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Economics Legislation Committee
17/10/2012
Estimates
TREASURY PORTFOLIO
Productivity Commission

Productivity Commission

[20:05]

CHAIR: I welcome Senator the Hon. Penny Wong, Minister for Finance and Deregulation and officers of the Productivity Commission. Minister, or officers, would either of you like to make an opening statement?

Senator Wong: I have no opening statement. I suspect Mr Banks might.

CHAIR: Mr Banks, do you have an opening statement?

Mr Banks : Very briefly, as always, I will just run through the things we have been doing and completed. Since we were last here in May, we have completed inquiry reports into Australia's export credit arrangements, default superannuation funds, performance benchmarking of business regulation—where we looked at local government as a regulator—and we have also done an assessment of some of the gains from COAG's regulatory and competition reform agenda. We have also completed a report that has not yet been released into barriers to effective climate change adaptation. We have released our annual report on trade and assistance, and we have also released a number of reports in our capacity as secretariat to the review of government services—namely, one on overcoming Indigenous disadvantage key indicators report and a review of that process, and an Indigenous expenditure report for 2012.

Since we were with you last, we have also received two new commission projects—one on compulsory licensing of patents, for which a draft report is due in early December, a couple of months away; and one more recently on mineral and energy and resource exploration, for which a draft is not due until next year. We still have three commission projects underway that we talked about last time—one on Australia-New Zealand economic relations, the other one on a benchmarking report on regulatory impact analysis and a report on electricity network regulation, for which a draft report is imminent.

We have two other streams of work that we are applying ourselves to—one on carbon policy assistance reviews related to the clean energy and related legislation, and we have issued some consultation papers in the area; and also ongoing work in relation to the COAG reform agenda, where we are to report periodically on economic impacts and benefits of that agenda. Then we have ongoing streams of work as secretariat to the government services review and also in relation to the Competitive Neutrality Complaints Office. With that brief overview, I will end there and be happy to take questions.

CHAIR: Thank you very much, Mr Banks, for that introduction. You have been busy as always. Welcome again. Senator Cormann.

Senator CORMANN: Before we get into questions, Mr Banks, could I acknowledge that this is your last meeting in your current capacity and thank you on behalf of the coalition for the outstanding job you have done in your current role as Chairman of the Productivity Commission.

Mr Banks : Thank you.

Senator CORMANN: Minister, I might start with a few questions around where the selection process is at to identify a replacement for Mr Banks' current role.

Senator Wong: Mr Banks might know more than me, to be honest.

Senator CORMANN: I thought it was appropriate to ask you, but if Mr Banks can assist us—

Senator Wong: That is fine—I take as a courtesy rather than as a gotcha moment.

Senator CORMANN: No, I was just trying to do the right thing, Minister.

Mr Banks : The position was advertised in the press and a short-listing process is underway. A panel headed by Martin Parkinson will be interviewing a short-list and making recommendations to the Treasurer. That process is well underway right now.

Senator CORMANN: Is there a timetable for this?

Mr Banks : I am not aware of a specific timetable in terms of when a decision has to be made by, but I understand that interviews are being conducted in early November. It is potentially on track for a decision potentially to be made by the end of the year. I finish up in this position on 31 December.

Senator CORMANN: Will the contract be for the usual five-year period?

Mr Banks : My understanding is that the default position is a five-year contract.

Senator CORMANN: You would be expected to do a handover with the new person whenever they come in?

Mr Banks : It would depend on the timing of that, of course. I would always be available if the new person ever thought it would be useful to talk to me and so on. I suppose one of the advantages of coming in as a new chair to the Productivity Commission is that there is a senior management group. We have a deputy chairman and we have a head of office and commissioners who are busily engaged in their particular projects. In that sense, there is a structure that the new chair can take up.

Senator CORMANN: Thank you. I have a few questions around your recently released report into default super and selection of default of funds under modern awards. Why has the commission changed its assessment from its draft report to its final report of what should happen?

