Competition Reform Needs to Focus on Consumers

This opinion article by Jennifer Westacott, Chief Executive of the Business Council of Australia was published in The Australian on 28 November 2015 under the title 'Consumer choice at heart of review'.

The government’s response to the Harper review of Australian competition policy is rightly focused on the interests of consumers, including recommendations for greater competition in the provision of social and community services.

Empowering consumers is the key to improving services — whether they are delivered by government, not-for-profits or the private sector.

Consumer sovereignty and empowerment is the key to unlocking innovation in the economy because it’s consumers who recognise value and know what works.

Mobilising consumers and enabling them to exercise choice is how a competitive market develops, where businesses and community organisations offer competing services to existing public sector providers.

It incentivises all service providers to innovate and provide better services at lower prices to attract customers, delivering better value for the taxpayer.

Increasing competition is not a binary choice between public provision and privatisation. It isn’t about ideology either — it’s about what works better for consumers.

And there will be limits to competition in some instances — it’s a matter of degree and will require careful design and balancing of the costs and benefits, focusing particular care and attention to the implications for vulnerable consumers.

We have to redesign these markets knowing that the power of today’s consumer is profoundly different to the consumer at the time of the Hilmer competition review.

A consumer with a smartphone has at their disposal a super computer that gives them the power to drive innovation like never before. While the mechanism is profoundly different, the essential requirements are the same — information, choice, and price signals.

There are many details to be worked through on how to implement the Harper recommendations — introducing greater competition and contestability to public service is not a simple matter.

Most governments in Australia have already started to introduce competition into the delivery of some areas of human services. An example of this is their increased interest in funding private or not-for-profit organisations to deliver services.

But each area of human services is different and each jurisdiction is at varying stages of reform in these sectors.

The focus has to be on outcomes for consumers and not on contestability for the sake of it.

This is not a matter of the number of providers but the power of consumers to mobilise the market.

We already have multiple private providers in the health sector, yet consumers are still not empowered with information — information that one in 10 patients are harmed while in hospital or that an estimated 20 per cent of the resources invested in the sector are lost through inefficiency.

So in health, the challenge is to mobilise the consumer to engage in the market and force greater competition which will result in better outcomes.

For each sector there are different levels of consumer entitlement to services and public funding to take into account.

Some are offered as a universal entitlement, such as public hospitals and schools. Others, like social housing, are rationed and allocated to those in greatest need.

For each area of human services delivery, the design needs to start with the current state of the sector. A reform pathway should be designed to enable the market to grow and become well functioning.

In education, for example, the focus should be on a student centred payments system.

Some sectors already have the features of a well-functioning market and others are further behind.

Some already have a fair mix of providers and consumer choice, such as child care.

Childcare is also a good example of where regulatory responsibilities, such as child protection decisions, should be separate from delivery and remain within government.

Increased competition will give public sector service delivery organisations an incentive to do better. The strengthened competitive neutrality framework recommended by Harper will level the playing field between public and private providers.

Increasing contestability should be linked to broader regulatory reform that promotes an efficient, low-cost business environment and innovation in service delivery.

How should a government work out what market design is right? There are many considerations, but prioritising the interests of the consumer over those of existing providers must be the guiding principle.

A well-functioning market in the delivery of human services should have four key features:

• choice for consumers, balanced with consumer protection;

• good information so consumers can make informed choices;

• government funding that is targeted to achieving outcomes and is fiscally sustainable, and

• market design which facilitates competition between providers, involving unprecedented collaboration between government and the private sector to co-design these crucial markets Cost-reflective pricing should be used wherever feasible to encourage more efficient service provision and consumption.

Those who argue against greater contestability on the grounds of ideology need to explain why they want to deny consumers greater choice and the benefits of innovation.

The government has started on a path that will create jobs, grow the economy, lift real wages and benefit all Australians.

It is now up to the states to get behind the reforms.