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Helping the vulnerable: Harper to do a Hilmer on human services

The draft report by the Competition Policy Review has signalled a revolution in the provision of human services. But the interest has all been elsewhere.

That is not surprising. The draft report is more than 300 pages long and has 52 recommendations. Only one of these, recommendation 2, focuses solely on human services. And the business journalists who cover the Review are much more comfortable dealing with the ‘standard’ issues, such as removing sclerotic regulation in taxis, pharmacies and planning or changes to specific competition laws.

But the Review’s human services focus has the potential to significantly improve the lives of many Australians.

As the draft report notes, “[t]he human services sector covers a diverse range of services including health, education, disability care, aged care, job services, public housing and correctional services” (p.140).

The sector has not been ignored. You could fill a small library with the state and federal reports into these areas. Another one, into WA prison services, was announced last week.

Reform has not been absent, either here or overseas. But for each reform tried in one jurisdiction the opposite reform is being tried somewhere else. Success is hard to measure and opinions and vested interests are both strong.

So what has the Review chaired by Professor Ian Harper done differently?

Two things.

First, it has not tried to specify individual reforms for specific services, but rather to set up a framework for reform. The framework reflects the broad principles that have worked well in other areas where the government is key to service delivery – emphasise choice; separate funding, regulation and service delivery; allow for diversity in providers; and encourage innovation.

These principles may sound obvious to those working outside human services. They are not. And 25 years ago they were not obvious to other areas either!

Remember telecommunications in the 1980s? Australia had a single, integrated government-owned-and-operated telecommunications company, Telecom Australia. Its prices were high and its service standards were woeful. You could have any telephone you liked, as long as it was the one Telecom Australia gave you.

How about utilities? We complain about service provision now, but remember the old state-owned electricity monoliths like the State Electricity Commission of Victoria (SECV)? It controlled everything from the mines in the Latrobe valley to the wires into your house. Costs were high and the system was run by and for the engineers, not the public.

The reform to government utilities flowed from the Hilmer report into national competition policy in the early 1990s. It recommended a framework to allow all levels of government to work together and principles for reform. Now the Harper review aims to do the same for human services.

In human services, the approach where the regulator, funder and supplier are either the same or are closely related, is still common. This model has been eliminated in other areas of government service delivery.

Why? Because it promotes capture by the insiders, leads to a one-size-fits-all outcome and stifles innovation. Separating out these three functions leads to transparency and improved choice.

Why choice?

Choice is something that many of us take for granted. But uniform service delivery limits choice. That harms service recipients. In contrast, choice can empower. For example, the Review quotes a service recipient surveyed by the Brotherhood of St Laurence:

“Direct payments give me control. I now have a say in what I eat and drink, what I do and when I do it. I can choose carers that can help me to live my life. I can have continuity instead of a different carer every day.”

Well-designed choice in human service delivery can enhance lives. But choice must be cost effective and balanced. Too little choice reduces recipient welfare but too much can overwhelm. As the report notes, “[a] consumer choice model is not the right one for all services”.

Choice and funding are not separate, and groups who currently receive guaranteed funding will oppose choice. Choice means the ability for a service recipient to choose an alternative service or service provider. “In introducing choice-based models, an important element is to ensure that funding follows people’s choices so that providers have signals to better tailor services to individual and community needs” (p.154).

There is currently diversity in some areas of service delivery, including government, for-profit and not-for profit providers. This diversity can be further encouraged, both across services and by innovation in service delivery, such as through cooperatives and mutual groups. It can be encouraged through contractual arrangements. Public private partnerships already exist in some areas of human services. Do they work? What else works? What can we learn from overseas? How can we innovate?

The draft report does not seek to answer these questions. The aim is to set up a framework that can operate through the new Australian Council for Competition Policy. (ACCP). The ACCP is the second element of human services reform. It will advise, facilitate and monitor reform. It can investigate overseas experience and draw together both academic and practical learning to help advise governments. And it will fill the gap left by the demise of the COAG Reform Council.

Unsurprisingly, the initial reaction to these reforms from insiders and the ‘magic pudding’ brigade have been negative. This of course mirrors the earlier Hilmer reforms. The biggest opponents of these reforms were those who had a stake in the existing structure. The bureaucrats in Telecom Australia and the SECV did not give up their power easily!