Mr Banks : If I could make some general remarks and then handover to my deputy, Michael Woods, who was presiding on that inquiry. As you would be aware, an important part of the commission's process is to have a draft report and to receive feedback on that report. Those reports are genuinely draft reports where we are testing preliminary ideas. They are called draft recommendations for that very reason. It is typical of our inquiries that the final report would differ in some respects from the draft report because we hear things in response to draft recommendations that we may not have been aware of or had not considered adequately and so on.

The process of public hearings and exploring the views of people in response to draft recommendations in this case, I think, has led the commission to reconsider its position. Ultimately, judgement is required and that is why the commission has independent commissioners. There is judgement required in getting the right balance of what we believe ultimately is in the public interest. That process is sometimes most informative after we have put out a draft report. I might ask Mr Woods now to comment more specifically about the process and the reasons for the change.

Mr Woods : Thank you for your question, Senator. A reading of both the draft and the final report would show that there is a substantial amount of the position adopted in the draft that has carried through to the final report. A key element of the draft was that the employees' interest should be paramount in the process. We identified in the draft report that the process APRA was to undertake in identifying funds and their products that would be suitable and authorised for My Super was not in itself a sufficient set of criteria for selection of funds by employers in the best interests of their employees, that this is a process where there is a principal agent issue at stake.

That position carried through to the final. We continued to have the view that in fact there did need to be a second process of selection and we identified in the draft report a number of factors for consideration. All but one of those factors carried through to the final—one on flipping. We considered the amendments introduced in parliament were sufficient to overcome concerns about that specifically, so it got removed as a specific factor for consideration, but it could of course be raised in general consideration. So all of those issues are common between the draft and the final.

Senator CORMANN: Because I would like to focus obviously on the differences, why has the commission very specifically walked away from its statement in the draft report that the system 'should not impede the flexibility of employers to choose any fund so long as employees are not worse off and it is a MySuper product? Related to this, is it purely coincidental that where you have landed as a commission is quasi-identical with the submission that Minister Shorten made to your inquiry before your report into this was finalised?

Senator Wong: You mean the Treasurer.

Senator CORMANN: No, Minister Shorten.

Mr Woods : We received a submission from DEEWR and Treasury—

Senator CORMANN: Endorsed by Minister Shorten.

Mr Woods : There was a press release that the minister issued—

Senator CORMANN: Hint, hint! Everybody took it to be Minister Shorten's submission.

Senator Wong: You might have taken it to be, because you like the word on the street, Senator Cormann. Sorry, I had to get that in! It was quite funny—

Senator CORMANN: That is not even just the word on the street. That is the consensus view. I am sure that not even Minister Shorten would deny it.

Senator Wong: A press release is a press release, a submission is a submission, and can Mr Woods finish his answer.

Mr Woods : Thank you. We do in fact refer to that submission in several places in our final report. In some respects our position and the position in that submission are the same and in some respects they are significantly different, and we can deal with both. In terms of a particular issue that was put forward by the Financial Services Council that the employer should be able to choose any fund—which was our option 1 in our draft—we did not consider that that met the requirement specifically and that continued to be rejected in our final and was discussed with them at hearings.

On the particular issue that you raised, which was a draft recommendation that we allowed employer discretion in our draft recommendation that an employer could choose a fund not listed in the award—and I think this is probably the one you are referring to—but that, if required, they would have to justify that they had considered the factors and that employees would be at least no worse off. A reading of the draft will show that we were concerned with that as a draft recommendation in several respects. One is to get the balance right between having the best interests of the employees as the paramount concern but making sure that the test on employers was not so onerous that it would never be employed. We made that point specifically in the draft and in fact we put in an information request in the draft—which is not normal practice—to say that this was a concern. We did hold hearings—

Senator CORMANN: Before we go into the process, obviously the circumstance that we have got now is that we have got government legislation to regulate and prescribe all of the consumer protection mechanisms required for the superannuation product, and we have now got the Productivity Commission recommending—quite unusually, I would have thought—an additional regulatory process on top of that, through Fair Work Australia to ensure that a product which already should tick all the boxes from a consumer protection point of view ticks whatever other boxes. If those boxes are so important, why aren't they prescribed in the legislation in the first place? And, if they are not important enough to be in the legislation, why do we need to have another bit of red tape that makes the whole system less efficient, less transparent and less competitive?

