Commentary on the PECC Competition Principles Project from a New Zealand Perspective
30 April – 1 May 1999, Christchurch, New Zealand
This paper considers the ideas presented by Kerrin Vautier and formulated by the PECC Trade Policy Forum. The paper focuses on the concept of competition principles from a New Zealand perspective, rather than the specific principles developed by PECC. The New Zealand experience with regulatory reform based around competition policy principles is outlined, with some discussion on how New Zealand fits within the principles as presented by PECC. The paper concludes with a discussion of the value of adopting a set of competition principles or concepts for APEC and suggestions for further work in this area.
The changing nature of the global economy presents all economies with new challenges. Globalisation has changed the way our business community operates, and has seen a movement from a focus on trade liberalisation alone, to consideration of non- tariff barriers and the effects of domestic regulation. The traditional distinction between international trade and investment policy and domestic economic policy, is therefore, no longer appropriate in today's global economy.
The broader approach is already being reflected in the World Trade Organisation approach, for example in areas like services, where the GATS agreement addresses all the different policies that can affect the way firms located in one country may choose to supply services to customers in another country. This considers not just border barriers like duties, but also investment rules, sector and occupational licensing requirements, corporate and commercial law and visa requirements. This is a logical approach as so much of merchandise trade requires so many service inputs.
While this paper focuses on competition policy and principles, it is important to stress that these can not be viewed in isolation. It remains important that economies have a coherent policy framework that consistently covers trade, investment and industry policy. Also important in regulatory reform is the consideration of the role of the government and on what basis it will intervene in the economy.
Recent events, such as the economic crisis in our region have increased the need for economies to consider the effect of all of their policies and in particular that of domestic economic policy. It is apparent that a lack of competitive disciplines and good governance may have played a significant part in the crisis.
The crisis has provided a critical opportunity for difficult reform decisions to be taken. It is the right time for the region, and specifically for APEC to embrace the internationalisation of microeconomic policy. Competition principles, such as those developed by PECC, can play a key role in ensuring that APEC economies achieve sustainable growth for the region. Now we need policies that will assist all of us achieve this economic growth.
Competition Policy and Principles
APEC has previously considered the question of what makes up competition policy and the appropriate objectives for this policy. The focus of New Zealand policy has been to create an economic environment that is characterised by adaptability and flexibility. Microeconomic reform has been aimed at influencing the decision making behaviour of individuals or firms to respond to market based signals thereby improving economic efficiency.
The focus of competition policy as it has been applied in New Zealand, has changed significantly over the last 10 years. We have endorsed the more recent efficiency approaches and moved away from the traditional focus on income distribution and redistribution. In New Zealand, the redesign of competition policy is apparent in our competition law, which is focussed on behavioural, rather than per se or structural prohibitions with efficiency goals as well as consumer goals. The particular problem of natural monopolies and utilities are regulated under our general competition policy regime.
The Objectives of Competition Principles and The PECC Project
Competition principles are useful guidance for economies, rather than setting minimum standards to which economies must adhere. There must be adequate flexibility so policies are tailored to meet the particular needs and concerns of an individual economy.
Our experience in regulatory reform has revealed that reforming within a competition policy framework is extremely valuable, as it ensures that there is consistency and coherency across other policy areas. Competition principles for APEC could assist in achieving the aim of enhancing the competitive environment in the Asia-Pacific region.
The PECC project, as Vautier outlined, sets out first tier core principles of:
The PECC competition principles recognise that government regulation can distort competition and there is a need to determine criteria for government intervention. The second tier principles or key requirements are more detailed and consider minimising the risk of business replacing regulation with anticompetitive behaviour, and aspects that a competition law should include if it is considered appropriate.
The PECC project states that there must be a specification of clear end goals, clarification of the time path for achieving these, and the process for monitoring of progress. The timing and sequencing of liberalisation is important. Lessons from the deregulatory experience throughout the world (Williamson, 1994) are that wholehearted reform requires a coherent long term view of what needs to be done, a maintenance of long-term policy direction, and a willingness to reform fast if the opportunity arises. In New Zealand, the view has been that progress on trade, competition and industry policy in conjunction is desirable.
