Tuesday, 16 December 2014

FT and the Economic Regulator

The Government’s willingness to breach the spirit of national competition policy by its use of State resources to prop up Forestry Tasmania whilst imposing austerity on broader sections of the Tasmanian community has struck a discordant note with many of the affected.

If prices charged by Forestry Tasmania were required to fully cover costs then it would be required to cease its unprofitable native forest harvesting.

A willingness by the affected to pursue remedies and solutions has precipitated this note.

Competitive neutrality complaints are handled by the Office of the Tasmanian Economic Regulator (OTTER) pursuant to the Economic Regulator Act 2009 .

Part 6 of the Act covers competitive neutrality complaints.

Section 48 sets out who can make a complaint

A person may make a complaint to the Regulator if the person–

(a) believes that a prescribed body has contravened any of the national competition policy competitive neutrality principles; and

(b) is adversely affected by that supposed contravention; and

(c) has discussed that supposed contravention with the prescribed body.”

Definitions in section 3 of the Act means Forestry Tasmania is included.

prescribed body means–

(a) an Agency; or

(b) a Government Business Enterprise; or

(c) a statutory authority; or

(d) a State-owned company; or

(e) a Local Government Body;

A recent Treasury discussion paper discussion paper initiating a review of the role of the Tasmanian Economic Regulator discusses competitive neutrality arrangements.

”The objective of the competitive neutrality principles is the elimination of resource allocation distortions arising out of public ownership of entities engaged in significant business activities. These principles seek to prevent government businesses enjoying a competitive advantage over the private sector due to the fact that governments may subsidise certain activities and they generally face lower financing costs and no tax liabilities.

Part 6 of the Economic Regulator Act is designed to ensure that competitive neutrality principles are followed in Tasmania. This Part applies where a person believes that a public body has contravened any of the competitive neutrality principles. If that person is adversely affected by the alleged contravention and has discussed the alleged contravention with the public body, that person may make a complaint to the Regulator. After conducting the investigation, the Regulator must determine whether the complaint is justified or not.”


“The Government has the capacity to direct a State Government entity to alter its behaviour if the Regulator upholds a competitive neutrality complaint. However, there is a deficiency in the powers of the Economic Regulator Act because the Government is unable to direct a council or an entity owned by local government in matters involving competitive neutrality in cases where a breach has been found by the Regulator. “

No such deficiency exists in the case of a government business like Forestry Tasmania.

Governments may compete in the private sector via a corporatised model such as a GBE or a State Owned Corporation (SOC).

At other times government departments and/or local governments may compete without a separate formalised legal structure, the provision of overnight camping facilities by local governments for instance.

In the latter cases the business activity is required to adopt full cost attribution.

In other words prices are required to reflect the full costs of producing the goods or providing the services.

Under the corporatised model the entity is supposed to pay income tax equivalent payments to government as well as guarantee fees to reflect the cheaper costs of finance of a government owned business. At this stage Forestry Tasmania idoesn’t pay income tax because it’s unprofitable and it pays few guarantee fees because it has no borrowings apart from temporary overdraft facilities.

But the competitive neutrality guidelines don’t entertain the possibility of a corparatised government business being deficit funded to the extent that Forestry Tasmania has been over the past few years.

If Forestry Tasmania were a government agency, as in the days of the Forestry Commission, it would clearly be required to adopt full cost attribution.

But under the rules that apply to government businesses conducted via a corporate entity the full cost attribution rules may not apply and the government can continue to provide deficit funds or equity transfers.

But that would lead to the absurd situation where a loss making government activity competing in the private sector could be corporatized so as to avoid full cost attribution.

That would obviously contravene the principles of competitive neutrality .

Certainly the spirit if not the letter.

So why isn’t the continued propping up of Forestry Tasmania using the resources of the State against the principles of competitive neutrality?

It might take a complaint to the Regulator to determine.


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