At the meeting of the Council of Australian Governments (COAG) on 25 February 1994, Heads of Government agreed to the principles of the national competition policy articulated in the Hilmer Report.

Commonwealth, State and Territory governments have agreed to co operate in preparing legislation to implement the Hilmer recommendations.

In addition, States have undertaken to investigate the manner and extent of anti-competitive behaviour in their various jurisdictions in order to determine in what manner the Hilmer recommendations should be implemented, and what, if any, transitional and/or exemption powers should be written into the legislation.

CEOs are asked to examine in detail the implications of the Hilmer report's recommendations for their areas of responsibility. In requesting this I note that Ministers and their departments have previously supplied general reactions to the recommendations.

In light of the Heads of Governments' agreement to co operate with the Commonwealth in drafting its legislation (for consideration by COAG on 19 August 1994), NSW government agencies must review carefully the recommendations of Hilmer to enable Cabinet to be fully advised of any administrative and/or legislative implications.

In particular it is important for CEOs to identify as soon as possible any difficulties they forsee in this regard.

ATTACHMENT

NATIONAL AGENDA FOR MICRO-ECONOMIC REFORM: THE HILMER REPORT

Heads of Government Communique

At the meeting of the Council of Australian Governments (COAG) on 25 February 1994, Heads of Government agreed to the principles of the national competition policy articulated in the Hilmer Report. A Standing Committee of officials is to be established to manage the continuing agenda of microeconomic reform. Specifically, the Council agreed:

(1) that any recommendation or legislation arising from the Report would apply to all bodies, including Commonwealth and State government agencies and authorities;

(2) to merge the Trade Practices Commission and the Prices Surveillance Authority as the basis for a new body, the Australian Competition Commission (ACC). The ACC would also have new powers. The detailed arrangements for the establishment of the ACC, including the process of State and Territory participation in the appointments process, will be developed by Commonwealth, State and Territory Governments;

(3) that State, Territory and Commonwealth Governments will commence joint work on the new legislation, with the aim of considering it in August 1994;

(4) that State, Territory and Commonwealth Governments will establish, by reporting to the next Council of Australian Governments meeting, the practicalities of applying the Report;

(5) that the Commonwealth will consider assistance to the States and Territories for loss of monopoly rents and the process of managing adjustment; and

(6) that the broadened application of the new legislation will require changes to some State and Territory regulatory arrangements and business practices. A two year transitional period has been recommended by the Report, and officials will explore how to provide States and Territories with a capacity beyond this period to temporarily authorise or exempt particular conduct, practices or arrangements on a case-by-case basis.

The Hilmer Report

The Hilmer Report on National Competition Policy makes recommendations relating to the extension and refinement of the existing competition and prices surveillance legislation (the Trade Practices Act and the Prices Surveillance Act respectively) and the adoption by governments of ''additional policy elements' designed to enhance competition. The Report recommends new institutional arrangements in each of these areas.

The Report recommends that current provisions permitting other Commonwealth statutes and regulations to specifically authorise or approve conduct otherwise in breach of the Act should be amended to improve the transparency of any specific exemptions.

The Report recommends that the shield of the Crown doctrine be removed.

The institutional arrangements recommended in Hilmer Report include the establishment of a National Competition Council to play a key role in future policy development and the establishment of an Australian Competition Commission (arising from the merger of the current Trade Practices Commission and the Prices Surveillance Authority) to administer relevant aspects of the proposed competition policy and play a complementary role with respect to regulation review.

Examination of Report from NSW Perspective

The specific examination to be undertaken by State and Territory governments under points 3, 4, 5 and 6 of the 25 February 1994 COAG Communique (see page 1 above) will involve consideration of a number of Hilmer's recommendations, including:

• the extension or amendment of the competitive conduct rules set out in Part IV of the Trade Practices Act.

These changes would prohibit all price fixing arrangements between competitors, prohibit other forms of agreement which substantially lessen competition, prohibit third line forcing only if it substantially lessens competition, extend the prohibition against resale price maintenance to services as well as goods, and remove the separate prohibition on price discrimination.

• the application of these rules to unincorporated businesses, the removal of the 'shield of the Crown' doctrine so that Government bodies engaged in business activities would be covered (with a proposed two-year transition period for both) and making the current authorisation process by the Trade Practices Commission (or its successor, the Australian Competition Commission) the primary means of permitting exceptions to the conduct rules.

Exemptions now in place under State legislation could be continued for three years. It is in fact proposed that officials should explore how to provide States with a capacity to authorise or exempt conduct on a case by case basis beyond the proposed transitional period.

