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About the National Competition Policy

How the National Competition Policy came about

By the early 1990s Australia recognised that it needed to develop its competition policy arrangements if they were to support further microeconomic reform.

The then Prime Minister observed that expanding the scope of the Trade Practices Act would provide significant benefit (Building a Competitive Australia 12 March 1991). At a Special Premier’s Conference in July 1991, government leaders agreed that competitive markets would benefit Australia, and that a national approach to competition policy would be important.

On 4 October 1992, the Prime Minister announced an independent inquiry into a national competition policy for Australia (Statement by the Prime Minister on the National Competition Policy and Terms of Reference of 4 October 1992). The inquiry, which was chaired by Professor Frederick Hilmer, reported on 25 August 1993. The report of the inquiry, known as the Hilmer Report advocated:

  • extending the reach of the Trade Practices Act
  • introducing arrangements for third party access to nationally significant infrastructure
  • introducing competitive neutrality so government businesses do not enjoy unfair advantages
  • restructuring public monopoly businesses to increase competition
  • reviewing all laws that restrict competition, and
  • extending prices surveillance to state and territory government businesses to deal with circumstances where the other reforms are inadequate.

On 25 February 1994 the Council of Australian Governments endorsed the principles of the competition policy outlined in the Hilmer Report.

The National Competition Policy agreements

On 11 April 1995, Australia’s governments, acting on the Hilmer Report recommendations, agreed to the National Competition Policy and Related Reforms. The National Competition Policy component reflected the Hilmer recommendations. The related reforms were pre-existing commitments in the areas of electricity, gas, water reform and road transport.

The legislative package comprised the Commonwealth Competition Policy Reform Act 1995 and associated state/territory application legislation. Governments also signed three agreements: the Competition Principles Agreement, the Conduct Code Agreement and the Agreement to Implement the National Competition Policy and Related Reforms.

The Competition Policy Reform Act amended the competitive conduct rules in the Trade Practices Act extending their coverage to state/territory and local government businesses and to unincorporated businesses. It also created Part IIIA of the Trade Practices Act to provide a national regime for access to the services provided by nationally significant infrastructure facilities and amended the Prices Surveillance Act 1983 to extend arrangements to state and territory business enterprises.

The Competition Principles Agreement set out the principles agreed by governments for implementing the National Competition Policy, including on prices oversight, structural reform of public monopolies, review and reform of restrictive regulation, competitive neutrality and third party access to infrastructure services, and the application of these principles to local government.

The Conduct Code Agreement set out the basis for extending the coverage of the Trade Practices Act. It committed state and territory governments to extending the prohibitions against anti-competitive behaviour in the Trade Practices Act to virtually all businesses in Australia. In addition, it required each government to notify the Australian Competition and Consumer Commission when it enacts legislation that relies on section 51 of the Trade Practices Act. Section 51 enables state and territory governments to exempt conduct from the prohibitions against anti-competitive behaviour in Part IV of the Trade Practices Act.

The Agreement to Implement the National Competition Policy and Related Reforms set out the reform commitments agreed by governments, covering the National Competition Policy reforms, national markets in electricity and gas, water reform and national road transport regulations, and provided for payments by the Australian Government to the states and territories where they achieve satisfactory progress with reform implementation.

The major reforms implemented under the National Competition Policy in summary

The National Competition Policy and Related Reform package, as specified by the three National Competition Policy agreements, involved:

  • extending trade practices laws prohibiting anti-competitive activities (such as the abuse of market power and market-fixing) to all businesses – previously most government owned and some private businesses were exempt
  • introducing competitive neutrality so that government owned businesses have no advantage over their privately-owned competitors because of their public ownership
  • developing a National Access Regime to enable businesses to use ‘nationally significant’ infrastructure (like airports, electricity cables, gas pipelines and railway lines) which are owned by government and other businesses
  • the review and where appropriate reform of all laws that restrict competition unless the benefits of the restriction to the community as a whole outweigh the costs and the objective of the law can be achieved only by restricting competition, and a requirement that all new legislation that restricts competition meet this test
  • consideration being given to extending price monitoring to all government businesses that have a market monopoly
  • specific ‘related reforms’ to increase competition in key infrastructure services of the economy on which businesses rely – such as the gas, electricity and road transport sectors, where there were pre-existing reform commitments
  • specific ‘related reforms’ designed to better manage Australia’s water resources to promote efficient use of water and to achieve improved environmental outcomes, where there were pre-existing reform commitments
  • the implementation of national standards in accord with agreed guidelines and principles and advice from the Office of Regulation Review.

Who implemented the National Competition Policy

Australia’s governments through the Council of Australian Governments were responsible for determining the National Competition Policy program (via the three National Competition Policy agreements), setting reform agendas consistent with the agreements, conducting reviews and implementing reforms.