The optimal sequencing of reform has been the subject of discussion previously. The wider experience suggests that in the early stages of liberalisation, trade and industry deregulation may be promoted relatively independently. However, before long these deregulations depend for their effectiveness on the efficient operation of domestic markets, and for that reason competition policy reform can not be left undone. In the absence of competition policy reform, deregulated industry can monopolise and re-impose the very monopoly power that the government has just removed. In the absence of competition policy reform, trade liberalisation may see border tariffs lifted, but only to be replaced by restrictive trade practices imposed by vertically integrated domestic producer/distributor alliances. Political economy and the conditions of the economy at the time will, of course, impact on the ability to progress with the optimal sequence of reforms.
PECC also recognises that the adoption of principles may also raise education and institutional capacity issues.
The ideas that good competition and regulatory policy requires that there are minimal barriers to entry, application across all sectors of the economy, be aimed at the competitive process and not competitors, are ones that form the basis of New Zealand's policy approach. We have learnt that policies need to be stable and transparent, the legal framework needs to be effective, and property rights clearly defined in order for reforms to be effective.
In New Zealand, our reforms have been comprehensive. What we have learnt is that macro and microeconomic policies need to be stable and transparent. We consider that these also benefit from being focussed on well defined, single objectives. However, there do remain some sectors of the economy where the policy approach is not consistent. For example, the regulation of Producers Boards and some occupational regulations do not currently fit within our overarching competition policy framework. We are working towards making these consistent in the future.
New Zealand Experience: Domestic Benefits of Applying a Competition Policy Framework
New Zealand's economic reforms over the past 15 years have been strongly underpinned by the belief that contestable markets are a key driver to efficiency in the domestic economy. Clearly over this period of reform, the broad level of political support and recognition for the need for reform has been critical. In addition, the capacity of successive governments to act quickly and decisively within the New Zealand parliamentary system has been key to the speed of the reform process. The approach has been aimed at providing welfare improvements for the New Zealand consumer (including business).
Areas of Reform
In 1984 New Zealand commenced its programme of rapid and widespread economic liberalisation. These reforms were designed to promote competition in markets within New Zealand and to remove the distorting influence of the government controls and subsidies. The reforms touched almost all sectors of the economy. The changes in microeconomic policy fall under the following headings:
Reduction in assistance to industry
Regulatory reform - i.e. to the finance and foreign exchange markets
Changes to the tax system
Labour market reform
Agency reform - corportisation of state owned enterprises.
Changes in macroeconomic policy also had effects at the microeconomic level. These policies included:
A fiscal policy commitment to keep government expenditure under control and reduce debt, so as to reduce cost of capital and improve the competitiveness of the economy; and
A monetary policy which was principally aimed at lowering inflation to provide certainty and overtime, to lower costs of capital.
The reform process focused on strengthening the role of the market in allocating resources. For New Zealand, competition policy is defined in its broadest sense including those policies that may have an indirect impact on competition. The objectives of these policies were, therefore, key to these reforms and continue to be important to achieve the goals of promoting economic growth.
Rationale for Reform
These reforms were far-reaching and comprehensive affecting the entire private and most of the public sectors of the economy. The policy approach was to apply key themes consistently across all economic activity.
The main thrust of the reforms were to free the market mechanism from distorting government controls and subsidies. Previously the justification for government involvement in the production sector had been based on traditional arguments of developing individual firms and avoiding market failure, preserving equity by providing access to services and maintaining control of those services regarded as being of national importance.
The new view in the early 1980s period was that market failure needed to be balanced by the potential for bureaucratic failure. There was recognition that a focus on equity would come at the cost of reduced efficiency and that public ownership concerns also had to be balanced against the advantages of foreign capital, technology, expertise; overseas market access.
A critical aspect of the underlying thinking of reform was agreement that New Zealand needed to increase the competitiveness of all sectors of the economy. New Zealand had been a heavily regulated, protected economy. It now needed to move towards the competition end of the spectrum to enable a more balanced, flexible and competitive economy to emerge. A balance of policies is a key element, as it is also recognised that to pursue competition at all costs can also be economically inefficient.
The reform programme was unusually comprehensive and consistent, the result of it having been based on a consistent theoretical microeconomic framework. For example, public choice theory superseded traditional market failure theories on public funding. Principal agency theory led to the view that public ownership of state trading activities was likely to be inefficient. Contestability theory was particularly attractive to all policy matters because it offered a way through ongoing problems of small numbers of local competitors. This focused on removing import protection to allow foreigners to act as potential entrants and hence help regulate local produces in the interests of domestic consumers.
Microeconomic reforms were aimed at influencing the decision making behaviour of individual firms to respond to market based efficiency and therefore improving economic efficiency. Microeconomics reforms were aimed at providing consistency in policies and stability in the economic environment.