• the transfer of the price oversight functions currently carried out by the Prices Surveillance Authority to the Australian Competition Commission.

States and their agencies would continue to be excluded from their coverage.

Executive Overview

Australia is facing major challenges in reforming its economy to enhance national living standards and opportunities. There is the challenge of improving productivity, not only in producing more with less and deploying scarce assets wisely, but also in becoming better at making and exploiting new discoveries, whether in technology, resources, fashion or ideas. A possibly more difficult challenge is to develop in a way that creates new jobs and growth rather than see the economy shrinking to an efficient but diminishing core of activity.

Coping with these challenges is an enormous task for any country, and Australia is not alone in finding the process of reform testing and early benefits elusive, particularly when world economic growth is negligible. However, Australia faces an additional complexity in tackling these challenges, as most reforms require action by up to nine governments. This is particularly true in competition policy, an area central to micro-economic reform which aims at improvements at the front line of the economy.

A. TOWARDS A NATIONAL COMPETITION POLICY

As the Prime Minister has observed, 'the engine which drives efficiency is free and open competition'.¹ Competition is also a positive force that assists economic growth and job creation. It has triggered initiative and discovery in fields ranging from the invention of the telephone to the opening of new retail stores and small manufacturing operations. In fact, it is these developments in smaller firms, prompted by the belief of these firms in their ability to compete, that are the main source of both new jobs and value-added exports.²

The benefits of fostering more competitive markets are being increasingly recognised by governments around Australia, and indeed around the world. Within Australia, all levels of government have made important reforms to enhance competition. Trade barriers have been lowered to increase international competition, and restrictions on competition within Australia have been relaxed in sectors as diverse as telecommunications, aviation, egg marketing and conveyancing. Consumers are already obtaining substantial benefits through these reforms, and businesses which rely on these inputs are better placed to compete successfully in international markets. Reforms of these kinds also foster innovation and make the economy more flexible, improving its capacity to respond to external shocks and changing market opportunities.

Competition Policy

Competition policy is not about the pursuit of competition per se. Rather, it seeks to facilitate effective competition to promote efficiency and economic growth while accommodating situations where competition does not achieve efficiency or conflicts with other social objectives. These accommodations are reflected in the content and breadth of application of pro-competitive policies, as well as the sanctioning of anti-competitive arrangements on public benefit grounds

Australian competition policy is sometimes seen as solely comprising the provisions of Part IV of the Commonwealth Trade Practices Act 1974 (TPA). While laws of that kind are an important part of competition policy, the relevant field of policy interest is much wider. In its broadest sense, competition policy encompasses all policy dealing with the extent and nature of competition in the economy.³ It permeates a large body of legislation and government action that influences permissible competitive behaviour by firms, the capacity of firms to contest particular economic activities and differences in regulatory regimes faced by different firms competing in the one market.

The Committee has considered competition policy in terms of six specific elements, each of which is supported by laws, policy and/or government action as illustrated in box 1.

Box 1: Elements of Competition Policy

Policy Element Example

1. Limiting anti-competitive Competitive conduct rules of Part IV of conduct of firms the Trade Practices Act

2. Reforming regulation which Deregulation of domestic aviation, egg unjustifiably restricts marketing and telecommunications
competition

3. Reforming the structure of Proposed restructuring of energy utilities public monopolies to facilitate in several States competition.

4. Providing third-party access to Access arrangements for the certain facilities that are telecommunications network essential for competition

5. Restraining monopoly pricing Price surveillance by Prices Surveillance behaviour Authority

6. Fostering 'competitive Requirements for government businesses neutrality' between to make tax-equivalent payments government And private businesses when they compete

The Need for a National Competition Policy

The imperative for developing a national competition policy rests on three main factors.

First, there is increasing acknowledgment that Australia is for all practical purposes a single integrated market. The economic significance of State and Territory boundaries is diminishing rapidly as advances in transport and communications permit even the smallest firms to trade around the nation. The increasing national orientation of commercial life has been recognised by a series of significant cooperative ventures by Australian Governments. The 1990s have already seen national progress on reforms including the National Rail Corporation, road transport regulation, the Corporations Law, the mutual recognition of product standards and occupational licensing, and the regulation of non-bank financial institutions. There are also moves towards greater interstate trade in electricity and gas. Business and the community generally are impatient for much more rapid progress by governments in reforming our infrastructure and regulatory systems.

Second, while trade policy reforms have markedly increased the competitiveness of the internationally traded sector, many goods and services provided by public utilities, professions and some areas of agriculture are sheltered from international and indeed domestic competition. ln this regard, recent micro-economic reforms have highlighted that an important part of Australian competition policy the Trade Practices Act remains limited in its application to these sectors, with coverage depending on ownership or corporate form rather than considerations of community welfare.

