FOREWORD Tbi~ statement fulfils Victoria's obligations under the N ational Competition Policy Competition Principles Agreemmt to publish, by June 1996, a statement prep ared in consultation with local government on the applic ation of competition principles to local government. The statement has been prepared by aJoint State /Local Government Working Group comprising representatives of both metropolitan and non-metropolitan Victorian municipalities, the Municipal Association of Victoria and relevant Victorian Government agencies . A consultation draft of the statement was distributed to all local councils and other key stakeholders in April 1996 . Comments received on the draft have been taken into account in the finalisation of the statement. ) H •••• the process (~ r exposing services to (o1llpetitive delilJeril7g COUl1flllHity and at Port Phillip City Council Submission to Industry TABLE OF CONTENTS 1. Overview 6 Competition and public sector reform National Competition Policy Application to Local Government Implementation timetable 6 6 7 10 2. The Reshaping ofLocal Government in Victoria 12 Restructure of Local Government Competitive tendering Local Government utility responsibilities 12 13 14 15 3. National Competition Policy Agreements Conduct Code Agreement Competition Principles Agreement Agreement to Implement the National Competition Policy and Related Riforms National competition institiutions 15 15 16 16 18 4. Application of the Competition Code to Local Government Extension of Part IV of the Trade Practices Act Provisions Penalties Exemptions Application to Local Government Whnt is expected of Local Government? 18 18 21 21 22 23 25 c Part IV I ) 5. Application of Competitive Neutrality Principles Background Coverage of Competitive Ne utrality Principles Policies to achieve Competitive Neutrality Victorian Government Competitive Neutrality Policy Statement Competitive Neutrality in the Local Government context Application to Local Government What is expected of Local Government? 25 26 27 28 30 31 38 4 6. Legislation Review Background Application to Local Government 39 39 40 42 7. Structural Reform Background Application to Local Government 42 42 43 43 43 8. Prices Oversight Background Application to Local Government 9. Access to Essential Facilities Background Application to Local Government 44 44 44 10. State/Local Government Relations 45 47 48 Appendix A: List ofPublications: Compulsory Competitive Tendering Appendix B: Competition Principles Agreement ) 5 1. OVERVIEW Competition and public sector reform Recent years have seen th e introduction of competition into a variety of public sec tor activities with the aim of delivering higher quality services at least cost to service users and taxpayers. Competition can be a powerful to ol not only for fostering increased efficien cy, bu t also for encouraging innovation and gre ater responsiveness to custo mer preferences. In the co ntest to win and retain bu sine ss, rival service providers face strong incentives to offer the highest quality, m ost reliable and most cost effective services to their custo mers. Effectively managed, the introduction of competition into both user and taxpa yer funded public sector activ ities can th erefore help to ensure that resources are put to their best use and not dissipated through inefficient operations or over-investment in underutilised assets. Through the implementation of compulsory competitive tenderin g, Victoria is already setting the pace for the rest of Australia in the introduction of competition into the supply of a wide range of local government services. Victorian councils, ratepayers and the community at large are now beginning to see the material benefits of competitive tendering, which is co ntributing to low er rate levels and the provision of more efficient and effective services . National Competition Policy In recogni tio n of th e in creasin g im po rta nc e of co m pe titio n policy to th e achievem ent of im proved produ cti vity and enhanced inte rnational competitiveness, the C om m on w ealth and all State s an d Territories agree d in April 1995 to th e implementation of a N ational Competition Poli cy. T his agreem ent foll owed the report of the in de pe n de nt National Competitio n Policy R eview Com m ittee, chai red by Professor H ilmer. T he Hilmer report found th at , w h ile th er e had been signi ficant progr ess towards improving the com pe titiveness of the trade exposed sectors of th e Au stralian eco nomy, m any restric tions on competition remained wi thin the domestic ec ono my. T he se restrictions pro tec t inefficiencies w hic h, in the public sec tor, can result in higher th an necessary costs of in frastructure and of government services and can result in a less in terna tionally competitive ec onomy. Competitio n polic)' is not int ended to override tlll )' other social, eco nomic or environmental }Iolic)' objectives. Rather; it aims to[as ter better iliforll/ed public polic]' choices based 0 11 a more transparent assessment cf wetfare costs ? tlI/ d benejits:ill the deuclopmeu! ~fgovernment regulatioll alld tlte provision oj services. 6 National Competition Policy represents a commitment by all Australian governments to reduce or remove many of these restrictions on competition with a view to enhancing the nation's economic performance and improving the welfare of the Australian community. National Competition Policy involves a commitment by the Commonwealth, States and Territories to apply uniform competition laws to all market participants, to apply a common set of competition principles to the reform and restructure of public monopolies and to remove unwarranted statutory restrictions on competition. Governments also agreed to the establishment of two new national competition bodies: the Australian Competition and Consumer Commission (ACCC), which combines the functions of the former Trade Practices Commission and Prices Surveillance Authority. The ACCC will oversee compliance with uniform national competition laws, make determinations under the new national third party access <; Application to Local Government It was agreed by the Council of Australian Governments that National Competition Policy would also apply to local government. Recent reforms to the structure and operations oflocal government in Victoria mean that councils in this State are particularly well placed to respond to the National Competition Policy agenda. Competition laws While there has in the past been some doubt whether the prohibitions on anti-competitive conduct contained in Part IV of the 'Trade Practices Act 1974 applied to local government, the National Competition Policy agreement to extend uniform national competition laws to all market participants will remove that doubt. From 21 July 1996, Part IV of the TPA (or the Competition Code) will apply to local government, as it will to all other statutory authorities, government business enterprises and to Crown entities so far as they engage in business. In preparation for this, in the latter half of 1995 all councils were advised to conduct an audit of their activities to identify any conduct which may contravene competition law and to develop appropriate trade practice compliance programs. regime and be responsible for prices surveillance and monitoring; and the National Competition Council (NCC), a new national advisory body which will make recommendations on whether a facility should be declared an essential service for purposes of the national third party access regime, will monitor compliance with the National Competition Policy Agreements and will advise the Commonwealth on whether States and Territories have satisfied the conditions for receipt of Competition Payments. Competition principles The principles set out in the Competition Principles Agreement will also apply to local government, with each State and Territory having the discretion to specify the application of the principles to particular local government activities and functions within its jurisdiction. 7 These principles commit each government to: consider the establishment of independent sources of prices oversight of government monopolies where such oversight does not already exist; apply competitive neutrality policies and principles to all significant government business activities; On the other hand, the application of principles of competitive neutrality to government business activities will be of particular significance for Victorian local authorities given the already extensive procompetitive reform of council operations through the introduction of compulsory competitive tendering. Councils will also be affected by the adoption adopt certain structural reform principles before introducing competition into markets traditionally supplied by public monopolies; adopt the guiding principle that legislation should not restrict competition unless it can be demonstrated that the benefits to the community as a whole outweigh the costs and the objectives of the legislation can only be achieved by restricting competition; and facilitate access to essential facilities where such access is required to permit competition in upstream or downstream markets. Having been divested of water and sewerage services and electricity distribution businesses as part of the State's wider public sector reform program, local government in Victoria is unlikely to be significantly affected by the structural reform and essential services access provisions of the Competition Principles of pro-competitive legislative principles, including the requirement to review and, where appropriate, reform restrictions on competition contained in local laws. The principle of competitive neutrality states that government owned businesses should not enjoy any net competitive advantage relative to their private sector counterparts simply by virtue of their public sector ownership. Competitive neutrality principles need to be considered wherever government is engaged in significant commercial activities and wherever competition is being introduced into the performance of functions which were former government monopolies, including the supply of non-commercial government services subject to competitive tender. As required under the Competition Principles Agreement, the Victorian Government has published a policy statement on how it intends to apply principles of competitive neutrality within the State's jurisdiction, including an implementation timetable and a complaints mechanism. That policy is to apply to all significant government businesses, including local government businesses, and to noncommercial activities of State and local government agencies wherever these are subject to competitive tendering. Application of the policy is to be subject in each case to the assessment that the wider efficiency benefits would outweigh the costs of implementation. Agreement. Similarly, the agreement to consider independent prices oversight mechanisms for public monopolies will not generally be applicable since Victorian councils have few, if any, significant business enterprises that are monopoly or near monopoly suppliers of goods or services. 8 In accordance with the poli cy, councils will be responsible for ensuring that their significant business enterprises comply with principles of compe titive neutrality. Where there are expected to be benefits in terms of improved resource allocation wh ich wo uld outweigh impl ementation costs, and subj ect to the approval of the M inister for Local Government and the Treasurer, councils will nee d to consider adopting a cor poratised struc ture for th eir significant conunercial operations and the application of poli cies - such as C ommonwealth and State tax equivalent paym ents - to remove any net competitive advantages enj oyed by those businesses as a result of government ownership. For significant business activities not considered to warrant separate inco rporation or the application of tax equivalent payment regimes, councils will need to consider the application of competitively neutral pricing principles. In applying competitive neutrality po licies to significant local government business activities which are primarily for profit or commercial purposes, councils will be subject to the State's competitive neutrality complaints mechanism to be established within the D epartment of Treasury and Finance. In applying competitive neutrality pr in ciples in the context of com petitive tendering, councils will need to adopt competitively neutral pricing principles and appropriate struc tural arrangements for in-house units competing for council contracts. In preparation for competitive tendermg, councils have already instituted significant reforms in respect of th eir business activities and ways of opera ting in order to fulfil the requirements of competitive tendering. By July 1997, competitive tendering requirements will m ean that councils will have already subj ected the stru cture and pricing of th eir business activities to close scrutiny. Victorian councils sho uld therefore be well placed to comply with Victorian Government policy on competitive neutrality from an early date. General compliance with th ese policies will be monitored by the Office of Local Government, which will also be respons ible for considering any complaints against councils by third parties alleging non-compliance with competitive neutrality in the context of competitive tendering. C ompliance with the National Competition Policy agreements will also require the review and, whe re appropriate, reform of loc al laws which restrict competition . In September 1995, the Minister for Local Government requested the Local Government Board to review the local laws provisions in Part 5 of the Local Government Act 1989. In particular, the Minister requested that the Board assess any adverse impacts on econ omic activity caused by local laws and how these could be addressed. The Board was also to have regard to the goals of National C ompetition Policy. In May 1996 the Local Government Board released a discussion paper canvassing views on four possible options for the future of local laws. Whichever of these options is ultimately adopted, the revocation or revie w and reform oflocallaws that restr ict competition will be completed by no later than Ju ne 1999. In addi tion, by Ju ly 1997, approval processes for making or amending local laws will be in place. This will ensure that new or amended local laws do not restrict competition unless it is demonstrated that the benefits of the restriction to th e community as a whole outweigh the costs and that the objectives of the legislation can only be achieved by restricting competition. 