The National Competition Council was created on 6 November 1995 as an independent advisory body for governments on National Competition Policy issues. Although funded by the Australian Government, the National Competition Council’s responsibilities were to all Australian governments. The National Competition Council was tasked with assessing progress by all governments in implementing the reforms to which they had committed under the National Competition Policy.

The former Trade Practices Commission and Prices Surveillance Authority merged to become the Australian Competition and Consumer Commission, whose primary function is to administer the Trade Practices Act. The Act also created the Australian Competition Tribunal (formerly the Trade Practices Tribunal), which is a quasi-judicial review body.

National Competition Policy reform implementation assessments

The Agreement to Implement the National Competition Policy and Related Reforms required the National Competition Council to assess governments’ progress with implementing their reform commitments prior to 1 July 1997, 1999 and 2001. There were three tranches of (indexed) funding commencing in 1997-98, 1999-2000 and 2001-02, which were to be distributed on a per capita basis among those jurisdictions that were assessed to have met their reform commitments.

At its meeting on 3 November 2000, the Council of Australian Governments determined that the National Competition Council should annually assess governments’ progress with implementing reform from 2001 up to and including 2005. This decision extended the timeframe for the National Competition Policy program to 2005.

The Council of Australian Governments originally set a timetable of five to seven years for implementing the 1994 water reform program, envisaging that all reforms would be completed by 2001. In January 1999, Council of Australian Governments’ senior officials extended the timeframe for completing the water reform program from 2001 to 2005. Subsequently the Intergovernmental Agreement on a National Water Initiative reached by the Council of Australian Governments on 25 June 2004 augmented the National Competition Policy water reform program.

To ensure transparency and to assist the Council, each government provided an annual report on its progress with implementing the National Competition Policy program. Governments published these annual reports in the year of each assessment, commencing in 1997. As part of the first tranche, assessment, all governments published a policy statement on competitive neutrality, a timetable for the review and where appropriate reform of all legislation that restricts competition and a statement specifying the application of the principles in the Competition Principles Agreement to local government.

The National Competition Council provided its assessments of reform implementation progress to the Australian Government Treasurer. Progress assessments covered the Australian Government as well as the states and territories. The progress assessment reports became publicly available when the Treasurer announced a decision on the distribution of transfers: the National Competition Council’s assessment reports for 1997, 1999, 2001, 2002, 2003, 2004 and 2005 are publicly available.

As well as the annual assessments, the National Competition Council undertook supplementary assessments and deferred assessments over the period of the National Competition Policy program. These assessments focussed on particular issues, where there was evidence that reform implementation was under way but not fully implemented at the time of the annual assessment.

The Agreement on a National Water Initiative refreshed and extended the National Competition Policy water reform program and created the National Water Commission, which performed the 2005 National Competition Policy assessment of water reform implementation.

The National Competition Council's final assessment of governments’ implementation of the National Competition Policy and Related Reforms (in 2005) found that:

  • all state and territory governments had extended the Trade Practices Act prohibitions against anti-competitive behaviour, such that the Competition Code applies to all persons, including the Crown (in so far as it carries on a business), within a jurisdiction’s reach
  • all Australian governments had determined that independent prices oversight arrangements would be in the public interest, with the function generally residing within regulatory authorities, but also undertaken by other institutions such as competitive neutrality units
  • in all states and territories, major government business enterprises had been corporatised, other significant businesses exposed to competitive neutrality principles, and competitive neutrality complaints units established
  • governments generally met public monopoly structural reform commitments, in particular recognising the need to remove regulatory functions from government businesses that have private sector competitors
  • in aggregate terms, around 85 per cent of the legislation nominated by governments in 1996 had been reviewed and, where appropriate, reformed, such that there were fewer unwarranted competition restrictions
  • all governments have legislation gatekeeping mechanisms that could, in principle, operate to ensure compliance with National Competition Policy commitments, although it was not clear whether all gatekeeping processes were delivering appropriate outcomes in practice
  • part IIIA of Trade Practices Act had been established to provide three pathways for a party to seek access to an infrastructure service
  • there is an interconnected national electricity market in eastern and southern Australia, such that customers are able to choose suppliers (generator, retailer and trader), generation and retail suppliers can enter the market, and there can be interstate and intrastate trade in electricity
  • there is in essence national free and fair trade in gas and the Australian gas market is increasingly competitive, dynamic and efficient
  • road transport initiatives relating to registration charges for heavy vehicles, transport of dangerous goods, vehicle operations, heavy vehicle registration, driver licensing and compliance and enforcement had been implemented
  • water reform had progressed though there was significant remaining work.

The Productivity Commission assessed the impact of the National Competition Policy reforms on rural and regional Australia (1999) and reviewed the National Competition Policy Reforms (2005). The Productivity Commission’s 2005 report found that the National Competition Policy had delivered substantial benefits to the Australian community which, overall, have greatly outweighed the costs but warned that there is the scope and need to do better.