The reform process focused on strengthening the role of the market in allocating resources. Competition policy, was therefore a key driver in achieving change in the New Zealand economy. The process of reform began in 1984 and continued for a decade. The reforms are notable in several respects:
The level of government intervention in the economy prior to 1984;
The extent, consistency and speed of the reforms; and
The degree in which the market economy has been liberalised as a result.
These reforms were made against the background of the new economic thinking. The Government had also very publicly committed itself to improving the competitive environment, thereby forcing gains in efficiency and resulting in overall improvements in economic growth.
Once deciding on a theoretical framework, the objectives were enshrined into legislation. One example of this is our competition law. In 1986, New Zealand's competition law was revised, giving an early indication of the Government's commitment to its competition policy objectives. The revised competition law is now contained in the Commerce Act 1986.
The Commerce Act was seen as a necessary accompaniment to the market reforms, as it ensured that private firms did not replace the previous government regulation with anti-competitive behaviour. The Act was needed to:
Define the rules by which business were to operate in the newly deregulated, open economy;
Deter the possible spread of restrictive practices and mergers by firms wishing to reduce the new competition; and
Provide a basis for the regulation of corportised and privatised utilities.
This Act was designed as a key statue representing the new rules of the game. The implication was that firms in the open economy should move towards efficient competitive operation or else exit. The economic policies that provided the underlying rationale for the reforms of the 1980s also provided a key to the design of our competition law.
The Act has the stated objective to "promote competition in markets within New Zealand". A key feature of our law is its narrow focus on a single well-defined objective - the promotion of competition as a means of increasing efficiency.
While the Act looked to the underlying principles of the reform process, it was largely modelled on the Australian Trade Practices Act. The enactment of the 1986 Act represented a radical change in competition law in New Zealand moving from an abuse control to a prohibition law modelled on the Australian Act, which, in turn was clearly modelled on US antitrust law. These New Zealand and Australian Acts are designed to prevent:
competition being artificially constrained by firms;
the acquisition or strengthening of an undesirable degree of market power;
A dominant position in a market being used for the purpose of lessening competition.
New Zealand's approach, like Australia, is to focus on the behaviour of industries rather than their structure and recognises in some cases an efficient industry structure may imply fewer competitors.
The Commerce Act 1986 has the following characteristics:
Broad reach: the Act covers almost all sectors of the economy, with a small number of exceptions. These include some export cartels; primary products exceptions and exemptions; international practices such as international shipping and international aviation agreements; the Employment Contracts Act and other industrial legislation cover genuine labour market conduct. Health sector exemptions comprising certain conduct by regional health authorities and arrangements relating to needle and syringe swapping; standards approved by the Standards Association of New Zealand. All other markets are included, such as utilities, corporate forms such as co-operatives, charities and government departments if they are in trade.
A single regulator: the Commerce Commission is the single regulator of the Commerce Act, adjudicating on business acquisitions, dominant firms, trade practices, and enforcing compliance across the spectrum of industries. It treats all industries on the same competition criteria.
Regulatory independence: the Commerce Commission is a quasi-judicial body at arm's length from the political and administrative arms of government, and makes it own independent decisions;
Scope for private action: private action can be taken through the courts under most parts of the Act. The expectation is that if there is no public interest involved, enforcement action will most likely be private.
Behavioural not structural: the Act does not proscribe particular industry forms or structures, nor set market share thresholds for judging potential breaches of the Act.
Proscriptive, not prescriptive: the Act and the Commerce Commission do not instruct business on how they should organise themselves or conduct their affairs, nor attempt to design the market forms for them;
Rule of reason based: while there are important exceptions such as price fixing and resale price maintenance, which are illegal per se, the emphasis is on the rule of reason approach of judging whether a practice breaches the Act. Most vertical and horizontal arrangements are judged according to whether they substantially lessen competition.
Distributional neutrality: the Commerce Commission makes no attempt to impose a distributional standard, other than to meet the requirement in the Act that benefits should be to New Zealand;
Dynamic approach: the Commission and the courts are prepared to recognise that a firm that appears to hold a dominant position in a market may be constrained by the threat of potential, as well as actual, entry. This focuses attention on the presence of possible competitors, the height of entry barriers, and in some cases the potential for substitute products to evolve.