9 Relationship to national competition institutions While the NCC m ay also conduct, or provide assistance with, reviews under the Comp etition Principles Agreement, the reviews it undertakes will be in accordance with a work program determined by the participating Commonwealth, State and Territor y Governments. The NCC is not empowered to accept referrals of work from any other source, including local government. With respect to compliance with the Competition Code or Part IV of the Trade Practices Act councils will be subject to the oversight of the AC CC, as will all State government agencies. As well as enforcement of national competition laws, the ACCC has an educative role in helping agencies to understand their obligations un der th e law and in providing advice on effective co mpliance strategies. The National Competition Council will monitor the State's compliance with other aspects of the National Competition Policy agreements, including the compliance oflocal government authorities within the State's jurisdiction. The Minister for Local Government will be responsible for ensuring that councils comply with NCp, including annual reporting requirements, with respect both to progress with the review and reform of legislative restrictions on competition and with the implementation of competitive neutrality principles in accordance with Victoria's published policy and implementation timetable. The Premier will be responsible for any direct reporting to the NCC regarding the compliance of both State and local government agencies with NCP requirements. Implementation timetable Commencing fromJuly 1996, local government in Victoria will progressively become subject to certain requirements under both the Competition Code and the Competition Principles Agreement. The implementation of Compulsory Competitive Tendering will be completed during the same time frame. The key requirements for local government are shown on the following page : 10 Competition Code Councils subject to Code from 21 July 1996 All Victori an councils advised to undertake trade practice audit and develop compliance strategies by July 1996. Councils to tender 30% of total expenses as set out in the Council's operating statement for 1995-96. --- - - - - --------- - - - Compulsory 1995-96 Competitive 'Dndering 1996-97 and subsequent years Councils to tender 50% of total expenses as set out in the Council's operating statements for 1996-97 and each subsequent year. Competitive Neutrality by June 1997 Councils to have reviewed the corporate structure of their business activities and determined which ofModel 1 or Model 2 competitive neutrality policies will apply. from July 1997 Councils to apply competitively neutral pricing principles to all in house bids and to Model 2 business activities. Allegations of non-compliance to be investigated by OLG. from Sept 1997 Councils to report annually on implementation of competitive neutrality principles, including substantiated allegations of non-compliance. by July 1998 Councils apply Model 1 policies to any significant business activities approved for corporatisation. Corporatised entities to be subject to Statewide complaints mechanism. Review of Local Laws from July 1997 • Ensure all new local laws comply with Competition Principles . from Sept 1997 Councils to report annually on the implementation of the Competition Principles Agreement legislative principle. by June 1999 Review and where appropriate reform local law restrictions on competition. 11 2. THE RESHAPING OF LOCAL GOVERNMENT IN VICTORIA This restructure process was not simply a re"Co uncils tlre I/ OII' ill I' position to provide drawing of municipal boundaries to create a smaller number of larger councils than existed previously. Its aim was to establish councils with a significantly stronger voice and greater resources to meet their responsibilities in key areas such as planning, tourism, economic development and environmental management. Importantly, restructure has also resulted in significant economies of scale, reduced duplication and increased efficiency in local government. This has enabled all restructured municipalities to reduce their overall expenditure in 1995-96 (as revealed in their annual reports for that year) and deliver significant rate reductions to their communities. In 1995-96, Victorian ratepayers paid $263 million less in council rates compared to 1993-94 as a direct result of recent reform. This equates to a reduction of 17.7 per cent. Further reductions in aggregate rate levels will occur over the next two financial years. Rate cuts have been provided to 88 per cent of Victorian ratepayers. In addition to these rate reductions, efficiency gains made by councils made a further $59 million available in 1995-96 for improved services and new capital works initiatives. Total council debt was reduced by at least $78 million in 1995-96. This is a conservative estimate and is likely to be exceeded as councils use the proceeds of the sale of electricity distribution assets to retire debt. better roads, better lib raries, bett er childcare - Cl bett er standard oj Ii'lil/g j or all Victor ians. T ile)' are also in a better positio n to deepell and bm adell the State 's economic base th rol/gillacal and regio'lllI develop me nt, " The Hon. Roger Hallam. MlC Minister for l ocal Government (Vic) l ocal Government in 1995 Recent reform of the structure and operation oflocal government in Victoria means that councils in this State are particularly well placed to respond to and build on the requirements of National Competition Policy. The reshaping oflocal government in Victoria - which has included significant boundary reform, divestiture of utility functions, deregulation of some former local government monopolies and the introduction of competitive tendering for the delivery of core services - has strengthened local government, instilled in it a culture of competitiveness and refocussed councils on their core responsibilities. In addition to the reforms initiated by the Victorian Government, individual councils have been pro-active in adopting new and more responsive management structures and approaches. Restructure of Local Government Between April 1993, when the Greater Geelong City Council was established, and January 1995, when new councils were established in north-west and north-central Victoria, the number of councils in Victoria was reduced from 210 to 78. 12 Competitive tendering A major element of the reform of Victorian local government has been the introduction of compulsory competitive tendering (CCT). By exposing local government services to competition, competitive tendering affords councils the opportunity to examine and improve the specification of service levels and standards. Through this, councils can improve their capacity to respond to community needs and preferences. The underlying rationale for compulsory competitive tendering is that a council will be able to ensure, through market testing, that it is delivering quality services to the community in an efficient and effective manner. The introduction of CCT in Victoria began in 1992 with the Government's local government pre-election policy statement. Its implementation was examined by the Local Government Board which established an Advisory Committee and consulted widely on the best method for implementing competitive tendering. The Board's final report in December 1993 recommended J A Victorian Local Government Code of Tendering was released in August 1995 to provide a guide to good practice in local government tendering. Developed with local government and private sector input, the Code's intent is to ensure that local government tendering is fair, transparent and accountable to the tenderers and the community. The Code sets out the principles which underlie good tendering practice and provides guidance on the way each stage of the tendering process should be conducted. During 1995, the Victorian Office of Local Government undertook a series of spot audits at a number of councils to ensure fairness and probity during the tendering process. While the audit report concluded that there was room for improvement in some councils' CCT processes, it did not identify any pattern of advantage to either "in-house" or external renderers in the awarding of tenders. The 1994-95 target of market testing 20 per cent of total expenses was achieved by almost all Victorian councils. Overall, councils tendered 24.7 per cent of their expenditure in 1994-95. performance based model, While still in its infancy, competitive tendering has already demonstrated its considerable potential to improve the efficiency and effectiveness oflocal government operations through the introduction of competition. This potential was recognised in a recent report by the former Industry (now Productivity) Conunission, Competitive Tendering and suggested by local government itself, which required councils to achieve CCT expenditure targets . This model allowed local government to determine which services to put to tender, rather than follow the more prescriptive British or New Zealand models where specific services are nominated for exposure to tendering. The CCT legislation passed by the Victorian Parliament in May 1994 required councils to market test 20 per cent of total operating expenses in the 1994-95 financial year, 30 per cent in 1995-96, and 50 per cent in 1996-97 and subsequent years. Contracting by Public Sector Agencies (October 1995) , which concluded that. managed correctly, competitive tendering can produce real benefits to the public sector in terms of both cost and quality of service. This and other reports relating to the implementation of competitive tendering in Victoria are listed in Appendix A. 13 Local Government utility responsibilities A third element in the reshaping of local government has been the divestment of utility functions. Since 1992, the Victorian Government has undertaken a sweeping program of public sector reform. A central feature of this program has been the reform of the Victorian Government's business enterprises in the electricity, gas, water and ports sectors. These reforms have resulted in the separation and divestment of local government's water and sewerage services and electricity distribution functions, enabling councils to focus more clearly on their core service and governance responsibilities. Until comparatively recently, many nonmetropolitan Victorian councils were responsible for the provision of water and wastewater services to their communities, in addition to their direct local government responsibilities. In October 1993, the Government's policy The process of separating water functions from local government and incorporating these into the new regional water authorities was completed in 1995. This has given new focus to the management of water and wastewater services as separate, commercially-oriented businesses across the State. Victoria's utility reforms have also involved a major restructure of the State's electricity sector. This has resulted in the division of the former State Electricity Commission of Victoria (SECV) into separate generation, transmission and distribution businesses and the progressive corporatisation and privatisation of the generation and distribution businesses. Until 1994, 11 metropolitan municipalities operated electricity distribution services. These were responsible for distributing approximately 15 per cent of the State's electricity. With the reform of the Victorian electricity industry, the 11 municipal electricity undertakings were absorbed into the five new distribution companies established by the Government to introduce competition into the retailing of electricity in Victoria. The privatisation of each of the five new businesses was announced during 1995. Under ~I! I Reforming Victoria 5 Vllater Industry Il Competitive Future was released. The policy identified substantial scope for improvement in the Victorian water industry by introducing competition to drive efficiencies and by empowering customers to make choices about the services they require. In 1994, building on this statement, the Government began restructuring the 83 non-metropolitan urban water authorities into 18 new regional water authorities. agreement with the Government, the successors to the former councils which owned municipal electricity undertakings received a share of the proceeds of the sale of the distribution businesses. 14 3. NATIONAL COMPETITION POLICY AGREEMENTS In April 1995, the Commonwealth and all States and Territories agreed to implement a National Competition Policy. The policy is to be given effect through the implementation of three intergovernmental agreements signed by the Council of Australian Governments: The Agreement commits the parties to the following actions: consider the establishment of independent sources of prices oversight advice with respect to government business enterprises where these do not already exist; remove any net competitive advantage enjoyed by significant government enterprises by virtue of their pu blic sector ownership, subject to the benefits outweighing the costs; the Conduct Code Agreement; the Competition Principles Agreement; and the Agreement to Implement National Competition Policy and Related Reforms. Conduct Code Agreement Under the Conduct Code Agreement, State and Territory Governments agreed to extend the application of Part IV of the Trade Practices when introducing competition to a sector traditionally supplied by a public monopoly, remove from the public monopoly any responsibility for industry regulation, and undertake a review of the appropriate structure and regulatory framework to be applied to the industry; review and, where appropriate, reform all existing legislation that restricts competition by the year 2000 and thereafter every ten years in line with the guiding principle that legislation should not restrict competition unless it can be demonstrated that: the benefits of the restriction to the community as a whole outweigh the costs; and the objectives of the legislation can only be achieved by restricting competition; and conform to a set of agreed guiding principles to facilitate third party access to Act 1974 to all persons within their jurisdiction. This will ensure that universal and uniformly applied competitive conduct rules apply to all market participants, regardless of their ownership or legal form. To give effect to this, each State and Territory agreed to enact its own legislation applying Part IV; known as the Competition Code. Oversight of the Competition Code is the responsibility of the Australian Competition and Consumer Commission (ACCC), which was established on 6 November 1995 through a merger of the former Trade Practices Commission and the Prices Surveillance Authority. Competition Principles Agreement While the Conduct Code Agreement deals mainly with restrictions on competition arising from anti-competitive conduct, the Competition services provided by significant infrastructure facilities to which access is necessary to permit effective competition in an upstream or downstream market. A copy of the relevant sections of the Principles Agreement establishes principles to address other forms of restriction on competition identified by the National Competition Policy Review Committee (Hilmer Report) as impediments to greater competition in the Australian economy. Competition Principles Agreement is provided at Appendix B. 15 HILMER CPA FIGURE 1 Agreement to Implement the National Competition