National Competition Policy payments to the states and territories

Under the Agreement to Implement the National Competition Policy and Related Reforms, there were three tranches of payments from the Australian Government to the states and territories, commencing in 1997‑98. The payments were made to the states and territories (on a per capita basis), where they achieved satisfactory progress against their reform commitments.

The payments were the means by which gains from reform were distributed throughout the community. The payments recognised that, although the states and territories were responsible for significant elements of the National Competition Policy, much of the direct financial return accrued to the Australian Government via increases in taxation revenue that flows from greater economic activity.

The payments originally comprised a component that maintained the real per capita value of the Financial Assistance Grants pool (discontinued when the Goods and Services Tax commenced) and a competition payment component. The competition payment component totalled $200 million (in 1994-95 dollars) for the first tranche, $400 million in the second tranche commencing in 1999-2000 and $600 million in the third tranche commencing in 2001-02. Competition payments were made to the states and territories until 2005‑06.

The National Competition Council made recommendations on the allocation of National Competition Policy payments in its tranche assessments. The Australian Government decided on the quantum of the payments after considering the National Competition Council’s advice on each jurisdiction’s progress.

Where the National Competition Council considered that a government had not satisfactorily complied with its reform commitments or had not indicated a preparedness to address non-compliance, it recommended that the Australian Treasurer impose a permanent payments deduction. Where a government had indicated a preparedness to address non-compliance, the National Competition Council recommended a specific payments suspension, being a temporary hold on payments to allow further time for the matter to be addressed. The quantum of the deduction or suspension depended on the significance of the breach.

Annual NCP payments received by jurisdictions ($ million)

Jurisdiction 1997-98 (a) 1998-99 (a) 1999-00 (a) 2000-01 (a) 2001-02 (a) 2002-03 (a) 2003-04 (a) (b) 2004-05 (a) (b) 2005-06 (b) (c)
New South Wales126.5138.7211.9155.9242.5251.8203.5233.6292.5
Victoria92.8102.0153.8114.7179.6182.4178.7201.6197.9
Queensland74.281.6120.473.0147.9138.987.9143.3178.7
Western Australia38.442.462.645.571.172.033.653.571.0
South Australia34.338.454.235.955.757.140.750.454.3
Tasmania12.613.914.811.217.417.717.219.819.0
ACT6.27.010.97.511.612.411.013.612.7
Northern Territory11.213.019.14.57.67.55.98.48.0
Total396.2436.9647.7448.0733.3739.9578.5724.2834.1
(a) From Final Budget Outcome documents.
(b) Each jurisdiction's payments reflects the application of permanent deductions and suspensions.
(c) Costello, the Hon. P (Treasurer) 2005, 'National Competition Payments to States and Territories for 2005', Media release, 15 December
Note 1: Totals may not add due to rounding
Note 2: Figures up to and including 1999-2000 include Financial Assistance Grants

Following on from the National Competition Policy

On 3 June 2005, the Council of Australian Governments endorsed the need to maintain reform momentum and to lock in the substantial benefits achieved and agreed to review the National Competition Policy, with the objective of determining a new reform agenda and accompanying institutional arrangements.

At this meeting, the Council of Australian Governments noted that a collaborative national approach had been ‘the cornerstone of successful implementation of the National Competition Policy reform agenda. It drew together the reform priorities of the Commonwealth, states and territories, to improve Australia's overall competitiveness and raise living standards – with Australian income per head rising from 16th in the OECD in 1990 to 8th in 2004.’

The Council of Australian Governments agreed that it was important not to be complacent about the continued performance of the Australian economy and that a broader economic reform agenda – achieved through collaborative action on issues of national importance – had the capacity to deliver much more to the community. It agreed among other things to review the National Competition Policy to assess the effectiveness of the existing National Competition Policy arrangements, focusing on a possible new national reform agenda and identifying practical options for the implementation, monitoring and assessment of any new agenda.

Arising from its review of the National Competition Policy, on 10 February 2006, the Council of Australian Governments agreed to the National Reform Agenda and supporting institutional arrangements. The objective of the National Reform Agenda was to enhance the nation’s human capital and to continue competition reform and regulatory reform. Under the competition stream, governments recommitted to the legislation review principles in the Competition Principles Agreement and to completing their outstanding priority legislation reviews under the National Competition Policy. Governments also committed to establish and maintain effective arrangements for maximising the efficiency of new and amended regulation via, among other things, effective gatekeeping mechanisms and regulation impact analysis.

On 13 April 2007 the Council of Australian Governments agreed that the COAG Reform Council would monitor reform progress and assess the costs and benefits of reforms referred to it unanimously by the Council of Australian Governments, and that the National Competition Council would undertake functions under part IIIA of the Trade Practices Act in relation to third-party access to infrastructure. The Prime Minister announced on 6 June 2007 that the COAG Reform Council had commenced its work.