Third, the domestic pro-competitive reforms implemented to date have all been progressed on a sector-by-sector basis, without the benefit of a broader policy framework or process. Reforms undertaken in this way are typically more difficult to achieve, with the ground rules including the respective roles of Commonwealth, State and Territory Governments having to be negotiated on a case-by-case basis. A national competition policy presents opportunities to progress reform more broadly, to promote nationally consistent approach and to avoid the costs of establishing diverse industry-specific and sub-national regulatory arrangements.

Considerations of these kinds led Commonwealth, State and Territory Governments to agree on the need to develop a national competition policy which would give effect to the principles set out below:

(a) No participant in the market should be able to engage in anti-competitive conduct against the public interest;

(b) As far as possible, universal and uniformly applied rules of market conduct should apply to all market participants regardless of the form of business ownership;

(c) Conduct with anti-competitive potential said to be in the public interest should be assessed by an appropriate transparent assessment process, with provision for review, to demonstrate the nature and incidence of the public costs and benefits claimed.

(d) Any changes in the coverage or nature of competition policy should be consistent with, and support, the general thrust of reforms:

(i) to develop an open, integrated domestic market for goods and services by removing unnecessary barriers to trade and competition;

(ii) in recognition of the increasingly national operation of markets, to reduce complexity and administrative duplication.

Agreement on these principles, and the support of all Australian Governments for the establishment of this Inquiry in October 1992, represents a significant step toward an effective national competition policy. Submissions to this Inquiry showed strong and widespread community support for implementing such a policy.

The Committee's Approach

The Committee saw its task as proposing the most effective form, content and implementation approach for a national competition policy that will support an open, integrated domestic market for goods and services.

It approached this task at a broad policy level, looking for common themes and issues rather than developing detailed prescriptions for each individual sector of the economy. At the same time, the Committee considers that its proposals are flexible enough to address all of the main issues presented in submissions.

The Committee also sought to build on the lessons learned in cooperative economic reform in areas such as mutual recognition, electricity, rail and gas. But the Committee is taking a bolder stance because of the urgency of the reform task and the belief that precedents should be considered as steps towards more effective national reform rather than as desirable models in and of themselves.

The Inquiry Process

The Committee took account of a wide spectrum of community views, with written submissions received from nearly 150 organisations and interests.⁴ In October 1992 the Committee invited written submissions from interested persons and organisations through advertisements in the national and major regional newspapers. In February 1993 the Committee published an issues paper to elicit further comments on the issues under consideration. Submissions were received from major business, industry, professional and consumer organisations, trade unions, small and large businesses and private individuals, as well as Australian Governments.

The Committee met with Premiers, Chief Ministers, Ministers and senior officials of each State and Territory and senior representatives of several Commonwealth Departments and agencies. The Committee also consulted with a number of business, industry, professional and consumer organisations.

In accordance with its terms of reference, the Committee took account of overseas approaches where they were thought to offer lessons for Australia. Particular attention was given to other countries with federal systems of government and to the European Community. New Zealand approaches were of particular interest, not only because of its similar competition laws and the desirability of harmonising business laws in accordance with the Australia/New Zealand Closer Economic Relations Trade Agreement, but also because of New Zealand's recent experiences in pro-competitive reforms.

In its initial terms of reference the Inquiry was to have reported in May 1993. However, the Committee's reporting date was extended until August 1993 to permit further consultations, particularly with State and Territory governments.⁵

B. KEY FINDINGS And RECOMMENDATIONS

The Committee has recommended a national competition policy covering each of the six main elements highlighted in Box 1. These elements, and the Committee's findings and recommendations, are dealt with in three parts.

• Part I deals with the generally applicable conduct rules, including the content of those rules, their sphere of application and aspects of the enforcement regime. It argues that a slightly modified version of the rules currently contained in Part IV of the Trade Practices Act should apply universally to all business activity in Australia.
• Part II outlines specific policy proposals and mechanisms for the five additional policy elements the Committee proposes should form part of a national competition policy. These include principles and processes governing the reform of regulatory restrictions on competition, the structural reform of public monopolies, and competitive neutrality between government and private businesses; a general access regime; and a more focussed prices oversight mechanism.
• Part III outlines issues associated with the implementation of the Committee's policy proposals, including institutional, legal, transitional and resource matters. Two new institutions are proposed: a National Competition Council, formed jointly by Australian Governments to assist in progressing cooperative reforms, and an Australian Competition Commission, which would administer the competitive conduct rules and some other aspects of the new policy.

