BRISBANE CITY COUNCIL
Review of National Competition Policy Arrangements
Productivity Commission Issues Paper

1.	Introduction

The review of NCP arrangements is welcomed.  Modern governments are complex and previous governance and organisational models have led to poor customer service, lack of accountability and a culture of throwing money at a problem, particularly if it has political ramifications.  The result has been to obscure the true role of government, providing lack of clarity, secretive rule by the powerful and unaccountable, and concentration on legal plausibility as opposed to practical community benefits.  The benefits of the NCP reforms has been a focus on the real costs and benefits to the community of particular activities, provision of more choice and concentration on the enormous sums of public monies often tied up in either under-performing and over-engineered assets.

Previous models of government service and business activities have disenfranchised the community.  Policy objectives, their costs and implications were not made clear.  The requirement for identification and specific funding of Community Service Obligations (CSOs) has assisted both governments and the community to determine the nature of, and implications for, policy objectives.  It has allowed for better decision-making by making explicit issues such as cost of capital and the trade-off between capital and operating costs.  Previous models have favoured secretive bureaucracies, deciding their version of the public good behind closed doors, the requirements of NCP have been such that accountability and transparency has been enhanced.

Separating policy objectives, setting and accountability from service providers is a significant advantage.  It allows government policy decisions to be implemented without facing blockage from a sometimes faceless bureaucracy.  It allows explicit budgets, outcomes and objectives to be established and funded.  NCP reforms do increase accountability and transparency.

2.	Water Reform

The advantages are particularly acute in the case of public water utilities that have been exposed to the policy requirements of NCP and where CoAG agreements have bolstered processes already underway.  Part of the CoAG reforms has been a requirement to properly cost and account for the storage, treatment and transport costs of water.  This has also led to scientific assessment of the resources available, after making provision, for instance, for environmental flows.  Previous failures to make these assessments public was often due to structural blockages.  The resultant debate was then clouded by uncertainty about the policy context and basis for scientific assessments.  Debates were based on hyperbole rather than facts.

The water reform agenda in particular should be hastened.  The proposals for market trading of water entitlements would reduce the extent of ad hoc policy decisions and lead to a more systematic and sustainable allocation of the resource.  The underpricing of water has been significant in urban areas, and efforts have been made to address this policy failure.  However rural water prices are typically far short of the true cost in financial, economic and environmental terms.  This leads to substantial cross-subsidies from the environment to property owners.  Time is critical.  The longer this inequitable situation continues the worse are the impacts.  There are also often disguised cross-subsidies from urban and other rural property owners to particular owners of rural properties in the case of irrigation dams and the like.  

There is a lack of transparency for the public in where the often-substantial monetary benefits fall with a wealth transfer to the wealthy and often dysfunctional behaviour involving property speculation.  The amounts of money involved often swamp other public policy debates such as particular welfare payments, but are rarely analysed in terms of alternative uses.

The heavy, and often inefficient use of water in the rural sector (70%+) compared with the urban areas (industrial 20%+, domestic 5%) should be recognised with heavy emphasis on making all users of water bear the environmental costs of that use.  The structural and other reforms inherent in the NCP package allows a systematic, robust and sustainable mechanism for addressing these issues.

Prices for water in all parts of Australia, rural and urban should be set at full financial cost as a minimum.  Accounting for externalities, particularly environmental externalities should be systemised and included in pricing.  Some of the major environmental costs associated with water such as the impact of dam construction and electricity required for treatment and transport of water or sewerage should be included in the costings and flow through to prices.  The commencement of a market for greenhouse gases is crucial in assisting to determine the full economic cost to society of existing and proposed water-related items.

3.	NCP - A benefited or conflicting world

Turning next to the claims of a benefited world subsequent to NCP reform, the world is actually one where ‘regulatory failure’ can occur. A recent specific, albeit minor example, of this failure may be found in the operation of Queensland’s Integrated Development Assessment System.

The issues paper on page two talks of “an extensive program to review and, where appropriate, reform legislation restricting competition in areas such as (inter alia) planning and development services”.  One reality of the result of the reform here is that regulatory assessment of building construction is performed by the certifiers engaged to provide the certification service to the developers who constructed such buildings; and, to use a proverb, those certifiers do not act to bite the hand that feeds them.  This is ‘conflict of interest’ in its purest form. Council does not believe it to be sufficient to argue that the residual local government power to also take enforcement action constitutes a sufficient protection for the community, and is somehow of less weight than the “6.1.	Is NCP useful in delivering social outcomes and does a focus on pricing efficiency deliver longer term planning outcomes?

BCC would argue that economic rationalism is often in conflict with social outcomes and it is governments' role to deliver these outcomes because it does not make economic sense for the private sector to do so.  BCC would also argue that in the case of infrastructure a focus on pricing efficiency does not necessarily deliver longer term planning outcomes.

NCP, together with regulation of water services based on NCP, has given economic efficiency an extreme dominance over existing water reform agenda and relative legislative requirements.

The water reform agenda is largely driven by the Council of Australian Governments agreement on water resource policy and a strategic reform framework.  Whilst the agreement shares the economic efficiency objectives of the NCP, it focuses on an integrated approach that gives equal weighting to environmental and social issues as well as economic efficiency. The agreement also recognises the need for institutional reforms that remove potential conflicts of interest between regulation and service provision.

The provision of water infrastructure in Queensland is carried out predominantly under two acts – the Water Act 2000, premised on efficient resource management and ecological sustainability, and the Integrated Planning Act 1997, premised on sustainable development and ecological sustainability.  

Hence whilst water reform is taking place to address environmental and social concerns, and economic efficiency; and infrastructure is being provided under the broad banner of sustainability; the outcome in regulated water businesses is ultimately being assessed on the basis of economic efficiency under NCP concepts.  

Since the optimal provision of water infrastructure under legislation, addressing sustainability and the environment, may have little to do with economic efficiency, there is a potential conflict between providing a water service to the community and the assessment of the regulated business providing that service.  The dominance of economic efficiency generated under NCP means that the least-cost-planning concepts (under NCP) drift towards lowest-cost-valuation for pricing under regulation and social issues are then assessed outside the regulatory framework.  This “drift” is not conducive to good long-term outcomes for the community.   

This NCP review needs to take into account the social and political obligations involved in providing community infrastructure, that has component cost that can not be incorporated into CSO’s.  It also need to consider how social issues become a “before the fact” consideration rather than a post assessment. 

6.2.	Further reforms may be achievable, but only with re-alignment of Federal/State and local government functions and activities.  Local government continues to feel that it is being asked to deliver more without additional resources; a cost shift from the other levels of government.

6.3.	A move to a less regulatory environment may permit greater reform: 
•	deregulation of the telecommunication industry has seen new entrants, which stimulates price benefits.
•	looking at some other industries, such as the aviation sector, price benefits from encouraging competition is offset in other ways with differentiating levels of service (eg no foods on planes, boarding at smaller airports, no seat allocation etc).

7.	Conclusion

BCC is of the view that NCP for Local Government was appropriate for its time, as it was one of many enablers for reform to take place in our organisation.  The BCC of today is a substantially different organisation from the BCC of 10 years ago.  Since then we have come a long way and have embedded this way of thinking into our governance structures, management, operations and processes.  We have done more than NCP required and continue to evolve as circumstances change.  Consequently we are of the view that further external invention at the local government level is unnecessary and possibly undesirable with the exception of water reform.