Competitive Neutrality Matrix

2015-16 Heads of Treasuries
Competitive Neutrality Matrix

February 2017

Contents

Summary

Competitive neutrality assessment criteria

Background to competitive neutrality in Australia

Commonwealth Competitive Neutrality Matrix 2015-16

New South Wales Competitive Neutrality Matrix 2015-16

Victoria Competitive Neutrality Matrix 2015-16

Queensland Competitive Neutrality Matrix 2015-16

Western Australia Competitive Neutrality Matrix 2015-16

South Australia Competitive Neutrality Matrix 2015-16

Tasmania Competitive Neutrality Matrix 2015-16

Australian Capital Territory Competitive Neutrality Matrix 2015-16

Northern Territory Competitive Neutrality Matrix 2014-15

South Australia Competitive Neutrality Matrix 2015-16

Summary

•The Competitive Neutrality Matrix Reports contain each jurisdiction’s assessment of how well their government business enterprises (GBEs) have complied with the principles of competitive neutrality (CN). Specifically, CN compliance assessments are made against 16criteria derived from the 1995 Competition Principles Agreement (CPA) and the 2006 Competition and Infrastructure Regulation Agreement (CIRA).

•While the 1995 CPA applied to ‘significant GBEs’ and to the activities of other agencies that undertake ‘significant business activities’, the 2006 CIRA aimed to ‘enhance the application of competitive neutrality principles to government business enterprises engaged in significant business activities in competition with the private sector’. Reflecting the CIRA’s focus on GBEs, most CN Matrix Reports restrict their assessments to GBEs and do not provide assessments for other agencies that are also engaged in significant business activities.

•The 2015-16 Report provides assessments for a total of 99 entities (see table). While most jurisdictions (NSW, Victoria, Queensland, South Australia and Tasmania) reported on
9-15entities, WA reported on 27 GBEs (including 10 that have not yet been formally assessed as subject to competitive neutrality) while the Commonwealth, Northern Territory and the ACT had six or less.These entities were responsible for, amongst other things, ports, rail tracks, motorways, energy, water, housing, communications and forestry.

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South Australia Competitive Neutrality Matrix 2015-16

Competitive neutrality assessment criteria

Note:In each matrix report, ‘Yes’/’No’ signifies that the GBE is compliant/non-compliant with that criterion. For example, a GBE is compliant with the ‘regulatory functions’ criterion if it does not exercise any relevant regulatory or planning approval functions. Furthermore, a GBE may be compliant for various reasons. For example, it may be compliant with tax neutrality because it does not have any special tax exemptions or because it does have such exemptions but pays corresponding tax neutrality payments.

Background to competitive neutrality in Australia

As part of the 1995 Competition Principles Agreement(CPA), Commonwealth, State and Territory governments agreed that:

The objective of competitive neutrality policy is the elimination of resource allocation distortions arising out of the 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. (CPA3.3(a))

This objective was supported by a series of CN principles that applied to all ‘significant Government business enterprises’ (GBEs) and, where appropriate, to other agencies that undertake ‘significant business activities’ (CPA 3.5(a)). In summary, these principles are:

•Corporatisation (significant GBEs only): the Parties will, where appropriate, adopt a corporatisation model for significant Government business enterprises(CPA 3.4(a));

•Tax neutrality: impose taxes or tax equivalent systems in full (CPA 3.4(b)(i));

•Debt neutrality: impose debt guarantee fees directed towards offsetting the competitive advantages provided by government guarantees(CPA 3.4(b)(ii));

•Regulatory neutrality: impose regulations on an equivalent basis to private sector competitors(CPA 3.4(b)(iii)); and

•Cost-reflective pricing (nonGBEs only): ensure that prices charged for goods and services reflect full cost attribution for these activities(CPA 3.5(b)).

These principles only apply to the extent that the benefits to be realised from their implementation outweighed the costs (CPA 3.6; CPA 1.3 also provides guidance on the range of factors to be considered in assessing costs and benefits).