The Commerce Commission was set up as a combined regulatory and judicial authority to administer the Act. The Commission is however, an independent statutory body, operating at arm length from the government. The Commission has wide powers covering all activities "in trade", including those of the public sector. Also, there are, no industry specific regulatory bodies, which differentiates the New Zealand approach from others in the APEC and OCED regions. Commission decisions can be appealed to the High Court and the Court of Appeal. Private rights of action are also available for most contraventions and are able to be appealed up to the Privy Council in London.
The New Zealand approach to competition policy is often referred to as "light handed" given the policy of avoiding direct regulation in the first instance. Light-handed regulation is based on controlling anti-competitive behaviour by providing adequate incentives for enterprises not to engage in anti-competitive behaviour through:
enforcement under the Commerce Act – either the Commerce Commission or private parties have the capacity to seek legal redress from anti-competitive behaviour;
the threat of further regulation – the Government reserves the right to regulate where it deems appropriate; and
information disclosure – certain industries are required through regulation to disclose information on cost structures which is used both for monitoring behaviour and also to overcome information asymmetry problems for competitors.
Benefits of Competition Policy Approach
New Zealand's approach was very broad based, effecting almost all sectors of the economy. The timing of the reforms was crucial, as we had reached a crisis point as an economy. We do not know what the results would have been for New Zealand if we had not embarked on this comprehensive reform programme, driven off a competition framework. It is, therefore, difficult to precisely quantify the benefits that have been derived directly from competition policy, as distinct from the overall consistency and coherency of approach across all economic activity. However, competition has driven efficiency in a number of sectors of the New Zealand economy, which has had significant overall benefits for consumers.
New Zealand's economic performance has improved markedly during the last decade. In the 20 years up to 1990, economic growth in New Zealand had averaged less that 1.5% per annum. By mid 1991, the broad programme of opening the New Zealand economy was starting to pay dividends with increasing levels of economic growth and increasing levels of business confidence and associated increase in investment.
Improved economic performance has also been a key factor in the improvements to the Government's fiscal performance. The New Zealand Government ran fiscal deficits every year from 1978 to 1993. In addition public debt increased sevenfold in the decade from 1975. Since 1993, the Government has managed to run fiscal surpluses has enabled significant reductions in level of public debt which has been halved since 1996. In addition, sustained fiscal surpluses have enabled the Government to introduce tax cuts and has resulted in a 10% reduction in the overall amount of tax collected.
The Treasury, the Department of Labour and the Reserve Bank recently commissioned a report to provide a measure of New Zealand's productivity performance over the 27-year period since 1972 and to assess the tools and data for measuring productivity. Professor Diewert, University of British Columbia, and Dr Denis Lawrence, of the Australian consultancy, Tasman Asia Pacific, prepared it.
The report was released this week, indicates that New Zealand's productivity performance was relatively poor during the 1970's. While there was a brief surge in productivity between 1980 and 1985, it then plateaued until 1993 when there was a significant surge in productivity. It appears that the effects of the labour market reforms of the early 1990's aided the increase in productivity.
Increased Consumer Choice, Service and Price Reductions
Although we may not have seen vast aggregate improvements, perhaps the most visible gain from increasing competition in the New Zealand economy has been the increases in choice for consumers and reductions in prices. Improvements in these have been widespread. The easiest way to see the gains made is through specific competition issues and sectors.
The telecommunications sector is one illustration of where improvements for consumers have been achieved. Figure 4 shows quarterly price changes in residential telephone services. It indicates that there has been a significant reduction in the cost of telecommunications services overall (the overall situation is shown by the dotted line), though this has mainly been the result of a reduction in long distance calling costs. In fact, since 1989 the prices of:
residential toll calls have declined by 54% in real terms, an average of about 9.4% per annum; and
calls to major international destinations such as the UK and the USA have reduced by over 80%, depending on volume and time of day calling pattern.
The price for residential local telephone services has been relatively stable over the period, as figure 4 shows. However, this is likely to show an increasingly downward trend in the future with likely competitive developments.
Business telecommunications prices have also fallen significantly: since 1991 the prices of business telephone line rental have reduced in real terms by 13.9% for all users and over 27% for users in the main central business districts.
