6501
[email protected]
© Copyright 2007
NERA Australia Pty Ltd
All rights reserved.