Policy and Related Reforms This Agreement sets out the overall timetable for the implementation of th e N ational C om petition Policy reforms and related COAG agreem en ts governing reforms in spe cific in dustries - electricity, gas, road transport and water. Provided that the States and Territories meet this agreed timetable, the Agreement provides th at the Commonwealth will m ake to each State and Territory a series of " competitio n payment s" . By th e year 2001-02, the total pool of com petition payments will amount to $600 million per year in 1994- 95 terms. U nder the Agreement, th e C ommonwealth w ill also exten d its guarantee to maintain Financial Assistan ce Grants in real per capita terms on a rolling three year basis from 1997-98. National competition institutions Governments also agreed to the establishm ent of tw o new national competition bodies: the Au stralian C ompetition and Consum er Commission (AC CC); and the National Competition Council (N C C) . Australian Competition and Consumer Commission (ACCC) The ACCC was established in November 1995 through a merger of the former Trade Pract ices Com mission and Prices Surveillance Authority. It is responsible for enforcement of the competition and co nsumer provisions of the Trade Practices A ct and the provisions of the Comp etition Code. All en forcement action will be brought in the Federal Court. The ACCC will also m ake det erminations under the national third party access reg ime established through the insertion of a new Part IlIA into the Trade Practices A ct. In addition, the ACCC is respons ible for prices surveillance, inquiries and m onitoring under the Prices Surveillance Act. This may include price oversight of a State or Ter ritory Go ver nm ent business where the State or Territory co ncerned has agreed, or where the 16 N ational Competition Council has recommended declaration of the auth or ity and the business is not already subject to an effective prices oversight mechanism established by the relevant State or Territory. National Competition Council (Nec) The NCC m ay also conduct or provide assistance with reviews under the Competition Principles Agreement in accordance with a work program determined by participating Commonwealth, State and Territory governments. The NCC is not empowered to initiate such reviews or to carry out work referred to The NCC is a new national advisory body established by the Competition Policy Reform Act (Cth) 1995. The NCC will make recommendations on whether a facility should be declared an essential service for purposes of the national third party access regime. It will also monitor compliance with the National Competition Policy Agreements and advise on whether States and Territories have satisfied the conditions for receipt of Competition Payments. it by any other body, including local government. 17 4. APPLICATION OF THE COMPETITION CODE TO LOCAL GOVERNMENT Under the intergovernmental Conduct Code "EI'ery m oder n m arket eCOllum)' "a s a set Agreement, the Commonwealth and the States and Territories agreed to extend the application of Part IV to all persons within their jurisdiction. This has the effect of extending the reach of competition law to unincorporated businesses and to State and Territory Governments, their authorities and local government bodies. The extension of Part IV of the 'Trade Practices t!.f rul es ddiglled to ellsllre that th e compe titive process is not und ermined IIJ' tile ant icom petit iue. behaulour ojfirm s, wh eth er actillg collllshlel)' or illlfi,'it/IIIIIlJ''' ' ill A ust ralia th ese rules IIrc contained ;11 Part I V o th e Co mmo nwealth Trade f Practices Act 1974. " " T he Co m mittee reviewed the provision s oJ the.Act ;11 some detail alld.f;'r tile most Act (TPA) requires each State and Territory to enact legislation to apply the Competition Code as a law of its jurisdiction. Victoria's Competition Policy Reform Act 1995 applying the Competition Code (Part IV of the TPA) within the State received Royal Assent on 14 November 1995. The Competition Code will take effect from 21 July 1996. There will be a 12 month moratorium on partJill/lid them to tIC operllt;ng sntisfactarilv... , the most ill a II'll)' JJI'ess;II.~ issue is to em llre that IInjllstifi ed gill'S ill their applicatio n I//'C j'illed tha t promotes a nationally .con sistent legal fra llu lI'Ol'k for business activitv", National Competition Policy Report of Independe nt Committee of Inqu iry, 1993 pp .xxi-xxli Extension of Part IV of the Trade Practices Act Part IV of the Commonwealth 'Trade Practices pecuniary penalties, which will apply from 21 July 1997. However, other remedies (such as damages and injunctions) will be applicable from 21 July 1996. ) Act 1974 (as amended by the Competition Policy Reform Act 1995) sets out the competitive con duct rules which govern incorporated enterprises. This Act draws on the Commonwealth 's constitutional power to regulate corporations, but also applies to unincorporated businesses engaged in interstate trade. The reach of th e Commonwealth's corporations power does not extend to other unincorporated enterprises, nor does it cover State owned entities or business activities covered by the "shield of the Crown". Part IV of the TPA prohibits certain forms of anti-competitive conduct. A number of restrictive practices are regarded as being so inherently anti-competitive that they are prohibited absolutely. Other practices are only prohibited if they have the purpose, or are likely to have the effect, of substantially lessening competition. Provisions of Part IV 18 The following forms of conduct are prohibited absolute ly : ~ - Prohibited conduct Description Primary Boycotts where two or more competi tors collaborate for purpos es of preventing or limiting supply of goods or services to, Or acquisition of goods or services from, particular persons or classes of persons. Risk areas include trade association meetings/ opportunities for collusion among competitors. • any arrangement which has the purpose or effect offixing, controlling or maintaining prices for, or any discount allowance, rebate or credit in relation to, goods or services to be supplied or acquired by any of the parties to the arrangement. Encompasses any restraint on price flexibility. - - ._- - - - Price fixing between comp etitors - - - -- - - - - - - - -- - - - ---_ . .. _._ ._----_..._ ..._. _ Third line forcing where a supplier supplies goods or services on condition that the buyer buys goods or services from another person. • any direct or indirect attempt at enforcing resale price maintenance. The practice of recommending prices for goods and services is not prohibited provided that certain conditions are complied with. Resale price maintenance 19 Part IV also prohibits the following forms of conduct if they have the pur pose or are likely to have the effect of substantially lessening competition in a market. Prohibited conduct Description Anti-competitive agreements contracts, arrangements or understandings which have the purpose or are likely to have the effect of substantially lessening competition in a market. Risk areas include market sharing agreements and agreements which restrict the supply or quality of goods. . __. ..__._._._- -- Misuse of market power an entity which has a substantial degree of power in a market is prohibited from using that power for the purpose of: eliminating or substantially damaging a competitor; preventing the entry of a person into any market; or deterring or preventing a person from engaging in competitive conduct in any market; examples could include refusals to deal, termination of existing supply or trading arrangements, predatory pricing and price discrimination. Exclusive dealing the interference by a supplier with the freedom of its buyers to buy from other suppliers and with the freedom of its suppliers to supply to other buyers. Risk areas include: exclusive distribution - the purchase of goods or services on condition that the supplier will not supply goods or services to another distributor in a territory; exclusive purchase - the supply of goods or services on condition that the buyer will not acquire similar goods or services from another supplier; and restrictions on the resupply of goods or services to M ergers particular persons or in particular areas. - - -- - - - - - - - a merger is prohibited if it would have the effect, or be likely to have the effect, ofsubstantially lessening competition. Other boycotts where two parties together engage in conduct which restricts a third party from supplying to, or acquiring from, a fourth party. 20 Penalties Various penalties may be applied or remedies sought for a breach of the restrictive trade practices provisions of Part IV or the Competition Code. These include: monetary penalties of up to $10 million for companies or State authorities and $500,000 for individuals; injunctions; damages; divestiture of shares or assets in the case of prohibited mergers ; and ancillary orders of various kinds to remedy the loss or damage suffered. Th e State Government will not be liable for pecuniary penalties (fines), but this protection does not extend to State authorities that are bodies corporate or companies, nor does it extend to individuals who are knowingly concerned in any contraventions. Legislative exemptions The Victorian Government has adopted a policy of ensuring th at exemptions from C ompetition Laws are only allowed when absolutely necessary. As a general rule, the Government does not support exemptions from Part IV of the TPA (or the Competition Code). In other words, offending conduct should, wherever possible, be modified so that it ceases to offend Part IV (or the Competition Code) . The Go vernment will only enact exemptions where it has heen demonstrated th at: the benefits to the community as a whole of the restriction on competition (caused by the conduct to be exempted) would outweigh the costs to the community as a whole of the restriction on competition (caused by the conduct to be exempted); and the objective of the proposed exemption can only be achieved by restricting competition. Exemptions In all cases, the approval of the Premier must be There are three possible avenues whereby conduct may be exempted from Part IV of the TPA or the Competition Code: exceptions enacted under an Act or regulations made under a State Act ; authorisation by the Australian Competition and Consumer Commission (ACCC); or in th e case of exclu sive dealing, notifying the conduct to the ACCC. obtained before excepting legislation or regulations can be made. ACCC authorisations/notifications Any conduct covered by the Competition Code may be authorised except for misuse of market power. Conduct which would otherwise offend Part IV is permitted while an authorisation is in force . 21 An application for authorisation is made to the ACCC and will attract a fee of$7,500 (or $15,000 in the case of a merger). The ACCC wiJ1 not grant an authorisation unless it is satisfied that the proposed conduct would result, or be likely to result, in a benefit to the public which would outweigh the detriment to the public constituted by any lessening of competition that would result, or be likely to result, if the proposed conduct were engaged in. Conduct which would otherwise offend the In addition to the Competition Code, the TPA will directly apply (as it already does) to any local councils which are trading corporations as defined under the Commonwealth Constitution and/or to any local councils to the extent they are engaged in trade or commerce across two or more States. The exemptions mentioned above also apply in these circumstances. It is stressed that the Competition Code is not a voluntary code, it is a law of Victoria with which councils must comply. All Victorian councils will be subject to the Code from 21 July 1996. While full pecuniary penalties will not apply until 21 July 1997, other remedies (eg damages and injunctions) will be available from 21 July 1996. On 5 September 1995, the Director of the Office of Local Government w rote to the Chief Executive Officers of all Victorian councils, outlining the contents of the Competition Code and recommending that councils obtain appropriate legal advice as to whether or not their activities will be in breach of the Code. The Director noted that, to the extent that any of a council's activities do breach the Competition Code, changes will need to be made or, if absolutely necessary, an exemption or authorisation obtained. exclusive dealing provisions of the Competition Code is permitted where notice of the conduct has been given to the ACCC, for so long as the ACCC has not withdrawn this protection. The ACCC can withdraw this protection by giving 30 days written notice if it is satisfied that the likely benefit to the public from the conduct will not outweigh the likely detriment to the public from the conduct. Application to Local Government The provisions of Part IV of the Trade Practices Act (as incorporated in the Competition Code) will apply to local government from 21 July 1996. There are two exceptions. Section 2D of the TPA provides that the Competition Code does not apply to: the rejusal togrant, or thegranting, suspension or variation if, licences (whether or not they are subject to conditions) by a local government body (a "licence" is defined to mean a licence that allows the licensee to supplygoods or services); and a transaction involving only persons who are acting fo r the same local government body. 22 What is expected of Local Government? From July 1996, the Competition Code is a law of Victoria. Penalties for breach of the Code can be severe and ignorance of the law will not count in defence of any breach. All councils that have not already done so are strongly advised to conduct an audit of their activities to identify any conduct which may contravene the Competition Code. While it is not possible to provide an exhaustive listing of all forms of conduct that may contravene th e Code, the following forms of conduct in particular should be avoided: discussing prices with competitors; agreements with competitors to share or split up a market; agreements to refuse to deal with a particular person; discussing customers or other competitors with persons who may be a competitor; imposing re-sale prices on customers to which goods or services are supplied; withholding or threatening to withhold goods or services for the purpose, or with the effect, of damaging a competitor. after that date. Any contracts entered into since 19 August 1994 and intended to last beyond 21 July 1996 will need to be reviewed and modified if necessary in order to comply with the Code. As a matter of good risk management practice, councils should also develop and implement ongoing compliance programs to ensure that they continue to act in accordance with the provisions of the Code. Not only are there hefty fines for breach of the Code, the costs involved in litigation can be considerable. An effective compliance program should start with identification of the markets in which councils are participants - who are the suppliers, customers and competitors. The next step is to identify who within the organisation may be at risk of contravening the law and to make sure that appropriate action is taken to educate those persons so that they know where the risks are and who to turn to if they are in any doubt. For ongoing reference, councils should consider developing a compliance manual tailored to their business environment. 