I. Competitive Conduct Rules

Every modern market economy has a set of rules designed to ensure that the competitive process is not undermined by the anti-competitive behaviour of firms, whether acting collusively or individually. Typically, these rules prohibit agreements or arrangements that increase the market power of firms and prohibit firms which individually possess substantial market power from using that power in an anti-competitive way. In Australia these rules are contained in Part IV of the Commonwealth Trade Practices Act 1974.

The Committee's work uncovered two major misconceptions about the TPA, which ultimately proved pivotal to its recommendations.

The first is the extent to which particular entities or activities are exempt from the Act. While the Committee found that many of the current exemptions from the Act are not justified on considered policy grounds, there are no general exemptions favouring government businesses, the professions or agricultural marketing authorities, and many of these groups are already subject to the Act to some degree or in some circumstances.

The second misconception relates to the impact of applying the Act to currently excluded sectors. Application of the TPA would have only limited impact on many sectors that are partially excluded from its reach. Important as it is in protecting competition, the Act only prohibits certain kinds of voluntary conduct that may restrict competition, and will generally have little or no impact on matters such as market structure or restrictions imposed by laws or other government policies. For this reason, the Committee recommends other means for addressing these competition issues, which respond to the main concerns raised in submissions. The Committee's proposals in these areas are outlined in Section B.

The Committee reviewed the provisions of the Act in some detail and for the most part found them to be operating satisfactorily, to be broadly consistent with overseas approaches, and to be appropriate for application to currently excluded sectors without substantial revision. The most pressing issue is to ensure that unjustified gaps in their application are filled in a way that promotes a nationally consistent legal framework for business activity.

Content of the Rules

The rules contained in Part IV of the Trade Practices Act are intended to protect the competitive process by prohibiting anti-competitive agreements, the misuse of market power, resale price maintenance and certain mergers or acquisitions. There is also a specific prohibition on anti-competitive price discrimination.

The Committee reviewed the current rules in light of submissions received, oversees approaches and any possible new issues that might arise in applying the rules more broadly in the Australian economy. The Committee is mindful that unnecessary tinkering with the current rules could create uncertainty and delay extending the application of the rules, which is seen as the more pressing objective. Accordingly, the Committee has adopted a deliberate policy of limiting proposed charges to those areas where the current rules were found to be clearly deficient from the standpoint of a national competition policy. The Committee's main recommended changes to the current rules are:

• strengthening the prohibition on price fixing arrangements by removing the distinction between goods and services, which potentially allows agreements relating to services to be authorised, thus sending an unambiguous signal about the undesirability of collusive price-fixing;
• relaxing the prohibition on third line forcing by requiring that it substantially lessen competition, thus bringing it into line with the Act's treatment of other forms of exclusive dealing;
• permitting authorisation of resale price maintenance where it can be demonstrated to offer net public benefits;
• repealing the specific prohibition on price discrimination, with any anti-competitive conduct in this area addressed under the prohibition on the misuse of market power; and
• removing unjustified distinctions between goods and services in the Act.

Exemptions from the General Conduct Rules

Gaps in coverage of market conduct rules can allow excluded firms to engage in anti-competitive conduct with impunity, impairing efficiency and equity. At the same time, there may be cases where application of the market conduct rules should be suspended or adjusted on public interest grounds, primarily where the benefits of the conduct in question are found to outweigh the anti-competitive detriments. The current Australian regime involves the interaction of up to seven often overlapping exemption mechanisms, many of which are unrelated to any question of public benefit and can fragment application of the rules according to State borders. The Committee sees a need for substantial reform in this area, with fewer and more rigorous and transparent exemption processes.

The Committee concluded that the general conduct rules of a national competition policy should, in principle, apply to all business activity in Australia, with exemptions for any particular conduct only permitted when a clear public benefit has been demonstrated through an appropriate and transparent process. The Committee's findings on each of the current exemption processes are summarised below.

• Authorisation By An Independent Body

The Committee concludes that the primary basis for permitting exemptions from the rules should be an authorisation process of the kind currently administered by the Trade Practices Commission. The proposed successor to that body the Australian Competition Commission should be directed to give primacy to economic efficiency considerations in determining questions of public benefit, and the new regime of user-pays fees should be reviewed.

• Specific Exemptions Set Out In the TPA

The Committee sees a continuing role for some specific exemptions in the Act itself. The current limited exemptions for labour agreements, standards, restrictive covenants, export contracts and consumer boycotts should be retained. The current exemption for certain intellectual property matters raises issues which warrant a separate review by appropriate experts. The current exemption for overseas shipping is considered a clear candidate for sweeping reform, although the Committee has not made comprehensive recommendations in light of a separate Inquiry on this matter.