When compared with other OECD countries, the price of telecommunication services in New Zealand is broadly in the middle of the range, which is generally in line with the New Zealand's international ranking on overall economic performance.
since deregulation, the petrol importer margin has generally been lower in real terms than it was prior to deregulation as a result of competition; and
more recently, the entry of Challenge! in April 1998 and, subsequently, Gull Petroleum in Hamilton, has resulted in a sharp fall in the importer margin, with petrol prices in major cities moving closer to the lower prices seen in major Australian cities;
from the time that import restrictions and tariffs began to be removed, the CPI figure for private transport has been trending downwards relative to the overall CPI; and
The removal of tariffs has resulted in significant reductions in car prices. However, at least as far as a sample of list prices for new cars is concerned, these have not fully reflected the magnitude of the tariff removal, though new models with new features were introduced in the sample period.
Increasing the level of competition within the New Zealand economy has proven valuable for consumers and enterprise in general. In general, deregulation has lead to price reductions and increased choice for consumers.
New Zealand has continued with a programme of micro economic reforms focused on improving overall economic efficiency. Recent initiatives have included:
Electricity – the splitting up of the dominant state owned generation company into 4 competing companies and sale of one company and the removal of impediments to competition in the retail electricity market;
Workplace accident compensation – the introduction of competition for the provision of work place insurance;
Occupational regulation - the Government is currently reviewing selected occupational regulations to ensure that there is a balance between the benefits of protecting the public and the costs of restricting competition by restricting who can perform an occupation. To date, the Government has announced that it will be ending the lawyer's monopoly of conveyancing. Further changes from the review of the Law Practitioners Act and other occupations are expected over the next few months.
In addition to these initiatives, ongoing improvements are also been sought to improve the effectiveness of the enforcement of the Commerce Act. The Government intends to increase the penalties and remedies in the Act to improve the credibility of enforcement and increase the incentives not to breach the Act.
Relevance of Competition Principles for APEC
APEC economies are at a crucial point, as we seek to recover from the recent crisis and move forward to achieving sustainable economic growth for the region. For APEC to achieve the Bogor goals of free trade and investment there will need to be recognition of the central role of competition as a necessary condition for the efficient operation of markets. Institutional capability will also be important.
The return to long term sustainable growth will require improved economic efficiency, good policy frameworks to guide regulatory policy, the development of better legal frameworks, improved governance arrangements, greater transparency and better information flows. Recognising the increasingly blurred distinction between domestic economic policy and the wider international trade and investment arena, the opportunity for economies to undertake such reforms has never been greater.
Competitive and open markets are valuable for consumers, producers, development and small and medium enterprises. Effective and strong markets will ensure the efficient allocation of resources within economies. In New Zealand, we have seen the consumer receive real gains from the introduction of competition in the economy. Business, however, considers that domestic regulation is the key obstacle to overcome in the APEC region.
The Strengthening markets theme is key to framing APEC's response to the economic crisis and applies to all areas of APEC, including Leaders, Trade Ministers and the Finance Ministers process. The development of competition principles provides a key element of the overarching strengthening markets framework. Competition principles would also be valuable for APEC economies to measure how they are progressing towards this goal, and the Bogor goals of free trade and investment.
General competition principles will provide economies with scope to design specific policy responses to meet their needs. The principles are therefore a framework for policy development, rather than a stringent set of rules. Competition principles can be applied to all economic activity and are useful in ensuring there is coherency between trade and investment and industry policy.
APEC already has an implementation framework in place to achieve its trade and investment goals through the individual and collective action plans. But APEC seems to be lacking the strategic direction necessary to ensure a coherent and consistent policy approach across the region.
A set of competition principles would help to promote a common policy culture across APEC. They can also provide effective benchmarking and allow development of yardsticks to measure the progress achieved in implementing the individual action plans, an area currently being focussed on. The principles will also inform APEC work on trade facilitation and promote a new focus on questioning the reasons for the rules that create problems for trade and investment within APEC.
The PECC principles provide APEC with a foundation on which to work towards building a consensus on a competition driven policy framework. High quality regulation and a competition driven policy framework require expertise in both the public and private sectors and strong institutions through which this expertise can be effectively applied.
APEC needs to ensure that progress continues on building capability and co-operation within the region. The EcoTech co-operation initiative will assist in making progress in this area and is essential for capacity building for individuals and institutions.
In New Zealand, we have applied a competition driven policy framework, or principles along the lines of those proposed by PECC. We have seen that a competition approach, combined with consistent and coherent approaches to trade and investment and industry policy, has increased economic welfare for consumers.
New Zealand has benefited from reforming within the context of a competition policy framework. The PECC competition principles provide a useful framework for APEC to carry forward its work on strengthening markets a core goal of APEC. Competition principles will be a good foundation on which APEC can progress towards achieving sustainable economic growth in the region.