(1) What assessment has the Government made of competitive federalism practices by the States and Territories, particularly the financial cost to the public sector of (a) taxation discounting designed to attract investment, (b) direct financial subsidies to the private sector, (c) subsidies on government business enterprise pricing and (d) local preference clauses in State and Territory tenders.

(2) What adjustments in Commonwealth financial payments are made in response to the practices referred to in part (1).

(3) What other Federal Government policies are designed to prevent investment bidding wars between the States and Territories.

(1) The then Industry Commission produced an information report, ie. one without recommendations, on State, Territory and Local Government Assistance to Industry. The final report was released on 23 February 1998. Given the nature and subject matter of the report, the Government did not provide a formal response.

(2) This question has potential implications for two aspects of Commonwealth-State financial arrangements, namely National Competition Payments and the Commonwealth Grants Commission's methodology used in the distribution of GST revenue.

States and Territories that do not adequately meet the commitments made under three intergovernmental National Competition Policy agreements in April 1995, may be negatively assessed by the National Competition Council, the independent assessor of each jurisdiction's reform progress. This may result in the Council recommending to the Commonwealth Treasurer that the level of competition payments made by the Commonwealth to that jurisdiction be reduced.

The methodology used by the Commonwealth Grants Commission in distributing GST revenue neither encourages nor discourages States and Territories to engage in practices referred to in Question 1. The Commission's financial benchmarks reflect an average of State and Territory policies and the Commission does not compensate a State or Territory if it chooses to forego tax or to assist private industry, at a greater cost to its budget than other States. This is because the Commission aims to measure States' relative needs for untied Commonwealth funding using indicators that are as policy-neutral as possible.

The Commission has deliberately chosen not to assess needs in areas of government expenditure aimed at promoting private industry. It assumes that differences in State expenditures in these areas are matters of government policy choice.

With regard to each practice listed, the Commission has provided the following detailed comments.

(a) Taxation discounting — States with greater revenue bases achieved through lower than average taxes may receive a lower grant. This is because the Commission applies the average revenue effort to a State's base to estimate its capacity to raise revenues.

(b) Direct financial subsidies to the private sector — these affect the average cost of providing services used in the Commission's calculations, but they have no direct effect on State grant shares.

(c) Subsidies on government business enterprise pricing — the Commission assesses the cost of community service obligations using policy-neutral indicators of need, such as the number of concession holders, or cost structures in particular regions.

(d) Local preference clauses in State and Territory tenders—these may increase the average costs of services used by the Commission in its calculations, but otherwise have no effect on grant shares.

The Strategic Investment Co-ordinator process also has a bearing on the issue raised in Question 2. If a Commonwealth strategic investment incentive is considered for a project, Invest Australia ensures the quantum of project-specific assistance that might potentially be offered takes into consideration the availability of other assistance from the Commonwealth or State and Territory governments. The project proponent is required to provide details of any state and territory assistance whether financial or in kind. The proposal can then be assessed to determine what additional incentive might be necessary to attract the project to Australia. In essence, then, before a Commonwealth incentive is offered it is "adjusted" to reflect any existing government assistance.

(3) The Commonwealth, States and Territories are signatories to the Operating Guidelines for Commonwealth, States and Territories on Investment Promotion, Attraction and Facilitation. The document is not a prescriptive agreement that prevents State and Territory Governments from attracting investment through industry policy measures. Rather, the document provides broad guidelines to help improve the effectiveness and efficiency of investment attraction activities. The Commonwealth and the State and Territory Governments will meet at least annually to review the effectiveness and efficiency of their respective efforts to promote Australia as a preferred investment location and the provision of investment facilitation services.

More generally, the Commonwealth, States and Territories signed three intergovernmental National Competition Policy agreements in April 1995. The Competition Principles Agreement establishes a requirement to implement a policy of competitive neutrality for significant government business activities. Competitive neutrality policy requires that significant government business activities should not enjoy a net competitive advantage over public or private competitors simply as a result of their public ownership. This involves corporatisation or pricing of goods and services on a full cost allocation basis (including provision for tax or tax equivalent payments.)