15 August 2022
#Competition & Consumer Law, #Government, #Local Government
It is well recognised that when conducting a business activity in competition with the private sector, public sector entities may have an advantage over competitors, or potential competitors, in a particular market because those entities are in the public sector.
Ensuring that public and private sector businesses operate on a level playing field is key to enabling competition to work properly and deliver benefits to consumers and the wider economy.
The protection of this level playing field is the principle known as competitive neutrality. The competitive neutrality principle means that a public sector entity conducting a business activity in competition with the private sector should not enjoy a net advantage over competitors only because the entity is in the public sector.
Competitive neutrality was formerly administered by Queensland Productivity Commission. However, on 2 June 2021, the Queensland Competition Authority (QCA) became responsible for advising both state and local government agencies about complying with the principle and receiving, investigating and reporting on complaints about the alleged failures of government agencies to comply with the requirements of competitive neutrality.
In Queensland, competitive neutrality applies to certain:
The competitive neutrality principle also applies to local governments where they undertake significant business activities involving trade in goods or services to clients. In the case of most local governments, business activities would cover undertakings such as water and sewerage services, public transport, entertainment venues, caravan parks and off-street parking.
In a case of waste not, want not, the QCA recently put its new powers to the test when handing down a report investigating Logan City Council (LCC) and its green waste collection service after a private business alleged the service had an unfair competitive advantage, in being able to offer cheaper prices solely because of its government ownership.
Ultimately, the QCA held the LCC had failed to conduct its own green waste bin service in accordance with the competitive neutrality principle. It therefore appears the QCA is prepared to run down private businesses’ concerns regarding competitive neutrality rather than rubbish them.
In July 2021, the LCC introduced a green waste bin service to its ratepayers, which competed with other green waste removal services operated by local private businesses.
One of these private businesses, The Rubbish Removers (TRR), which offers a green waste bag collection service to residents to dispose of their garden waste, submitted a competitive neutrality complaint to the QCA in October 2021. TRR alleged the LCC's green waste bin service had an unfair competitive advantage in being able to offer cheaper prices for green waste removal services solely because of its government ownership.
In first assessing whether the competitive neutrality principle applied to the LCC, the QCA considered whether the green waste collection service was a ‘significant business activity’ for the purposes of the Local Government Act 2009 (Qld). As the activity was conducted in competition, or potential competition, with the private sector, and the business activity met the expenditure threshold, the QCA designated the service as a ‘significant business activity’. Therefore, the LCC was required to apply the competitive neutrality principles of commercialisation or full-cost pricing to the activity.
The QCA held the LCC had applied the commercialisation principle to the activity by ensuring it was conducted by Logan Waste Services, a commercialised business unit part of the Health, Environment and Waste branch of the LCC.
Additionally, the QCA’s investigation showed the LCC had decided to apply the principles of full-cost pricing to the green waste bin service, which meant it should have set the price of the service such that it could recover the full cost of providing the service, including a normal risk-related return on any capital employed, and appropriately account for any competitive advantage (or disadvantage) the local government may have over private sector competitors. However, the price of the service was set below the full cost of providing the service after the LCC incorrectly allocated the costs of collection, disposal, marketing, promotion and staffing.
QCA’s analysis showed the costs of collection were not adequately accounted for in the final price for the green waste bin service. For example, if full-cost pricing principles had been correctly applied to the collection costs for the 240L green bin, the total price for the green waste bin service should have been $12 more per year than what the LCC was charging.
With regard to disposal costs, in contrast to the $75 per tonne disposal fee for commercial operators, the LCC had charged its own green waste bin service $27 per tonne for the processing and ultimate removal of green waste – that is, a difference of $48 per tonne.
The LCC also conducted an $85,000 marketing campaign to promote the introduction of its new green waste bin service and engaged an administration officer to support its introduction costing $32,000. However, neither cost was part of the full cost recovery modelling and subsequent price-setting for the green waste bin service.
The LCC’s green waste bin service therefore had a net competitive advantage, in terms of the price of the service, over private sector competitors. As a result, the QCA held the LCC had not complied with the competitive neutrality principle in conducting its green waste bin service. This was despite the fact that the QCA’s modelling indicated that even if the LCC had correctly applied the above costs to its pricing, it was likely that the price of the green waste service would still be lower than that offered by TRR.
Following its investigation, the QCA made eight recommendations on how the LCC could conduct its green waste bin service in a way that complied with the competitive neutrality principle.
While the report provides advice and recommendations only, the LCC was not required to accept the advice or to take any action in response to the report. However, at a recent city governance meeting, Logan councillors ultimately accepted six of the recommendations in their entirety, conditionally accepted one and rejected another.
With competitive neutrality investigations few and far between, the QCA’s decision provides insight for both private operators who compete with public sector entities and public sector entities who undertake significant business activities into the regulator’s interpretation and ultimate operation of the principle. In particular, where the QCA seeks to address pricing or financial advantages derived by a public sector entity.
The importance of competitive neutrality cannot be understated. In its absence, resource allocation may be distorted as prices charged by public sector businesses may not fully reflect resource costs. When prices do not reflect costs, production and consumption decisions may not be efficient and inefficient pricing can distort investment and other decisions of private sector competitors.
In a proactive step, the QCA released two competitive neutrality handbooks last year which detail the process of making a competitive neutrality complaint to the QCA in relation to a local government and the state government. The handbooks provide much needed updated guidance to private businesses and public sector entities where there are concerns and risks (respectively) that a government business may be competing on an unequal basis due to the government business' financial, regulatory or procedural advantages. This guidance is particularly welcome given the current Guideline – Competitive Neutrality and Queensland Government Business Activities, which sets out the process for dealing with competitive neutrality complaints in accordance with section 43 and 258 of the Queensland Competition Authority Act 1997 (Qld), dates back to 1996.
Our team can assist you in understanding the competitive neutrality principle and its application for public sector business activities.
We can also assist you in managing and mitigating risks associated with competitive neutrality and dealing with any investigations by the QCA. If you have any questions, please contact us or send in your enquiry here.
Authors: Joanne Jary & Kayla Plunkett
The information in this article is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this article is accurate at the date it is received or that it will continue to be accurate in the future.