Mr Woods : That is at the nub of the original issue that I was describing—that the APRA process to authorise funds to be MySuper products is a process to ensure that each fund goes through a number of criteria. They must identify what their fees are, if certain fees are capped they must identify what their long-term objectives are, their risk profile—but there is no quality filter on that. We make that point quite strongly in the draft. That tells you that these funds have met those minimum criteria for the purpose of being MySuper products, but they do not apply a quality filter to say which ones of those—

Senator CORMANN: Whatever happened to competition? You think that you can prescribe quality by government regulatory processes on top of the minimum consumer protection requirements.

Mr Woods : Competition is a very important issue and we did raise that both in the draft and the final. But, to achieve that, we think that the solution we have come up with in fact achieves the balance between all of those things. There is a filter that applies to quality, and I am sure you would have read our final recommendations—

Senator CORMANN: In detail.

Mr Woods : on that process, and you would have noticed that we are recommending that in fact there be a long list of all funds that meet the criteria, and that within that there be a subset that are identified as the best funds, so that you get that competitive element. So we are trying to balance a range of factors, because one of the other concerns that we had with our draft proposal—as you would no doubt recall—was that there was to be a quota of five to 10 funds in each award. That raised the problem of a cliff. So if a fund that was in as the 10th fund for a period suddenly became very slightly worse and became the 11th fund, suddenly it would no longer receive the premiums coming into that superannuation and it would have significant effects on the market and also on employees, because the employee could end up with multiple funds over time as the fund they were in was either in or out of that tightly prescribed list. So we have tried to keep competition by having a subset but having a longer list where the employer can now choose under our recommendations, because of the flexibility point that you rightly made earlier.

Senator CORMANN: Mr Woods, you know how this all started. This started because the current process is not transparent, it is not competitive, it is a closed shop, anticompetitive process which is riddled with inherent conflicts—

Mr Woods : We made a number of criticisms—

Senator CORMANN: And the reason the Productivity Commission was supposed to look at this was to come up with a process that is more open, transparent and competitive.

Mr Woods : and we think we have.

Senator CORMANN: The view is that what you have done is to essentially land in the exact same spot as the minister's press release of 22 August.

Senator Wong: 'A' view, senator.

Senator CORMANN: That is the view from those who are—

Senator Wong: From some. It might be from you and people you talk to, but it is not the view of everybody.

Senator CORMANN: The beneficiaries of current anticompetitive arrangements are clearly one segment of the market, which just happen to be—

Senator Wong: I could make an equally pointed comment about people having a commercial interest for a particular public policy outcome as well.

Senator CORMANN: We think it should be competitively neutral, Minister.

Senator Wong: I am simply saying: perhaps you could use more neutral language and then we would not have to have this argument.

Senator CORMANN: Our view is that the arrangements should be competitively neutral, and what has come out of the process, which is different from where the process started, is not competitively neutral, Minister. Manifestly not.

Mr Woods : The independence of the commission is fundamental and important, so I would just like to stress a couple of issues to demonstrate that. We put out the draft in June, we had hearings. On 31 July, in the hearings where we had the FSC present—and it is in the transcript and I can identify the particular pages for you—one of the exchanges that I had with John Brogden says in relation to this employer discretion component that the option of providing employer discretion to go beyond the award in terms of actually designing something that works is very problematic. I then go on to list a whole range of concerns that we had with that particular option: where is the demand coming from? Does it have a niche anyway? What is the issue about legal liability? I concluded that particular exchange by saying, 'so it is wavering as an option in consideration.' That was on 31 July, well before we received the submission from the department. That was my exchange with John Brogden. At that point on the record, we were struggling—and there are other references but that one will do—with how you would operationalise that. We had problems with operationalising that one, we had troubles with the quota system because of the cliff that it was creating and we wanted to create competition and flexibility so we walked away from both of those bits and we have come up with the system we have.