1/1 assist organisatio ns /0 cOlllpl}' witl: tlie These will not apply in circumstances where a joint tender is being prepared with a party, such as another council, which in other circumstances would be a cornpetitor. In auditing their activities, councils should review the terms of all existing contracts and arrangements to ensure that they do I .o t contain any provisions which could breach the Competition Code. Contracts signed before 19 August 1994 will be "grandfathered" (allowed Trade P ractices Act, tile A C C C pl/bfisfles a manual 0 1/ trade practices compliance entitled 'Best and Fai rest ', This gl/ide call I,,, obtailled jJ-oIII tfle M elbourne ~(fice o the j A CCC lI!1Jicfl is located at: Level 35, The Tower 360 Elizabeth Street, Melbourne Tel : (03) 9290 1800 Fax: (031 9663 3699 to continue even if they breach the Code). However, this protection will not extend to any changes or extensions made to such contracts 23 Areas where councils could be at risk of engaging in conduct which could breach the Competition Code include: arrangements with other councils to charge agreed fees for a particular service or use of a facility; misuse of regulatory powers to damage a competitor in a market for which the council is in competition with other suppliers; and use of profits from monopoly activities to subsidise competitive activities with the purpose or intent of damaging a competitor (predatory pricing). Councils should place particular emphasis on ensuring that the provisions of the Competition Code are complied with in competitive tendering processes. In addition, the Victorian Local Government Code of Tendering requires a council to "ensure that the tender process used is fair to all parties, and use its best endeavours to demonstrate that fairness to tenderers and potential tenderers." Specifically, the Code of Ten dering obliges a council to: package work put to tender in a manner which encourages competition and the best outcome for residents and ratepayers; not participate in, and actively discourage other parties from, improper tendering practices such as collusion, misrepresentation, and disclosure of confidential information; and require any conflict of interest to be disclosed immediately. 24 5. APPLICATION OF COMPETITIVE NEUTRALITY PRINCIPLES concessional interest rates on loans; 'If a less ifficicIlI G OI/em lllellt business is able to ';1'/" till net competitive ad,'Q /ltages to take busin essfrom a 1II0re ~/TIciellt .ll l'l", society's r(,SOllm's"are /1 01 beillg put to their best lise' National Competition Policy Report of Independent Committee of Inquiry, 1993 p 297 not being required to account for depreciation expenses; not being required to achieve a commercial rate of retu rn on assets; and effective imm unity from bankruptcy. The application of competitive neutrality policies to remove or offset any net competitive advantage resulting from the above is particularly impor tant where there is direct competition, or potential competition, between public and private entities. In these circumstances, and all other things being eq ual, cost advantages enjoyed by the government owned entity would enable it to price its product below a more efficient private sector producer. By taking business away from a more efficient producer, resources may be wasted which could have been allocated to better uses and society as a whole would be the worse off. Background The principle of competitive neutrality is that business activities of government owned bodies should not enjoy any net competitive advantage simply as a result of public sector ownership. The Hilmer Report identified a number of advantages accruing to government owned business, including: immunity from various taxes an d charges; immunity from various regul at or y regim es; explicit or implicit government guarantees on debt; ) COMPETITIVE NEUTRALITY ,t./_--\, \ \ ,.--7' \ -- \ ___J , \ \ \' \ ', \ _ \, \1 , - - \. t \ S f.Cl 0R 6US\Nf.S " - - - - - - - - - - I'U6 \'\C S - - - - - - - - , I I I I --FI GURE 2 25 However, the presence of a competitive market is not essential. Even where direct exposure to com petition is not possible, incentives for increased efficiency an d improved service delivery can be provided by ensuring that government businesses are organised along similar lines and face similar costs and regulatory requirements to private corporations. It is with the objective of harnessing these incentives that the Victorian Government has adopted a corporatised structure for its major Government Business Enterprises and subjected them to equivalent taxation and commercial rate of return dividend requirements to a private corporatio n . The Vic torian G overnm en t has determined th at principles of com petitive neutrality wi ll also apply where competition is being introduced in to the delivery of noncommercial services purchased by State and local government agencies on behalf of tax or ratepayers and w h ere in-house bids are permitted in direct competition with private tenderers for the contract to supply those services. However, the pr inciples wi ll not extend to general gove rnance functions . It m ust be elllphasised th at the I'dnciple o f com pe titive neutrality is concerned excll/sivel}' tultl: economic t:J.llciel/Cl' objectives. Coverage of competitive neutrality principles Under the Competition Principles Agreement, except in cases where the implementatio n costs would outweigh the expected benefits in terms of increased efficiency and improved resource allocation, all governments agreed to apply policies of competitive neutrality to all significant Government Business Enterprises which are classified as Public Trading Enterprises (PTEs) or Public Financial Enterprises (PFEs). Governments also agreed to implement competitive neutrality principles where appropriate to other "significant business activities" undertaken by government agencies as part of a broader range of functions. Cam petltiv« IIel/lmlit}' policies aim to promote greiltel' economic tificieJJC)' b}' relllOJlillg 0 /- o ettillg resoJl/'cc allocation ffi distortions wltich resJIll f roIII com pe tlti I 'e adl'Cl llfilges co/!fel'red II)' gO/le /-I/ mel/1 ownership. However; lite pursuit I!feconomic td'[iciel/Cl' is bu; mre IImollg lIIal/}' pl/blic policy.gools and is not intended to override Imy other economic, social or environmental polic}' objectives. II is to meet sud: p"",ic pllliC)' objectives that governmen: seeks to ensure II,e provision of certain gllCIIls "'Ill servicesfree or at less tluut[ull cost /IIlticlt the ma rket /110 11 111 not otherwise prO/,ide ill IIIllSl jTordable til S/!O,ciw t quantities or at a price a all. III selectiJlg th e appraprlat e supplier I!fsuch gllOds alld services, tllep";IIWI]' cons ideration Jor gOlle/-IIl11ellts will be tlte capacity of alternative sllppliers to deli/lcr th e specijied ser,'ice to the standards reqJli/-ed. 0111)' ollce these criteria are satisfied sllOlIld considerations o relative tdJiciellcJ' be taken f into account, It is at litis point that the applimtioll I!f policies ofcompetitive (l/ neutrality CllII Ildp 10 ensllre titat C Il petil/g bids-are com pared Oil aI/ equivalent basis. 26 Policies to achieve competitive neutrality The Competition Principles Agreement outlines two alternative approaches to the achievement of competitive neutrality, depending on the nature and significance of the business involved. For significant Government Business Enterprises which are classified as "Public Trading Enterprises" (PTEs) and "Public Financial Enterprises" (PFEs), Clause 3(4) of the Agreement provides that a corporatisation model will be adopted where appropriate and the following will be imposed: The alternative approaches outlined in the Competition Principles Agreement represent just two options within a spectrum of possible structural, administrative and ownership options which can be employed to reduce or offset competitive advantages conferred by gove rnment ownership. These are depicted in summary form in Figure 3. Each shift to the right in Figure 3 represents a further step towards exposing a government business activ ity to the full commercial discipline of the m arket place. At a minimum , offsett ing net competitive full Commonwealth, State and Territory taxes or tax equivalent systems; debt guarantee fees directed towards offsetting the competitive advantages provided by government guarantees; and those regulations to which private sector businesses are normally subject, such as those relating to the protection of the environment, and planning and approval processes, on an equivalent basis to private sector competitors. For "other significant business activities" undertaken as part of a broader range of functions, Clause 3(5) of th e Agreement provides that either: the principles outlined in 3(4) will be implemented; or the Parties will ensure that the prices charged for goods and services will take account, where appropriate, of the above items, and reflect full cost attribution for these activities. advantages conferred by government ownership requires the adoption of competitively neutral costing and pricing principles for government business activities. This enables th e consumer or purchaser of a service to select the most efficient am ong alternative suppliers of a given standard of service. By itself, competitively neutral pricing is simply an accounting device. The business does not incur these costs directly and so will not face the same incentives to in crease its internal efficiency. The efficacy of the pricing principles approach may therefore be enhanced by complementary stru ctural and administrative reforms which seek to impose greater commercial discipline on the agen cy. Options range from the establishment of separate administrative units with their own operating accounts, through commercialisation (with full recovery of all expenses incurred in production and separate balance sheet and rate of return requirements) to full legal separation, exposure to corporations law and the imposition of th e entire range of costs which would apply were the business in private ownership. In either case, implementation of the principles is to be subj ect to the assessment that the benefits to be realised from implementation outweigh the costs. 27 LEAST EXPOSURE TO MARKET FORCES MOST EXPOSURE TO MARKET FORCES ~ - - --I I I I I MODEll I I I ~> I· I PUBLIC SEcrOR PRIVATE SECTOR FIGURE 3 Victorian Government Policy on Competitive Neutrality For all significant State and local government business activities in Victoria undertaken primarily for profit or commercial purposes: A.; rt'I/lI;mt under the Competition Principles Agl'I~i!mell /, i) review ifongoing ownership arrangements, with consideration given to sale or wind-down; and ii) application ill[un e 1996 the Victorian all Government pllblished a statement o its poliC}1 j Oil ifeither Model 1 or Model 2 cotnpetltlve neutrality, ;/lcllllUIIg competitive neutrality policies (see below) to all commercial activities remaining in government ownership, provided the expected ben/fits outweigh the costs. In addition, for predominantly tax-funded or ratefunded areas lmplententation tim etahle and tI complaints mechanism , Tile policy is to tlp),IJI to both tile State aud local goverum/'II / sectors. Tile policJ~ entitled Competitive N eutrality : A S tatement o Victorian Government PoIiCJI f , is availablefrom tire D epartment oJPremier 1/1111 ifgovernment activity: Callinet, iii)fromJuly 1997, wherever competition is introduced into the supply ofgeneral government (predominantly tax-funded] activities for which Victorian Government policy on the application of competitive n eutrality policies to significant government bu sine sses and select ed other activities is as follow s: the State Government or a local council is the sole purchaser and in-house tenders are allowed, Model 2 competitive neutrality policies (see below) will apply to those activities. 28 Competltive Neutra_lity Policies 4 __ _ _ Application __ _ M odel l • corporatisation. rin cluding commercial accounting and rate of return requiremen ts ; • application of Commonwealth tax equivalent payments; • application of State tax or tax equivalent payments and of State utility charges; • application of local rate or rate equivalent payments; • application of debt guarantee fees; • application of relevant regulations to which the private sector is normally subject. Mod el 2 • examination of the most appropriate ongoing structural arrangements for the delivery of the business or service delivery activity, including commercialisation or the adoption of a Service Agency model; and • adoption of pricing principles which take account of and reflect full cost attribution for the net competitive advantages conferred on the activity by public sector ownership. Provided the benefits to be realised from implementation outweigh the costs, Model 2 policies will apply to: Provided the benefits to be realised from implementation outweigh the costs, Model 1 policies will apply to: 1. significant Government Business Enterprises (GBEs) which are Public Trading Enterprises (PTEs) or Public Financial Enterprises (PFEs); and 2. othersignificant government business activities that are not PTEs or PFEs where: a) the activity is or has the potential to be in competition with the private sector; and/or b) there are expected to be improved resource allocation outcomes from removing net competitive advantages resulting from government ownership. ·1 1. othercommercial activities of government entities (a substantial proportion of whose costs are met from user charges) where: a) the activity is or has the potential to be in competition with the private sector; and/or b) there are expected to be improved resource allocation outcomes from removing net competitive advantages resulting from government ownership; but c) the costs of implementing Model 1 policies would outweigh the benefits; and 2. non-commercial general government (predominantly taxlunded) activities where a) competition is being introduced to the supply of services to government; and b) in-house tenders are allowed. 