Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
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! 7 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? 9 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) 11 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) 12 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 13 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 ? 18 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 26 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.