Excellent ideas on competition in services

I'm delighted with what the Productivity Commission's got to say about the role of competition, in its final report on raising productivity in the services sector (here are the media release, a cut-to-the-chase summary, a longer summary, and the whole caboodle).

Somebody needed to say a few things unequivocally about the state of competition in services, and about the need for more of it, and the Productivity Commission has delivered.

"Pressure from actual or prospective competition increases productivity growth" it says (p81), no ifs or buts. It notes that you can in principle push competition too far, so that "innovation may be discouraged if competition is so intense that firms expect additional revenues from innovation to be quickly eroded, particularly when large investment is required and the probability of success is small or unknown" (p82), but it rightly points out that we are not exactly close to that hypercompetitive frontier, so it's a highly moot worry to be concerned about. "The smallness and remoteness of many New Zealand markets limit the intensity of competition in them, making it unlikely that policies to promote competition will create competition so intense that innovation is discouraged" (p82).

And when it looks at the current intensity of competition in practical terms from four different angles - accepting that it's an imprecise exercise from any of these perspectives - on an overall competition intensity heat map (which I've blogged about before) it finds there isn't a great deal: "there is a general pattern that service industries experience less intense competition than industries in the goods producing and primary sectors...No [services] industry scores well on all indicators" (p91).

From which it snappily concludes that "Given the clear evidence on the role that competition plays in improving productivity, it is logical that policy settings that intensify competition will also improve productivity" (p91).

When it gets down to brass tacks, I like everything it's got to say. It says the government should implement the recommendations from the Commission's 2012 joint study with its Aussie Productivity Commission equivalent into barriers to trans-Tasman trade in services. It says that perfectly capable services professionals are being shut out of doing business in New Zealand by obstructive and pointless licensing requirements (my words, but that's the guts of it), and that "The Government should mandate the recognition of foreign licenses to practise when those licences are based on equivalent or better standards than the corresponding New Zealand standards" (p95). It also says that "The Government should consider the competition benefits of a regime based on certification or registration rather than licensing when reviewing existing, or considering new, arrangements for the regulation of providers of professional services" (p120), and that "The promotion of competition should be included in the statutory objectives of all professional bodies afforded statutory recognition" (p123).

On competition law, it'd like s36 of the Commerce Act reviewed properly as there's a strong enough case that anti-competitive behaviour by incumbents with market power isn't being pinged effectively (the courts are delivering "false negatives"). It says that whatever we do on s36, we ought to aim to coordinate with wherever the Aussies get to with their own current review of their competition law.

And it thinks the Commerce Commission should have the statutory authority to carry out market studies into the state of competition in different markets (currently it can only do telecoms). I must say up front here that this was something I've been lobbying for (I chucked in two submissions arguing for it, which are quoted here and there in the report), and voilà - "The Commerce Commission should be able to undertake studies on competition in any specific market in the economy" (p150) and "The design of market studies should be based on existing practice under s9A(1)(b) of the Telecommunications Act 2001. The ability to make recommendations in market studies would be a useful additional feature, and this should be clarified in the Telecommunications Act and the Commerce Act 1986". Yay.

It has also looked at the Commerce (Cartels and Other Matters) Amendment Bill, which on the one hand criminalises hard-core cartel behaviour but on the other hand also provides protection for genuinely pro-competitive collaborative activities, and again they've got sensible things to say. They picked up on a submission from Russell McVeagh pointing out that the Bill is "languishing" in the entrails of the House, and said that "The Commission is not aware of any policy rationale for this delay. Regulatory uncertainty creates costs for businesses and should be avoided as much as possible. Government should use its influence to expedite the Commerce (Cartels and Other Matters) Amendment Bill, or, at minimum, provide businesses with more guidance on the Bill’s timetable".

And the Commission also wants to be sure that the Bill will work out as intended. There are a lot of folks who have real concerns about genuinely collaborative behaviour being misread as collusion, particularly now that there are criminal penalties involved (and I agree they're right to be concerned), and the Commission would like to see the Bill - as and when it ever emerges from the legislative sausage factory - reviewed not too long after the event (it suggests two to four years). I agree: indeed, it's not a bad idea for any bit of new legislation.

There's a whole lot more in the report, especially in chapters 9 through 11, about the potential for ICT to help lift services sector productivity - have a read for yourself.

When you look at this report, and the Commission's earlier work, you end up feeling that we needed the likes of the Productivity Commission. As a country, we're a little bit light on the dispassionate policy analysis shops that other, wealthier economies can run to. There is, I know, a lot of talent in the economic consultancies, and part of their work can be very useful when it bears on high level policy issues, but they're necessarily out on the commercial battlefield most days and not available to turn all their expertise to these kinds of topics. The Commission fills a gap - though we will also need successive governments to keep giving it meaty issues, and to pay attention to what it says.