29 Cost/benefit assessment The costs of implementing competitive neutrality are primarily the transaction costs assoc iated with implementation. D epending on which of Model 1 or Model 2 is applicable, the se may include the costs of: separate incorporation; legislative and regulatory amendment; ch anges to management sy stems and processes; obtaining info r rn ariou and undertaki ng analysis to assess appropriate levels for tax equivalents, debt guarantee fees or pricing principles; administration. of tax equivalent and debt gu arantee frarr i ewor ks: and compliance an d the monitoring of com plian ce . Costs may also in el ude w ider costs to the com m unity as a whole if applying th e policy would im pede ac.Irievem ent of other pub lic policy objectives. The benefits of im.plementing competitive neutrality policies are the benefits to the comm unity w hic h accrue both from increased efficien cy within th e government ow n ed business (technical efficiency) and from improved resourc e allocation when reso ur ces are free d up for nnore productive uses (allocative efficiency). Complaints mechanism As required under the Competition Principles Agreement, the Victorian Government Polic y on Competitive Neutrality in cludes the establishment of a com plaints m ech an ism to receive and investigate allegatio ns of n oncompliance with the policy. The complaints mechanism will be located in the Department of Treasury and Finance. It will have recommendatory powers only. Its cove rage will ext end to significant commercial activi ties of loc al councils, but will not cover activities subjected to co m pe titive tender w hich will co n tinue to be h andled through the Office of Lo cal Government. Annual reporting requirements Each Go vernment has agreed to publish an annual repor t on th e im plem entatio n of competitive neutrality principles within its jurisdicti on, including allegations of noncomplian ce. Competitive Neutrality in the Local Government context A major focus of competitive neutrality is on enhan cin g the efficiency of the large public utilities w hic h dominat e the pro vision of ene rgy, water and transpo rt ation services in Au stralia. With rec ent divestment of th eir public utility functions , Victorian loc al author ities are no lo nger engaged in significant busin ess activities in these m arke ts, althou gh th ey m ay be engaged in other signi ficant commercial undertakings w h ere com petitive neutrality principles will be relevant . On the o th er hand, as a result of co m p ulsory competitive tendering, Victorian cou nc ils are signific antly further advan ced than in other jurisdictions with introducing competition into the delivery of no n- commercial activities of government. Accordin gly, competitive 30 neutrality principles will be of greater relevance to these aspects of local government activity in Victoria than elsewhere. The reform oflocal government in Victoria and, in particular, the ongoing implementation of competitive tendering, means that councils should be well placed to meet most competitive neutrality requirements by July 1997. Application to Local Government Consistent with Victorian Government policy, councils will be required to apply competitive neutrality principles to: significant local government businesses engaged in primarily for profit or commercial purposes, in-house bids for the supply of non- Competitive tendering has instilled in local government a competitive culture and is requiring councils to assess tenders for the provision of goods and services on a commercial basis. The requirement that councils clearly separate their role as a "purchaser" of services from that as a "provider", to ensure the fairness of the tender process, has led to significant internal restructuring within councils and the formation of separate business units to bid for council contracts. Competitive neutrality principles will complement and reinforce the Victorian Local commercial activities subject to competitive tendering. Councils should apply either Model 1 or Model 2 policies to these activities, subject in each case to the assessment that the benefits in terms of improved efficiency and better resource allocation would outweigh the costs of implementation. The decision tree set out in Figure 4 illustrates the key steps involved in determining where competitive neutrality policies should apply and which approach (Model I or Model 2) to employ in each case. The first step is to determine whether the business meets the ABS definition of a public trading enterprise (PTE) or a public financial enterprise (PFE). To satisfy this definition, the predominant activity of the business would need to be trade in goods and/or services and the business would need to meet a substantial part of its operating costs or earn a substantial part of its operating revenue from user charges. If the answer to these questions is yes, the next step is to verify that the business has a predominantly commercial or profit making focus. If not, competitive neutrality is unlikely to be relevant. If yes, Modell policies should be applied, subject to the assessment that the benefits would outweigh the costs. Government Code of Tendering which obliges councils to assess in-house bids and external tenders on the same terms. Under the Code, councils are to treat an in-house tender on the same terms as an external tenderer. There is to be a clear separation between in-house tenders and those evaluating the tenders. The Code obliges councils to prepare in-house tenders on the basis that all direct costs and indirect or overhead costs attributable to the tender are included. The requirements of competitive tendering have resulted in a number of councils giving consideration to the corporatisation of certain business activities, to allow these to operate as a separate legal entity on a commercial basis. 31 If the business activity does not satisfy the ABS definition of a PTE or a PFE, the next step is to determine whether the business is nevertheless engaged in trade in goods or services for profit or comm ercial purposes. If yes, competitive neutrality policies are applicable , but which of Model 1 or Model 2 should apply depends on the scale of the operation and its significance in the relevant market. As a guide, a business would need annual revenues of at least $10 million or a workforce of at least 15 to warrant the adoption of Model 1 policies, and carefu l weighing up of the costs and benefits of corporatisation should occur for organisations with revenue bases between $10 million and $20 million . Otherwise, Model 2 should be applied. Finally, if a business is not engaged in trade primarily for profit or commercial purposes, it needs to be established whether the business is in actual or po tential competition with the private sector for the supply of goods or services to government. This will be the case for all noncomm ercial activities subject to competitive tender, and Model 2 poli cies will generally be applicable in all such cases. (The exception would be if a council team were to bid for government work outside its own municipality, when Model 1 policies would apply.) 1 NO 1 ~ YES YES ... ... .r NO - I I YES YES ' eN not applicabla NO' YE S' ... J FIGUR E 4 11 N ote 1: subject to an assessment of the costs and benefits of app lying the policy 32 Model 1 - corporatisation approach neutrality policies contained in Modell - viz: the application of tax equivalents and debt guarantee fees where appropriate and equivalent regulations to those applying to private corporations. Where councils are engaged in sign ificant commercial activities trad ed in the open market , th ey will need to consider possible corporatisation of those activities and the adoption of the full suite of competitive FIGURE 5 It is not the intent of National Competition Policy that State or Local Government authorities shift their focus toward selling services in the private market. On the contrary, competition policy in general, and the principle of competitive neutrality in particular, may have the effect of discouraging government agen cies from entering into or remaining in areas of business activity which can be provided more efficiently by the private sector. Nor should councils actively seek or encourage product or market diversification, other than where the State has endorsed such action (for example in tourism or waste management). Nevertheless, circum stan ces may ari se where a co unc il seeks involvement in business activities outside council operations or beyond its municipal boundaries. Any such changes away from trad itional rate revenue sources into different product and market areas or to other municipalities in competition with the private sector must be assessed from a total risk management perspective. There will be strict standards for the sorts of business form adopted to ensure commercial viability. 33 Sep arate incorporation requi re s statu tor y approval under Section 193 of the Local G overnment A ct 1989 . As part of the approval specific council incorporation proposals will be assessed, in the first instance, on commercial criteria using appropriate hurdle rates of return. Proposals should show these criteria, inclu din g an analysis of the risk/return trade-off. Councils should indicate clearly the proposed method of financing and its impa ct on the cou ncil's financial stru ctu re. When proposing an entrepreneurial venture, a council will ne ed to demonstrate not only the finan cial viability of the proje ct, but also that the co uncil itself has the capacity, given its overall financial status, to cope with any unforseen event that could jeopardise the viability of the project. In addition, a council will need to consider the Loan Council implications of any proposed borrowing it intends to undertake in facilitating the project; the council's proposal should demonstrate, in diversification into activities outside council, that private sector entities do not already adequately provide the activity or service; and incorporation proposals should clearly show the accountability links that council will establish for the entity. At a minimum, this will cover the formal organisational links, the shareholding (if any), the process for Board appointments, and the monitoring, finan cial and audit arrangements. The Government, through the Office of Local Government and the Department of Treasury and Financ e, will provide assistance to councils on request in determining the app ropriate corporate structure for their signifi cant business activitie s. process, the Treasurer and the M inister for Local Government will require issues of competitive neutrality to be ad dressed. Thus far, one wholly owned com pa ny has be en approved - City Wide Service Solutions Pty Ltd, which is owned by the Melbou rn e City Council. D iscussions are curre n tly underway on three further applications, for companies to manage the Queen Victoria M arket , the Melbourn e Wholesale Fish M arket and the Prah ran M arket. So that the effects of the reforms to the structu re and operatio ns oflocal government in Victoria are not co m promised, pro posals for inco rporation will be considered by the Department of Treasury and Financ e and the Office of Local Government against the guidelines set out bel ow. It should be noted, how ever, that Ministeri al approval under Section 193 does not represent a guarantee or acce ptanc e of liability by the State Government in relation to liabilit ies incurred, or into any aspec ts of the future funding o f any particular project. This remains the resp onsibility of the proponent council. it w ill be to councils' advan tage to discuss and seek in-principle app roval for any incorporation well before the re is significant commitment of resources, including management time; proposals should be fully cos ted . This should include cost attribution for co mpe titive neutrality fac to rs a such as tax equ ivalents and debt guarantee fess, where applicable; factors such as the optim u m ut ilisatio n of plant and equipme n t should be considered only after a council takes acco unt of minimum requirements , including its obl igations for eme rgen cy managem ent; 34 Model 2 - Competitively neutral pricing principles separate incorporation and the application of full tax equivalent regimes required under Model 1, councils will need to consider the application of Model 2 policies. For local government commercial activities which do not satisfy cost-benefit criteria for FIGUR E 6 Model 2 policies will for the most part also apply to non-commercial local government activities subjected to competitive tendering. Application of Model 2 com petitive neutrality policies calls for an examination of the ongoing structural and administrative arrangements for the business activity, and the adoption of competitively neutral pricing principles to the goods or services produced by the activity. As more contracts are put to tender as part of the implementation of CCT, in-house teams will inevitably lose some contracts and win others, including some for external work. By the time councils are market testing 50 per cent of their total expenditure, which is required by the 1996-97 financial year, it will be clear what business activities they will continue to maintain. Councils will then be in a position to consider appropriate administrative structures for those activities. Consistent with the competitive neutrality provisions of the Competition Principles R eviewifongoing structures The application of competitive neutrality principles using Model 2 will require councils to examine the most appropriate ongoing structure for the delivery of the activity. Some possible structural and adm inistrative options for ongoing business activities were depicted in Figure 3 . C onsideration should be given to at least the following options: outsourcing; commercialisation; or administrative reorganisation. Agreement, it is expected that, by Jul y 1997 , all councils will have reviewed the organisational stru cture of their business activities which compete with the private sector. The application of competitive neutrality policies to significant business enterprises in which councils are engaged primarily for profit or commercial purposes will be subject to the State's competitive neutrality complaints mechanism to be established within the Department of Treasury and Finance. 