Economy Could Become Roadkill in New Rush to Regulation

15 November 2010

The Australian

Katie Lahey
Chief Executive, Business Council of Australia

Australia’s recent economic success has been built on the back of a strong and stable regulatory environment. Our open and competitive economy has provided Australian and overseas enterprises with many opportunities to invest and grow their businesses, creating jobs and contributing to higher living standards for all Australians. Those commercial decisions have been made in the knowledge that Australia is a safe and predictable place in which to do business.

But Australia’s reputation as one of the most stable and secure places in which to invest is increasingly being challenged.

We are continuing to see proposals to amend key business laws, often as a hasty reaction to individual issues, where there is little or no evidence of the kind of market failure that warrants government intervention.

Each time there is a perceived problem with individual businesses or an industry sector, the immediate response seems to be to be to rush headlong into amending pieces of legislation.

The problem when you tinker with competition laws without fully thinking the issues through is that the impacts can be felt across the whole economy and will often have unintended consequences. The result can be detrimental to the community you are trying to serve.

Any proposals aimed at increasing regulation of the banking sector, including by amending competition laws to deal with so-called price signalling, need to be fully thought through.

It has been suggested that new price-signalling amendments should enable the Australian Competition and Consumer Commission to investigate unilateral public statements by companies if it believes that such statements were made for the purpose of reducing competition.

There have been reports that this will include both the private exchange of information and, critically, the public exchange of pricing information.

It will surely be difficult to craft a sensible provision in relation to price signalling because effective markets necessarily require businesses to communicate information publicly.

If such reforms were implemented one consequence might be to reduce the flow of information to the market. Were that to occur, it would be consumers and investors who suffer.

The federal government elevated regulatory reform to a priority by tasking a cabinet minister with the responsibility for deregulation.

This was a positive move. Yet despite all the systems in place supposedly to improve the quality of regulation-making processes we have recently seen many instances of new regulatory proposals that have come to light without a transparent cost-benefit analysis or even prior consultation with business.

These have included the Fuel Watch and Grocery Watch schemes and proposals dealing with the tax treatment of employee share schemes and mining profits.

Earlier this year the Organisation for Economic Co-operation and Development released a review of regulatory reform in Australia. It noted Australia has endorsed a new growth-oriented reform agenda focused on strengthening regulatory frameworks to boost productivity growth.

The then finance minister lauded this report, citing the OECD’s praise of the government’s macroeconomic management and the way our well regulated and resilient financial sector has limited the negative impact of the financial crisis on the economy.

What’s remarkable is that in that same report that OECD said of Australia’s banking sector, ‘even though concentration in housing loans has recently increased, the market is still contestable, and competition is generally considered to be healthy’.

Vigorous competition is a driver of higher productivity, greater innovation and works to drive down costs and lower prices. Robust competition laws are needed to maintain and support this ambition. Such laws should be guided by an expectation that regulatory intervention will be the exception not the norm. Competition laws should be designed to promote and protect the competitive process.

The announcement of the Fuel Watch scheme for example, without public consultation or a clear economic assessment, took business and the public by surprise. The scheme was widely criticised as being costly and depriving the community of the choice of low fuel prices at certain times, such as the beginning of the week. The now aborted scheme, and the associated cost to taxpayers, could have been avoided if proper regulatory process had been followed.

In relation to banking competition and reform, there is an opportunity to allow the banking review to run its course before adopting any new regulations in this sector.

Proper consultation and cost–benefit analysis of any proposals for regulation will ensure any response best addresses community needs and enhances Australia’s reputation for strong, stable, predictable regulation.

Any government committed to good regulation-making processes must be prepared to follow a procedure that delivers the best outcomes. Rushing to regulation rather than addressing issues with a thorough process of analysis and consultation will not be in Australia’s long-term interest. Let us learn from our previous mistakes.



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