Each jurisdiction subsequently published a CN policy statementwith an implementation timetable and a complaints mechanism. They also committed to publish an annual report on the implementation of the CN principles.Until the mid-2000s, CN compliance reporting was incorporated within the National Competition Policy (NCP) Annual Reports that were submitted to the National Competition Council (NCC). The NCC then drew on these reports to prepare an annual NCP assessment, including an assessment of CN compliance.[1]

In November 2000, the Council of Australian Governments (COAG) clarified some practical issues involved in implementing the competitive neutrality principles set out in clause 3 of the CPA and agreed that governments could have regard to the following factors.[2]

•GBEs not subject to executive control: Where a government business is not subject to the executive control of a government (for example, a university), a ‘best endeavours’ approach could be adopted. This would require, at a minimum, that governments provide a transparent statement of competitive neutrality obligations to the business.

•Community service obligations (CSOs): Governments are not required to undertake a competitive process for the delivery of CSOs, and are free to determine who should receive a CSO payment or subsidy, which should be transparent, appropriately costed and directly funded by government.

•Full cost attribution: A range of costing methods, including fully distributed cost, marginal cost and avoidable cost, satisfy the term ‘full cost attribution’ in subclause 3.5(b).

In the 2006 Competition and Infrastructure Reform Agreement(CIRA), all governments agreed to ‘enhance the application of competitive neutrality principles to government business enterprises engaged in significant business activities in competition with the private sector’. Accordingly, the following principles only apply to GBEs (and not to other agencies that undertake significant business activities).

•Commercial objectives: The GBE has clear commercial objectives (CIRA 6.1(a))

•Non-commercial objectives (CSOs): Any non-commercial objectives or obligationsare specified and publicly reported (CIRA6.1(b))

•Regulatoryfunctions: The GBE does not exercise regulatory or planning approval functions where it is in competition with private sector (CIRA6.1(c))

•Governing board responsibilities and governing board performance measures: The responsibilities of the governing board and the performance measures against which the board is held accountable are published (CIRA 6.1(d))

•Appointment of governing board: The governing board is appointed on basis of particular skills needed by board (CIRA 6.1(e))

•Operational autonomy: The GBE has operational autonomy in day to day management of affairs (CIRA 6.1(f))

•Dividend policy: The dividend policy applicable to the GBE is clearly and publicly specified (CIRA6.1(g))

•Payments to government: All payments to government as shareholder or for purposes of CN are identified in a transparent manner (CIRA 6.1(h))

•Annual performance reporting: Annual public report on commercial performance and performance of any non-commercial activities (CIRA 6.1(i))

•Government directions: Any directions given to enterprise by the government are published (CIRA 6.1(j))

•Legislative derogation from CN: Where the legislation establishing an enterprise derogates from CN, the derogation has been published (CIRA 6.1(k))

COAG’s National Competition Policy Review, which was released on 10 February 2006 and provided the foundation for the 2006 CIRA, stated that the enhanced competitive neutrality principles would be monitored by Heads of Treasuries (HoTs).Since then, HoTs has received Competitive Neutrality Matrix Reports annually. The latest reports (from 2011-12 onwards) are published on the Council of Federal Financial Relations website:
reporting.aspx.

In December 2016, six jurisdictions signed theIntergovernmental Agreement on Competition and ProductivityEnhancing Reformsand, in doing so, agreed to be guided by eight competition principles (subject to a public interest test). These principles included the following re-commitment to competitive neutrality:

Government business activities that compete with private providers, whether for-profit or not-for-profit, should comply with competitive neutrality principles to ensure they do not enjoy a net competitive advantage simply as a result of government ownership. (IGACPR9f)

Appendix A of the IGA CPR states that each Party should review their competitive neutrality policies so that they continue to fulfil this objective. These reviews should consider: the coverage of CN policies, the application of CN to new government businesses, CN compliance reporting, and CN complaints processes.