35 Competitively neutral pricing principles In adop ting comp etitively neutral pr icing, co unc ils should be guided by th e pr inciples set out in the Box below. The issue of taxari .m neurrali ty is central to the promotion of a le el playing fi eld between inhouse and private sector tenders. A number of private sec tor ten d erers have e xpressed con cerns that in-house t~.l1-:tl ~ While other Commonwealth taxes (mainly com pany tax wh ere applicabl e), and State taxes (including taxes on land , financial transactions and transfer of assets) may marginally affect the com parability of in-house and ext ernal bids, the se taxes will generally represent only a sma ll proportion of tot al busine ss costs and wi ll not be a deciding factor in the selection of a supplier. H owever, if accounting for th ese costs would materially affect the cost to co u nc il of a service which, were it provided in-house, would be exempt from such taxes, this component of competitive neutrality pricing principles should not apply on th e grounds th at costs would outweigh benefits. appear to have taxation advantages when bidding for council work. In 1995 , the O ffi c e of Local Governm ent engaged consulta n ts to investigate the effect of taxation issues o n th e comparative costin g of bids fo r co uncil t ~ l,c.t'r; . The resulting R eport on Tax ation Issues in Compulsory Competitive Tendering in Local Government concluded that, while the most significant taxes in this context are sales tax and p ayroll tax, the imp act of the se taxes varies w ith t h e nature an d stru cture of th e work tendered by a counc il. The incidence of sales and payroll taxes does not always benefit an in-house bid. For example, payroll tax is only p ayable by b idders whose total payroll costs exc e e d a certain threshold amount. (In 1995-96 the threshold payroll was $515 ,000 , representing a wo rkforce of around 17-20 employees.) M oreover, since lo cal government is exempt from sales tax wit h respect to the purchase of goods requ ired for the ordinary services of goverrxrnent, mos t council contracts can and should be struc ture d so that any provid er can obtain sales tax exemp tion. Reciprocal taxing and charging between State and Local Government To facilitate the future application of competitively neutral pricing principle s to State and local government business activities and to situations of competitive tendering for the supply of general government services, the Victorian Government is prepared to give consideration to the principle of reciprocal taxin g and charging betwe en the State and local government sectors. H owever, it is recognised that this could have unintended distributional consequences for local government finances. Moreover, taxing between levels of govern m ent cannot be considered in isolation . It should only be considered in th e context of a comprehensive review of national taxation policy and implemented as part of a bro ader pack age of tax reform. 36 .....-- ::-. -~ .. .- ~-.- r. -, ,-": .'.~ - . Model 2: Competitive Neutrality Pricing ~--.- ~rinciples The following pricing principles are to apply to all activities subject to Model 2 competitive neutrality policies: 1. Pricing should reflect fuR attribution of all costs incurred in the production of the good or service. All expenses used in the provision ofa unit of the good or service, including cash and non-cash items, should be accounted for. Costs may include direct labour costs, labour on-costs, materials and other operating expenses, accommodation and corporate overheads. 2. Pricing should include the net effect of any competitive advantages/disadvantages due solely to Government ownership. To the base ofall costs actually incurred should be added costs which would be faced by a private sector provider ofsimilar goods or services but from which government providers are exempt or face lower costs due to government ownership, less the costs of any significant competitive disadvantages resulting from public sector ownership. 3. The decision process should be transparent and defensible. The manner in which competitively neutral pricing principles have been applied should be fully documented and reasons given for the inclusion or exclusion of any relevant cost. For example, where a judgement is made that a particular cost is not relevant, or that a competitive advantage is fully offset by a competitive disadvantage, the reasoning behind such judgements should be documented. The application of these pricing principles is not a cost recovery exercise. Where government decides on public policy grounds to supply certain goods or services free or at well below cost, competitively neutral pricing principles are not intended to disturb these objectives in any way. However, they will affect the manner in which those activities are 'priced' or 'cosred' by in-house bidders for contracts to supply those services. Similarly, where government decides for public policy reasons to apply a subsidy to some or all consumers ofcommercially provided goods or services, that subsidy should be explicitly recognised in the costing of those services. Where government subjects the delivery ofsuch services to competitive tender, the government subsidy to support the CSO component should be equally available to in-house and external tenders. 37 What is expected of Local Government? The application of competitive neutrality principles to Victorian local government business activities will imp ose relatively few additional requirements on councils. Competitive neutrality principles should be applied wherever councils are engaged in commercial activities or have introduced competition into the delivery of services. They are not intended to apply to r egulatory or general governance functions. The date by which councils will be required to review the structure of their business activities and/or apply (Model 2) competitively neutral pric ing principles has been set at July 1997. This is in recognition that the timetable for the implementation of CCT require, by that time, all Victorian councils to be competitively tendering at least 50 per cent of their total expenses . This means that, by July 1997, all councils should have already subjected the stru cture and pricing of their activities to close scrutiny. Where a council considers that Model 1 policies should be app lied to a significant, ongoing business activity, involving corporatisation and the imposition of tax equivalent payments, this will need to be formally approved by the Minister and the Treasurer, and longer lead times will be involved in implementation. Accordingly, it is proposed that July I')98 be the target date for the application of Model 1 policies to any significant existing local government business activities approved for corporatisation. In accordance with sub-clause 3(10) of the Competition Principles Agreement, councils will be required to report annually on the implementation of competitive neutrality principles. This requirement will apply from Sept ember 1997, commencing with annual report for the 1996-97 financial year. Corporatised council business activities and other significant commercial activities of local government will be subject to the complaints mechanism to be established within the Department of Treasury and Finance to investigate allegations of noncompliance with the government's poli cy on competitive neutrality. The application of competitive neutrality policies to non-commercial activities which are competitively tendered under CCT will not be subject to the general competitive neutrality complaints mechanism. Rather, these activities will be subject to the complaints process established by the Office of Local Government in relation to CCT. In their annual reports on the implementation of competitive neutrality principles, councils will be required to include a report on action taken or proposed to deal with substantiated allegations of noncompliance with the policy. 38 6. LEGISLATION REVIEW All Australian Governments have agreed that "{{A llstmtin is to take compe tition and com pe tltioII potier sl'riollsl", a I/ew me chanism legislation (including Acts, enactments, Ordinances or regulations) should not restri ct competition unless it can be demonstrated that: a) the benefits of the restriction to the community as a whole outweigh the costs, and b) the objectives of the legislation can only be achi eved by restricting competition. Consistent with this principle, all Governments is required to ensu re that ..egIl /IIl M }' restrictions Oil compe tition do II0t ex ceed udtat is justified ill the public interest :" National Competition Pollcv Report of Independent Committee of Inquiry, 1993 p.185 Background The Hilmer Report found that legislative and regu latory restrictions were amo ng the m ost pervasive forms of restriction on competition in the Australian economy. have to review legislation that restricts competition by December 2000. Thereafter, legislation is to be reviewed every ten years. Governments have also agreed to ensure that any proposed new legislation complies with the above prin ciples. LEGISLATIVE REVIEW PRINCIPLES : REGULATION REFORM :' I I , ... I COMPETITION - - - - - - - - - I -tr- .... , COMPETITION FIGURE 7 39 Application to Local Government Loc al governm ent is subject to thr ee forms of Victorian law : State enabling legislation - laws establishing an d governing the operation ofl ocal government (Local GOI'/'rl1/J1 /'lI t Act 1989 (Vic)); other State legislation, including planning sch em es, conferring specific powers and responsibilities on local governm ent; and local laws made under po -wers conferred by the enabling legislation. In accordan ce with the Competition Principles traffic regu lation and parking; sh op trading hours; trading on foo tpaths and signage; itinerant traders; and local laws m ade subseq uen t to St ate Go vernment deregulation of a sector th at are co ntrary to that deregul atory intention. On 7 September 1995, th e Victorian Minister for Local Gove rn me nt made a refe r ral to th e Local Government Bo ard to co n du ct a review oflocallaws provisions con tained in Par t 5 of th e Local Government Act 1989, ir: p articular to assess how any adve rse impacts o n economic activity can be addressed. In undertaking th e review, the M inister requested that th e Bo ard should have regard to the Government's reform goals an d to the goa ls of National Competition Policy. In May 1996 th e Local Gove rn m en t Board released a discussion paper canvassing views on four po ssible opti ons for th e future ofJocal laws, as follows : 1. existing power of co uncils to make local laws on a wide range of topics would be maintained but backed by a voluntary code on th e preparation oflo cal laws consistent with agreed pri nciples, including m ore ex tensive procedures for co m m unity consultation and legal scru tiny; 2. existing power of council to m ake local laws retain ed but ne w statutory requirement s applied to for malise co mpliance wi th agreed principles, including more ex tensive procedures for community co nsultatio n and legal scru tiny; Agreement, the Victorian Government has prepared a timetable for the review and, where appropriate, reform of State Covernm ent legislation which restri cts competition, including restrictions contained in legislation confer ring spe cific powers an d responsibilities on lo cal government. Review of local laws Local laws which restr ict co m p etition mu st also b e reviewed an d, wh ere appro p riate, reformed over the period to th e year 2000. There are at present some 170 n local laws in place in Victoria. Those which were made by former cou ncils prior to ama lgamation are sunsetted one year after the abolition of those councils. While the local laws currentl -y in place cover a wide varie ty of matters, the overw helm ing majority are unlikely to have any impact on com pe tition . However, there are some areas in which loc al laws co uld be co n strued as restricting co m petition. These include: 3. adoption of model local laws on an agreed range of topics prepared jointly by State and local government, with local variations on these subject to more formal con sultation processes, and with councils retaining the right to introduce local laws not covered by the model provided they comply with agreed principles as above; and Annual reporting requirements The Com petition Principles Agreement includes a commitment byreach jurisdiction to publish' annua l.reports on progress wi th the review and reform of legislative restrictions on com petition. 'this reporting requirement commences:with the year ending 30 Jun e 1997. T he Minister for Planning and Local 4. statutory limits on the range of matters on which local laws can be made, possibly in combination with the model laws model outlined in option 3. Whichever of these options is ultim at ely adopted, the revocation or review oflocal laws that restrict co m p etitio n will be completed by no later than June 1999. In addition, by July 1997, approval processes for making or amend in g local laws will be in place to ensure th at such laws do not restrict competition unless it is demonstrated that the benefits of the restriction to the community as a whole outweigh the costs and that the objectives of the legislation can only be achieved by restricting competition. Government will.be responsible fQr providir1~ reports to the' Premier on pr9gress in impleme n ting the revie...v and reform oflocal laws which restrict co mpetition. Individua l councils will be respon sible for reporting annuall y on 'any new local laws whic h restrict competition. The Premi er will compile a rel'0rt tor Victo r ia that will be published in line with the requirements of the Competition Piiuciples Agreement. 41 7. STRUCTURAL REF ORM Application to Local Government " T I/e removal oj reglliatory restrictions 0 1/ competition lila}' not necessarilJ "" be s/!fficiellt tofos ter ~lTt'Cti/lc com petition in sectors CIIr rclltlJI domin ated by puhlic monopoli es.. , structural r~fo rlll oj ex isting pI/bUc monopolies Section 2 referred to the divestment that has taken place in recent years in Victoria of councils' water and sewerage services and electricity distribution businesses. These reforms, which have resulted in the progressive privatisation or corporatisation of a number of these businesses, have also allowed local government to focus on its core service and governance responsibilities. The Victorian situation now contrasts strongly with that in Queensland, and to a slightly lesser extent, New South Wales and Tasmania, where IIIay be required, as J~llI'erll ",e " ts II/lI'e "('cog" ised w itlt r~fiJrl l/s in place or IIl1der",ay iI/ II ""IIIber '!rsectors, " National Competition Policy Report of Independent Committee of Inq uiry, 1993 p.18S Background While each State and Territory Government remains free to determine its own agenda for the reform of public monopolies, the local government continues to playa significant role in the provision of utility services. With the divestment of councils' utility responsibilities, the structural reform provisions of the Competition Principles Agreement are not considered to be relevant to local government in Victoria. In the context of competitive tendering, however, similar principles will be applicable to the separation of a council's regulatory functions from activities exposed to competitive tender, as will implementation of competitive neutrality principles. Competition Principles Agreement contains provisions that apply where competition is to be introduced to a sector traditionally supplied by a public monopoly. All Governments have agreed that: before competition is iu rro duced to a sector traditionally supplied by a public monopoly, responsibilities for ind ustry regulation will be removed from the publ i c monopoly; and before competition is introduced to a market traditionally supplied by a public monopoly, or before a pub lic monopoly is privatised, a government w-ill review such matters as the entity's appropriate commercial objectives, sepa ration of natural monopoly from potentially competitive elements, separation of regulatory from commercial functions and implementation of competitive neutrality. 