Mr Banks : Could I also say: the way the commission operates is that between the draft and the final report the commission is involved—what they call the division of the commission will be getting this kind of feedback. Every month we will have a meeting of the full commission to discuss that kind of feedback and in particular any recommendations that are changing in the draft overview stage

So we have that layer of discussion as well. I want to reassure you that we do take our independence very seriously and whether it is a submission from a department or an industry group or whatever, we are not swayed by any particular party other than through logic that we believe will stand up first of all in the wider discussion among all the commissioners but then ultimately externally.

Senator CORMANN: But in response to your draft report, who has made submissions other than the government that recommended the approach that you have ultimately taken in your final report?

Mr Banks : My understanding is that we have not followed the recommendations of the DEEWR-Treasury submission to the letter, as you imply.

Senator CORMANN: Pretty close.

Mr Banks : No, they were trying to reduce considerably the scope for funds to be in a position where they had standing and it would have made it much harder for them to in a sense get access to a process that would consider their claims. There is quite an important difference, I think, between where we have come out and where the departmental submission would have wanted us to be.

Mr Woods : If I can elaborate on that briefly, the departmental proposal was that funds would be able to put their proposals to a panel of experts which would then make recommendations to the full bench of Fair Work Australia. We are adamant that all funds should be able to have standing for this purpose directly to a panel of Fair Work Australia as the final decision maker. That is a very big difference because that then takes out that middle layer of activity. So we have stuck with that very strongly despite the fact that a departmental submission did not consider that was appropriate. But in our view having all funds for the very first time being able themselves directly to make representations to the Fair Work default super panel is a significant breakthrough. I would have thought that a number of funds would consider that that is a significant improvement.

Senator CORMANN: Have you had any feedback from anyone that it is a significant improvement?

Mr Woods : They seem to have focused on a particular issue that they were also raising—

Senator CORMANN: Other than the industry funds I have not found anyone across the industry who thinks that this process is a significant improvement. Have you assessed the cost of that new process?

Mr Banks : Another important player is the employers and the businesses themselves and how they perceive the cost of different systems. I suspect you have not also seen any submissions from employers that have been against it.

Senator CORMANN: I am aware of the industrial relations club type setup that exists on these industry funds.

CHAIR: On that basis we are going to go to a former practitioner for the last 10 minutes of this session. Senator Cameron.

Senator CAMERON: Mr Banks, could I also add my best wishes to you and your family for the future. It would be completely disingenuous for me to say you have done a great job. I am not going to do that. As you know, I have got some significant differences with the operation of the Productivity Commission and some of the reports you have brought out. Be that as it may, you have always been extremely professional. You have always dealt with me in a manner that defends your position well. I just hope you do not pollute Monash University with your neoclassical economic views!

Mr Banks : I have to say they taught me.

Senator CAMERON: Seeing that this is your last estimates appearance and you are going to be there until December, I might try and give you a bit of homework. I will go through these questions and will put them on notice. National Competition Policy led to many changes in the way state and federal governments deliver services. In hindsight, were there any areas where you think the changes were poorly conceived or implemented, or would you describe competition policy as an unmitigated success story? I have only got a very short time so I will go through the range of questions.

Mr Banks : I could give you a one-sentence quick response to that, and that is that we did not in fact find that everything that NCP achieved was an unmitigated success. There were some problems along the way, including in areas of contracting out and so on, which are documented in a report from 2005. But I will get back in more detail.