• Exemption By Regulations Under the TPA

The current provision permitting exemption by regulation of certain conduct of primary commodity marketing bodies, Commonwealth businesses and contracts or conduct engaged pursuant to international agreements is not currently in use. This provision should be replaced by a regulation power unlimited as to subject matter but strictly limited as to time. The primary role of such a mechanism would be to provide urgent protection pending the consideration by Parliaments of alternative legisIative proposals.

• Exemption By State or Territory Statute or Regulations

The significance of the current provision which permits State or Territory statutes or regulations to specifically authorise or approve conduct otherwise in breach of the Act (subject to a power for the Commonwealth to over-ride such exemptions) was found to be misunderstood in many quarters. Although there were suggestions that removal of this provision would of itself see a large range of anti-competitive regulations being over-ridden, particularly in agricultural marketing and professional regulation, this is not borne out by a close analysis of the State and Territory laws in question.

The overwhelming majority of laws examined by the Committee in areas such as these were found to achieve their anti-competitive effect in a way that did not involve conduct that would otherwise have contravened the Act, making the current exemption provision irrelevant to their future operation. Some of the subtleties in this area are illustrated in Box 2.

In the Committee's view, the current exemption mechanism in the Act permitting State and Territory Acts to specifically authorise conduct that would otherwise contravene the Act is inappropriate. It discourages the development of nationally-consistent rules and is not readily transparent. No future exemptions of this kind should be permitted, and all existing exemptions should be deemed to expire at the end of three years.

• Exemption By Other Commonwealth Statutes or Regulations

The current provision permitting other Commonwealth statutes and regulations to specifically authorise or approve conduct otherwise in breach of the Act was also subject to misunderstanding in some quarters. However, the significance of the Commonwealth provision differs from the State and Territory provisions in two respects.

Box 2: Government Regulation And the TPA

The Trade Practices Act operates by prohibiting certain conduct by market participants, generally requiring a degree of collusion or anti-competitive purpose. It does not prohibit anti-competitive outcomes per se. Three situations in the price fixing area can be contrasted:

(a) A group of competing firms enter an agreement to fix prices

Prima facie, arrangements of this kind are prohibited by the TPA as a contract, arrangement or understanding between competitors with the effect of fixing, controlling or maintaining price.

(b) The same firms engage in the same conduct as (a), but with a statute or regulation specifically authorising them to agree on prices

Prima facie, there is still conduct prohibited by the Act, although the current Act permits Commonwealth, State and Territory Governments to effectively immunise such conduct.

(c) Rather then authorising a private agreement between firms, a statute or regulation provides that the goods in question shall only be sold at a price declared by a Minister or a marketing board

In this case, the same result (ie, a fixed price) is achieved without the need for firms to engage in conduct of the kind prohibited by the TPA. Statutes and regulations of this kind are unaffected by the TPA.

Comment

The different status of situations (b) and (c) is nor merely one of legal form. In situation (c), a governmental authority is directly responsible for particular prices, and the extent of benefit afforded the firms in question will be apparent through the legislative or regulation-making process. Similarly, the firms in question have no choice but to comply with the regulation. In situation (b), in contrast, governments have essentially delegated responsibility to the firms in question, and the reasonableness or otherwise of their pricing conduct is not subject to the same degree of public scrutiny.

First, unlike State and Territory laws, this provision does not have the potential to impede national consistency. Second, a provision of this kind provides greater certainty as to the interaction of Commonwealth statutes in the absence of such a provision there may be difficult questions of interpretation to determine whether a later Commonwealth Act had impliedly repealed part of the TPA to the extent of any inconsistency. This issue does not arise in relation to State and Territory laws, where the TPA would override even subsequent State and Territory laws.

The provision should be amended to improve the transparency of any specific exemptions: exemption under other laws should be limited to statutes, rather than regulations, and the exempting provision should be required to state specifically that its purpose is to authorise conduct for the purposes of the TPA.

• Shield of the Crown Doctrine

This doctrine provides that a statute will only be found to bind the Crown by express words or necessary implication. Since 1977 the Trade Practices Act has expressly bound the Crown in right of the Commonwealth in so far as it engages in business. This provision should be amended to remove any doubts as to the application of the Act to commercial transactions between Commonwealth businesses in competition with private firms.

The Act's silence on the question of whether it is intended to bind the Crown in right of the States and Territories led it to be interpreted as not binding these entities. Whether or not a particular State or Territory business is entitled to take advantage of the immunity is often a difficult question of statutory interpretation: certainly, there is no blanket exemption for all such businesses. The High Court has recently questioned the