42 8. PRICES OVERSIGHT Application to Local Government 1/ J a e afir m is not subject to dfecti /il' ¥lr ll ta) ' The prices oversight provisions of the competitive pressure.. . it l",tP II I be (IMe to restrict Competition Principles Agreement are no t considered to be applicable to local government in Victoria as councils h ave few, if any, enterprises that are monopoly or near monopoly suppliers of goods or services. It is expected that the pricing of general alld clrarge higher prices tba« wOllld Ie J II possible ill col/testable market. This behaviour pl"icil/g' fllld can result is known CIS ' 111 0 11 0 1' 0 11' ill Iti.!her prices to consumers fw d a l m isallocation o resources." f National Competition Policy Report of Independent Comm ittee of Inquiry , 1993 p.270 council services in Victoria will become increasi n gly competitive over time through the continuin g implementation of compulsory competitive tendering. Background The Prices Surveillance Authority Act 1983 provides for prices oversight of private enterprises and Commonwealth Government Business Enterprises that are monopoly or near monopoly suppliers of goods or services. Under the Competition Principles Agreement, prices oversight of State and Territory business enterprises remains primarily the responsibility of th e State or Territory that owns the enterprise, However, State and Territory Governments have agreed to consider establishing independent sources of price oversight of their GBEs, where such oversight does not exist. The Prices Surveillance Authority Act has also been amended to permit price oversight of State and Territory Government businesses in certain circumstances. 43 9. ACCESS TO ESSE IIITIAL FACILITIES Application to Local Government " lllll'Odllci/lg competition ;11 sOllie markets requires com peti tors to Ill! as s u red of access to certa in facilittcs - rtjerred [acillsles ' - th at economically.. .. National Competition Policy Report of Independent Committ:ee of Inquiry. 1993 p.186 C'I/ /I /(/I II) tIS T h e essenti al services access provisions of th e Competition Principles Agreement are not 'esse ntial considered to be applicable to local government in Victoria. The access provisions concern the establishment of mechanisms to grant third parties legal 'rights' to negotiate access on reasonable terms to essential serv ices provided by certain infrastructure facilities . It is understood that these provisions relate only to access to services provided through "significant be d"J'li cated Background Access to strategic essential tacilities may be necess ary if a party is to corrrpete in certain markets . These essential faci I itic: will be natural monopolies where access is necess ary to enable effective competition in a market. Under th e Competition Principles Agreement, all Governments have agreed o n a framework for third party access to services provided by sign ificant infrastructure facil .i tie. . The Co mmonwealth Comp etition Policy R ejorm Act 1995 establishes a n ational regime for third infrastructure assets" which have natural m onopoly characteristics. With the recent divestment oflocal government's water an d sewerage service and electricity distribution responsibilities , it is highly unlikely that Victorian local gove rnmen t would be co nsidered responsible for "significant infrastructure assets" . However, the concept of providing access to council facilities in the context of compulsory compe titive tendering is one which local councils mi gh t consider as a strategy for stim ulating greater co m petition . When calling for tenders for the supp ly of services to its ratep ayers, for example, the City of Melbourne offers pr ivate tenderers access to council facilities and equ ipment on th e same terms as these are available to its in-house team , CityWide Services Solutions Pty Ltd . party access to services provided by means of nat ionally signific ant infrastructure facilities . The Co mpetition Principles Agreement provid es for th e establishment of State o r Territory based access regimes in accor d anc e with a set of agreed principles. 44 10. STATE/LOCAL GOVERNMENT RELATIONS In implementing competitive neutrality policies, all Governments have agreed to impose full Commonwealth, State and Territory taxes or tax equivalents on those of their significant Government business enterprises which are classified as Public Trading Enterprises or Public Financial Enterprises. The Statement of Victorian Government Policy on Competitive Neutrality indicates that State Government Business Enterprises subject to Modell competitive neutrality policies will generally be liable for all State taxes and charges that would apply were the business in private ownership and will also be liable for Commonwealth tax equivalents and for local government rates or rate equivalents. Conversely, significant local government business enterprises with a primary commercial or profit-making focus should be liable for all relevant Commonwealth and State taxes or tax equivalents. Where a State government business is privatised or partially privatised, it is likely to be rateable. Under a 1993 Victorian Government policy, privatised entities are liable to pay rates to local government. In addition, in the case of certain large scale assets such as electricity generation plants, entities are required to make payments in lieu of rates. As the Victor ian Government progressively reviews the future structure and ownership of particular business enterprises, decisions on the rateability of assets are being made. As a result of reforms made to date: the five privatised electricity distribution companies are now liable for local government rates; electricity generation companies are now required to make payments to councils in lieu of rates, by agreement with the council, both prior to and following privatisation; the three metropolitan water distribution Current tax/rate status of State and Local Government business enterprises The current situation with regard to liability of local government for State taxes is that: local government activities are generally liable for State taxes where the activity is undertaken primarily for profit or commercial purposes; and local government activities undertaken for public or municipal purposes are generally exempt from State taxes. Conversely, property used by State government entities primarily for public (as opposed to commercial) purposes is generally exempt from local government rates, but State government businesses will generally be liable for local government rates. However, there is a general exemption for property vested in the Crown. companies (which are State owned companies) - City West Water, Yarra Valley Water and South East Water - are not specifically exempt from rates but most of the land which they occupy, being Crown land, is not rateable; and with respect to ports, the Ports of Portland and Geelong have been sold and subsequent owners will be rateable. The Melbourne Ports Corporation, which will carry out the functions of a commercial landlord, will remain in State ownership but will be liable for rates . 45 To facilitate the future application of competitive neutrality principles to the State and local government sectors, the Victorian Government is prepared to give consideration to reciprocal charging betw-een the State and local government sectors through removal of all current tax and rate exemptions. However, taxing between levels of government should only be considered in the context of a comprehensive review of national taxation policy and implemented as part of a broader package of tax reform. 46 APPENDIX A: LIST OF PUBLICATIONS COMPULSORY COMPETITIVE TENDERING Audit of CCT Procedures in Councils 1995, Office of Local Government, November 1995 . Minister's Review Local Government in 1993, Office of Local Government, December 1993 . Better Service, Best Value: Competitive Tendering Minister's Report on the First Year ofCCT, Office Of Local Government, November 1995. Minister's Review: It's Coming Together Local Government in 1994, Office of Local Government, December 1994. Compulsory Competitive Tendering Draft Report, Local Government Board, November 1993. Minister's Review: First Fruits of Reform Local Government in 1995, Office of Local Government, January 1996. Compulsory Competitive Tendering Final Report, Local Government Board, December 1993. Report on Taxation Issues in Compulsory Competitive Tendering in Local Government, Arthur Andersen, August 1995 Compulsory Competitive Tendering Models For Organisational Structure, Office of Local Government (Nicole Morgan), December 1994. Value For Money Case Studies in Competitive Tendering and Contracting in Local Government, Office of Local Government, June 1994. Compulsory Competitive Tendering Procedures Manual, Local Government Industry Working Party, August 1994. Victorian Local Government Code Of Tendering, Office of Local Government, August 1995. 47 APPENDIX B: COM PETITION PRINCIPLES AGREEMENT Competition Principles Agreement between "Commission" means the Australian Competition and Consume r Commission established by the Trade Practices Act ; The Commonwealth of Australia The State of New South Wales "Commonwealth Minister" means the The State of Victoria The State of Queensland The State of Western Australia The State of South Australia The State of Tasmania The Australian Capital Territory, and The Northern Territory of Australia Commonwealth Minister responsible for competition policy; "constitutional trade or co m m erce" means: (a) trade or commerce among the States; (b) trade or commerce between a State and a Territory or between two Territori es; or (c) trade or commerce between Australia WHEREAS the Council of Australian Governments at its m eeting i n Hobart on 25 February 1994 agreed to the principles of competition policy articulate d in the report of the National Competition Policy Review; and a plac e outside Au stralia; " C ouncil" means the National Competition Council established by the Trade Practices Act; "jurisdiction" m eans the AND WHEREAS the Parties intend to achieve and maintain consistent and complementary competition laws and policies which will apply to all businesses in Australia regardless of ownership; Commonwealth, a State, the Australian Capital Territory or the Northern Territory of Australia; "Party" means a jurisdiction that has executed, and has n ot withdraw n from, this Agreement; " Trade Practices Act" means the 'Trade The Commonwealth of Australia The State of New South Wales The State of Victoria The State of Queensland The State of Western Australia The State of South Australia The State of Tasmania The Australian Capital Territory, and The Northern Territory Of Australia agree as follows: Interpretation Practices Act 1974. (2) Where thi s Agre em ent refers to a provision in legislation which has no t been enacted at the date of comm en cem ent of this Agreement, or to an entity which has not been established at the date of com m encemen t of this Agreement, thi s Agreement will apply in respect of the pro vision or entity from the date when th e provision or entity commences operation. (3) Without limiting the m atters that may 1. (1) In this Agreem ent, unless the context indicates otherwise: be taken into account, where this Agreement calls: 48 (a) for the benefits of a particular policy or course of action to be balanced against the costs of the policy or course of action; or (b) for the merits or appropriateness of a particular policy or course of action to be determined; or (c) for an assessment of the most effective means of achieving a policy objective; the following matters shall, where relevant, be taken into account: (d) government legislation and policies relating to ecologically sustainable development; (e) social welfare and equity considerations, including community service obligations; Prices Oversight of Government Business Enterprises 2. (1) Prices oversight of State and Territory Government business enterprises is primarily the responsibility of the State or Territory that owns the enterprise. (2) The Parties will work cooperatively to examine issues associated with prices oversight of Government business enterprises and may seek assistance in this regard from the Council. The Council may provide such assistance in accordance with the Council's work program. (3) In accordance with these principles, State and Territory Parties will consider establishing independent sources of price oversigh t advice where these do not exist. (4) An independent source of price (f) government legislation and policies relating to matters such as occupational health and safety, industrial relations and access and equity; (g) economic and regional development, including employment and investment growth; (h) the interests of consumers generally or of a class of consumers; (i) the competitiveness of Australian businesses; and oversight advice should have the following characteristics: (a) it should be independent from the Government business enterprise whose prices are being assessed; (b) its prime objective should be one of efficient resource allocation but with regard to any explicitly identified and defined community service obligations imposed on a business enterprise by the Government or legislature of the jurisdiction that owns the enterprise; (c) it should apply to all significant Government business enterprises that are monopoly, or near monopoly, suppliers of goods or services (or both); (d) it should permit submissions by interested persons; and (e) its pricing recommendations, and the reasons for them, should be published. G) the efficient allocation of resources. (4) It is not intended that the matters set out in subclause (3) should affect the interpretation of "public benefit" for purposes of authorisations or notifications under the Trade Practices Act. (5) This Agreement is neutral with respect to the nature and form of ownership of business enterprises. It is not intended to promote public or private ownership. 