Senator CAMERON: Okay. In the nineties, we went to great lengths to increase competition in the provision of public services, but over the same period concentration in a number of private markets has increased quite substantially. Do you think that the market share of Coles and Woolworths is consistent with a competitive market outcome? Do you think that governments that are interested in reducing the cost of living should be concerned with the concentration of the power of the grocery market? The Productivity Commission often assumes that people behave rationally. If that is the case, why do you think so many people with mortgages are willing to pay an average 0.5 per cent higher interest rate to the big four banks rather than take out a loan from a smaller, government guaranteed credit union or building society? So this is about the rational behaviour that underpins much of the analysis of the Productivity Commission.

Mr Banks : In some inquiries, we have also drawn on behavioural economics where we think that there are reasons why consumers would behave in ways that could be problematic and require regulation. Again, I will try to give a detailed answer in response to that.

Senator CAMERON: It has been suggested that around 25 per cent of electricity customers are swapping electricity retailers each year and that retailers are spending large amounts of money on door-to-door salespeople who often confuse customers more than inform them. Do you think that this kind of competition is delivering benefits for consumers? I do not know if you have ever looked, but the range and complexity of mobile phone plans is really quite bewildering. If you had to choose a private mobile phone plan for yourself or a family member, do you think you would feel confident that you can choose the best possible plan for your needs? Do you think that mums on buses and people with poor English would make good choices? Given the PC assumes people are rational, can the phone market work efficiently if most consumers are completely confused? The Productivity Commission has been deeply concerned with market imperfections such as government monopoly and trade protection. Why do you think the PC has spent such a small proportion of its budget looking at other forms of market imperfection such as the market power of oligopolies such as Coles and Woolworths or externalities such as greenhouse gas emissions?

Mr Banks : Again, when you say that we always assume that consumers and investors are rational, that is true to a point but we also look at issues of information failure, asymmetric information and so on. It would depend on which inquiry we were looking at. For example, the question of concentration will be looked at in the context of a particular inquiry. Sorry, I did not mean to interrupt you. We will get back to you with more detail.

Senator CAMERON: Thank you. While the textbook conditions of perfect competition are rarely met, what percentage of the Australian economy would you describe as competitive and what percentage do you think is dominated by firms with significant market power? What should governments do about firms with that market power? You did a study into the vocational education and training system. Liberal-National governments in Victoria, Queensland and Western Australia have undertaken what I describe as a form of economic vandalism with an assault on productivity through cuts to the TAFE system and social advancement for people. Do you think that the reduction of hundreds of millions of dollars of public funding to the TAFE system will allow the TAFE system to continue to contribute to increased productivity in the nation?

Mr Banks : That sounds like a slightly loaded question, but we can probably respond to it in the context of the work we did on looking at the gains from VET reform more recently, including the education—

Senator CAMERON: That is why I am asking. I have had a look at that report and you do indicate the importance of the VET system to productivity, social cohesion and a range of other issues. If hundreds of millions of dollars have been pulled out of that system, I would like to know what the Productivity Commission thinks that will do to productivity and social cohesion.

Mr Woods : I can certainly confirm the first bit, because it is one of my inquiries, but we have not studied the consequence of the actions of the state governments. We will get back to you.

Senator CAMERON: Thanks.

CHAIR: That brings our proceedings with the Productivity Commission to a conclusion.

Senator Wong: On behalf of the government, would like to thank Mr Banks at his last estimates. I wish him well in the next stage of his career. Mr Banks, as the committee would probably be aware, was the inaugural chair of the PC and handled the integration of three other agencies. Notwithstanding the very interesting discussion between Mr Banks and Senator Cameron on occasion at Senate estimates, the Productivity Commission is certainly regarded worldwide as a leading institution in its field. We thank him for his public service and wish him well.

CHAIR: Thank you, Minister Wong. With those kind remarks, we will close the Productivity Commission's evidence this evening. I also wish you well in the future, Mr Banks.