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South Australia Competitive Neutrality Matrix 2015-16

Commonwealth Competitive Neutrality Matrix 2015-16

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South Australia Competitive Neutrality Matrix 2015-16

Commonwealth’s CN matrix – explanatory notes

1. Tax neutrality: Defence Housing Australia (DHA) pays income tax and pays tax equivalent payments for other taxes.
2. Debt neutrality: The Australian Rail Track Corporation’s (ARTC’s) borrowings are via external bank debt and bonds. DHA currently has outstanding government loans, with maturities schedules on a rolling basis over the next 10 years. In both cases, the loans are consistent with the principle of debt neutrality.
3. Non-commercial objectives: For each GBE, these objectives are disclosed in the Corporate Plan (Statement of Corporate Intent).
4. Regulatory functions: Moorebank Intermodal Company’s (MIC’s) role is to monitor the performance of the terminal operator (Sydney Intermodal Terminal Alliance) under a contractually-enforceable open access regime and to impose consequences for non-compliance, which is not considered to be a regulatory approval function.
5. Governing board responsibilities: These are outlined in Part 2 of GBE Guidelines. NBN and MIC are also subject to the requirements prescribed under the Corporations Act.
6. Governing board performance measures: Part 3 of GBE Guidelines requires broad financial and
   non-financial performance measures to be reported in the Corporate Plan (Statement of Corporate Intent).
7. Governing board appointments: ASC’s governing board is appointed by the Minister for Finance following consultation with the Chair. Consistent with the GBE Guidelines, the particular skills required by the Board of ASC are key considerations for all appointments by the Minister.
8. Dividend policy: The dividend policy is outlined in Part 4 of GBE Guidelines.
9. Payments to government: This is required under Section 6.1 of the 2004 CN Guidelines for Managers.
10. Annual performance reporting: This is covered as part of Annual Report.
11. Government directions: Part 1 of the GBE Guidelines requires government policy orders specifying the application of policy to a GBE be in writing and placed on the Federal Register of Legislative Instruments. For DHA, its enabling legislation also provides for directions to be in writing and disclosed in Annual Report.
12. Legislative derogations from CN: This is not applicable to any Commonwealth GBEs since there are no derogations from CN in the enabling legislation for DHA and AusPost and the other four (ARTC, ASC, NBN and MIC) have no enabling legislation. DHA’s enabling legislation was amended in 2006 to reflect CN requirements (e.g. to make tax equivalent payments where required). AusPost’s legislation is consistent with the CN principles.

Commonwealth’s CN matrix – discussion

The Commonwealth’s competitive neutrality policy applies to all Government Business Enterprises (GBEs) and, in addition, any other ‘significant business activities’. An agency is conducting a business activity if: there is user-charging for the goods or services, there are actual or potential competitors, and managers of the activity have some autonomy in the price and supply of the goods or services. A business activity is ‘significant’ if it is undertaken by a GBE, ‘Commonwealth company’ or ‘business unit’ or if it has a commercial turnover of at least $10 million per year.

The Commonwealth’s CN matrix report is restricted to its GBEs, of which there were six in 201516:

•Australian Rail Track Corporation Ltd (ARTC) manages most of Australia’s interstate rail network across five states.

•Australia Post (AusPost) provides postal, retail, financial and travel services.

•Defence Housing Australia (DHA) provides housing and related services to Defence members and families.

•ASC Pty Ltd (formerly the Australian Submarine Corporation) is a naval shipbuilding company responsible for the Collins-class submarine fleet and the construction of three Hobart-class destroyers, both for the Royal Australian Navy.

•NBN Co Ltd is a national wholesale-only data network that sells access to fixed line, wireless and satellite broadband connections to retail service providers.

•Moorebank Intermodal Company Ltd (MIC) oversees the development of the Moorebank intermodal freight precinct located in south-west Sydney.

Previously, the Australian Government Solicitor (AGS) was also a GBE however it was integrated with the AttorneyGeneral’s Department and ceased to be a GBE on 1 July 2015.

There is no overarching Commonwealth legislation that mandates compliance by GBEs with competitive neutrality policy. The enabling legislation of the Defence Housing Australia (as a GBE) contains provisions that allow for competitive neutrality-like payments. Other GBEs may also be required in their enabling legislation or company constitution to make dividend payments to the Commonwealth.

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South Australia Competitive Neutrality Matrix 2015-16

New South Wales Competitive Neutrality Matrix 2015-16

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