49 (5) A Party may generally or on a case-bycase basis: (a) with the 3 g r c e'lIl C n l (d) the Council has recommended that the Commonwealth Minister declare the enterprise for price surveillance by the Commission; and (e) the Commonwealth Minister has consulted the Party that owns the enterprise. of the Commonwealth, subj ect its Government business enterprises to a prices oversight rn echanism administered by the Commission; or (b) with the agreement of another jurisdiction, subject its Government business enterprises to the pricing oversight process of that jurisdiction. (6) In the absence of the consent of the Party that owns the enterprise, a State or Territory Government business enterprise will only be subj ect to a prices oversight mechanism administered by the Commission it: (a) the enterprise is not already subject to a source of pri c e oversight advice which is independent in terms of the principles set out in subclause (4); Competitive Neutrality Policy and Principles 3. (1) The objective of competitive neutrality policy is the elimination of resource allocation distortions arising out of th e public ownership of entities engaged in significant business activities: Government businesses should not enjoy any net competitive advantage simply as a result of their public sector ownership. These principles only apply to the business activities of publicly owned entities, not to the non-business, nonprofit activities of these entities. (2) Each Party is free to determine its own agenda for the implementation of competitive neutrality principles. (3) A Party may seek assistance with the implementation of competitive neutrality principles from the Council. The Council may provide such assistance in accordance with the Council's work program. (4) Subject to subclause (6), for significant Government business enterprises which are classified as "Public Trading Enterprises" and "Public Financial Enterprises" under the Government Financial Statistics Classification: (b) a jurisdiction which considers that it is adversely affected by the lack of price oversight (an «affected jurisdiction") has consulted the Party that owns the enterprise, and the matter is not resolv ed to the satisfaction of the affected jurisdiction; (c) the affected jurisdiction has then brought the matter to the attention of the Council and the Council has decided: (i) that the conditi o n in paragraph (a) exists; and (ii) that the pricing of the enterprise has a significant direct or indirect impact on constitutional trade or commerce; 50 (a) the Parties will, where appropriate, adopt a corporatisation model for these Government business enterprises (noting that a possible approach to corporatisation is the model developed by th e intergovernmental committee responsible for GTE National Performance Monitoring); and (b) the Parties will impose on the Government busi ness enterprise: (i) full Commonwealth, State and Territory taxes or tax equivalent systems; (ii) debt guarantee fees directed towards offsetting th e competitive advantages provided by government guarantees; and (iii) those regulations to which private sector businesses are normally subject, such as those relating to the protection of the environment, and planning and approval processes, on an equivalent basis to private sector competitors. (5) Subject to subclause (6), where an (6) Sub clauses (4) and (5) only require the Parties to implement the principles specified in those subclauses to th e extent that the benefits to be realised from implementation outweigh the costs. (7) Subparagraph (4)(b)(iii) shall not be interpreted to require the removal of regulation which applies to a Government business enterprise or agency (but which does not apply to the private sector) where the Party responsible for the regulation considers the regulation to be appropriate. (8) Each Party will publish a policy statement on competitive neutrality by June 1996. The policy statement will include an implementation timetable and a complaints mechanism. (9) Where a State or Territory becomes a Party at a date later than December 1995, that Party will publish its policy statement within six months of becoming a Party. (10) Each Party will publish an annual report on the implementation of the principles set out in sub clauses (1), (4) and (5), including allegations of non-compliance. Structural Reform of Public Monopolies agency (other than an agency covered by subclause (4)) undertakes significant business activities as part of a broader range of functions, the Parties will, in respect of the business activities: (a) where appropriate, implement the principles outlined in subclause (4); or (b) ensure that the prices charged for goods and services will take account, where appropriate, of the items listed in paragraph 4(b), and reflect full cost attribution for these activities. 4. (1) Ea ch Party is free to determine its own agenda for the reform of public mon opolies. (2) Before a Party introduces competition to a sector traditionally supplied by a public monopoly, it will remove from th e public monopoly any responsibilities for industry regulation. The Party will relocate industry regulation functions so as to prevent the former monopolist enjoying a regulatory advantage over its (existing and potential) rivals. 51 (3) Before a Party introduces competition to a market traditionally supplied by a public monopoly, a n d before a Party privatises a public monop oly, it wi ll undertake a review i n to: (a) the appropriate commercial objectives for th e public monopoly; Legislation Review 5. (1) The guiding principle is that legislation (including Acts, enactments, Ordinances or regulations) should not restrict competition unless it can be demonstrated that: (a) the benefits of the restriction to the community as a whole outweigh the costs; and (b) th e merits of separating any natural monopoly elements from potentially comp etitive elements of the publi c monopoly; (c) the merits of separatin g potentially competitive elements of the pub lic monopoly; (d) the most effective means of separating regulatory functions from commercial functions of the public monopoly; (e) the most effective means of implementing th e competitive neutrality principles set out in this Agreement; (b) the objectives of the legislation can only be achieved by restricting competition. (2) Subject to subclause (3), each Party is free to determine its own agenda for the reform of legislation that restricts competition. (3) Subject to subclause (4) each Party will develop a timetable by June 1996 for the review, and where appropriate, reform of all existing legislation that restricts competition by the year 2000. (4) Where a State or Territory becomes a Party at a date later than December 1995, that Party will develop its timetable within six months of becoming a Party. (5) Each Party will require proposals for new legislation that restricts competition to be accompanied by evidence that the legislation is consistent with the principle set out in subclause (1). (6) Once a Party has reviewed legislation that restricts competition under the principles set out in subclauses (3) an d (5), the Party will systematically review the legislation at least once every ten years. (f) the merits of any community service obligations undertaken by the public monopoly and the best means of funding and delivering any mandated community service obligations; (g) the price and service regulations to be applied to the industry; and (h) the appropriate financial relationships between the ow n e r of the public monopoly and the public monopoly, including the rate of return targets , dividends and cap ital structure. (4) A Party may seek assistance with such a review from the Council. The Council may provide such assistance in accordance with the Council's work program. 52 (7) Where a review issue has a national dimension or effect on competition (or both), the Party responsible for the review will consider whether the review should be a national review. If the Party determines a national review is appropriate, before determining the terms of reference for, and the appropriate body to conduct the national review, it will consult Parties that may have an interest in those matters. (8) Where a Party determines a review should be a national review, the Party may request the Council to undertake the review. The Council may undertake the review in accordance with the Council's work program. (9) Without limiting the terms of reference of a review, a review should: (a) clarify the objectives of the legislation; (b) identify the nature of the restriction on competition; (c) analyse the likely effect of the restriction on competition and on the economy generally; (d) assess and balance the costs and benefits of the restriction; and (e) consider alternative means for achieving the same result including non-legislative approaches. (10) Each Party will publish an annual report on its progress towards achieving the objective set out in subclause (3). The Council will publish an annual report consolidating the reports of each Party. Access to Services Provided by Means of Significant Infrastructure Facilities 6. (1) Subject to subclause (2), the Commonwealth will put forward legislation to establish a regime for third party access to services provided by means of significant infrastructure facilities where: (a) it would not be economically feasible to duplicate the facility; (b) access to the service is necessary in order to permit effective competition in a downstream or upstream market; (c) the facility is of national significance having regard to the size of the facility, its importance to constitutional trade or commerce or its importance to the national economy; and (d) the safe use of the facility by the person seeking access can be ensured at an economically feasible cost and, if there is a safety requirement, appropriate regulatory arrangements exist. (2) The regime to be established by Commonwealth legislation is not intended to cover a service provided by means of a facility where the State or Territory Party in whose jurisdiction the facility is situated has in place an access regime which covers the facility and conforms to the principles set out in this clause unless: (a) the Council determines that the regime is ineffective having regard to the influence of the facility beyond the jurisdictional boundary of the State or Territory; or (b) substantial difficulties arise from the facility being situated in more than one jurisdiction. 53 (3) For a State or Territory access regime to conform to the principles set out in this clause, it should: (a) apply to services provided by means of significant infras t ructure facilitie s where: (i) it would not be economically feasible to duplicate the facility ; (ii) access to the service is necessary in order to permit effective competition in a downstream or upstream market; and (d) Any right to negotiate access should include a date after which the right would lapse unless review ed and subsequently extended; however, existing contractual rights and obligations should not be automatically revok ed . (e) The owner of a facilit y th at is used to provide a ser vice should use all reason able endeavours to accommodate the requirements of persons seeking access. (f) Access to a service for persons (iii) the safe use of the facility by th e person seeking access can be ensured at an economically feasible cost and, if there is a safety requirement, appropriate regulatory arrangements exist; and (g) Where th e owner and a person seeking access cannot agree on terms and conditio ns for access to the servic e, the y should be required to appoint and fund an independent body to resolve the dispute, if the y have not already done so. (h) The decisions of the dispute resolution body sho uld bind the parties ; however, rights o f appeal under existing legislative provisions should be pres erved. (i) II! deciding on the terms and conditi ons for access, the dispute resolution body sho uld take into account: (i) the owner 's legitimate bu siness int erests and investm ent in the facility ; (ii) the costs to the owner of (c) Any right to negoti a te access sho uld provide for an enforcement pro cess. providing access, in cluding any costs of extending th e facility but not costs associated with losses arisin g from increased competition in upstre am or downstream markets; seeking access need not b e on exactl y the same terms and conditions. (b) incorporate the principles referred to in subclause (4). (4) A State or Territory access regime should inc orporate th e following principles: (a) Wherever possible third party access to a service provided by means of a facility should be 0 Jl the basis of ter m s and conditions agreed be twe en the owner of the facili ty and the person seeking access. (b) Where such agreerrrenr cannot be reached, Governments should establish a right for persons to n egot iate access to a service pro vided by me ans of a facili t y. 54 (iii) the economic value to the owner of any additional investment that the pers on seeking access or the owner has agreed to undertake; (iv) the int erests of all persons holding contracts for use of the facility ; (v) firm and binding contractual obli gations of the owner or other persons (or both) already using the facility; (vi) the operatio nal and technical requirements necessary for the safe and reliable operation of the facility; (vii) the economically efficient operation of the facility ; and (viii) the benefit to the public from having co m petitive markets. (k) If there has been a m ateri al change in circumstances, th e parties sh ould be able to apply for a revocation or modification of th e access arrangement which was made at the conclusion of the dispute resolution process. (I) The dispute resolution body should only impede the existing right of a person to use a facility where the dispute resolution body has considered whether there is a case for compensation of that p erson and, if appropriate, determined such compensation. (m) The owner or user of a service shall not engage in conduct for the purpose of h indering access to that service by anothe r person. (n) Separate accounting arrangements should be required for the elements of a busines s which are covered by the access regime. (0) The dispute resolution body, or relevant authority where provided for under specific legislation , should have access to finan cial statem en ts and other accounting information pertaining to a service. (p) Where more th an one State or Territory acce ss regime applies to a service, th ose regim es sho uld be consistent and, by means of vested jurisdiction or o ther cooperative legislative scheme, provide for a single process for persons to seek access to the servi ce, a single body to resolve disputes abou t any aspect of access and a single forum for enforcement of access arrangements. G) The own er m ay be required to extend, or to permit extension of, the facility th at is used to provide a service if nec essary but this would be subj ect to : (i) such ext ension being technically and eco no m ically feasible and co nsistent with th e safe and reliable operatio n of th e facility; (ii) the owner's legit im ate business interests in the facility being prot ected; an d (iii) the terms of access for the thi rd party takin g into acco unt the costs borne by the part ies for th e ext ension an d the economic benefits to th e parties resulting from the ext ension . 55 Application of the Principles to Local Government 7. (1) The principles set out i n this Agr eement will apply to local government , even #' though local governments are not Parties to this Agreement. Each State and Territory Party is responsible for applying those principles to local govern ment. (2) Subject to subclause (3 ) , wh ere clauses 3, 4 and 5 permit each Party to determine its own agenda for the imple men tation of the principles set out i J1 tho se clauses, each State and Territory Party will publish a statement by June 1996: (a) which is prepared i n consultation w ith lo cal government; and (b) which specifies the application of the principles to particular local government activit ies and funct ions . (3) Where a State or Territory be com es a Party at a date later than D ecember 1995, that Party will publish its statement within six months of be coming a Party. 56