The Hilmer reforms to utility industries were not easy. It will be even harder in human services.

For example, tendering for service delivery can lead to higher quality services being provided at a lower cost. But both economics and experience highlight potential shortcomings.

Contracts with third-party providers must be clear but flexible. It has to be clear what is to be provided, when and to whom. If these are not clear then service delivery will fail as the provider and government fight over the allocation of responsibility.

Service delivery may involve a variety of measured and unmeasured features. For example, delivery of services to the homeless can involve measurable outputs of food and shelter. But just as important are the unmeasurables, such as simply having a volunteer to talk to, someone to listen to your issues. These unmeasurables are critical but can be overlooked when formal contracts are written.

The Review’s focus on human services should be welcomed. But it needs broad feedback on the draft recommendations. And it needs to work out how the ACCP will bring the various factions, including government, into the debate.

(Stephen King is a member of the National Competition Council and the Economic Regulation Authority of WA. He attended the Review conference, held in Canberra last week)

Words matter. That’s why the ACCC has got it wrong.

Words matter.

With Australia’s competition laws, the wording of our ‘abuse of market power’ laws are ahead of the rest of the world. But the Australian Competition and Consumer Commission (ACCC) wants to change the words and introduce ambiguity just as the rest of the world is starting to recognise the benefits of the Australian approach.

What is the issue?

Australia’s competition laws make it illegal for “[a] corporation that has a substantial degree of power in a market” to “take advantage of that power” for an anti-competitive purpose. The ACCC wants to make three changes:

“The ACCC considers that making this provision effective could be best achieved through the introduction of an effects test, including a substantial lessening of competition, and amendments to overcome limitations inherent in the current interpretation of the ‘take advantage’ test.”

Making it clear that the law covers any acts that have a purpose of substantially lessening competition is benign.

The real issue is the combination of the other two changes. Together they weaken the link between market power and the anti-competitive objective of a business. At a minimum this will make businesses wary about engaging in pro-competitive actions that benefit consumers but harm competitors. At worst, it will force businesses to defend pro-competitive conduct before the Courts.

For a current state-of-play in the debate and a statement of the ACCC’s views, see the letter from the Chairman of the ACCC to the current Competition Policy Review.

Are we leading the world?

Coincidently, last Friday I heard a talk by one of the world’s leading experts on competition law, Professor Louis Kaplow from Harvard University. He outlined his new research on the failure of US and EU laws to link ‘market power’ and ‘anti-competitive conduct’. These laws look a lot like what the ACCC wants. Professor Kaplow noted that this had led the Courts to segment the analysis leading to poor decisions.

In contrast, Australia’s existing law links ‘market power’ and ‘conduct’.

A firm only ‘takes advantage’ of its market power if its behaviour is inconsistent with the behaviour of a business that doesn’t have market power. Any business can have a great idea, introduce a better product, or work hard to lower its costs. These actions raise its profits and usually harm its competitors. They do not depend on market power and are clearly not illegal in Australia under our current laws.

So our ‘take advantage’ test largely does what Professor Kaplow wants for the US and EU laws. The ACCC appears to agree.

“This means that the words “taking advantage” have had to do the heavy lifting in Section 46, distinguishing what is anti-competitive from what is pro-competitive.”

But the ACCC wants these words removed.

Why? Possibly because it makes the regulator’s job harder. It has to prove the link between ‘market power’ and the ‘anti-competitive conduct’. As The ACCC Chairman notes:

“[The] courts have been distracted into deliberations about what a hypothetical firm in a counterfactual world lacking substantial market power might do (for some other purpose).”

Sorry Mr Sims. These are not distractions. These are the key bits of the analysis. You cannot know if a business is abusing its market power unless you ask if its behaviour is inconsistent with a competitive business. Of course this bit of the law does the heavy lifting. It is the key economic test that ensures our competition laws promote, not prevent, competitive behaviour.

Throwing the baby out with the bathwater!

Don’t get me wrong. I am not saying that our laws are perfect. But our current law appears to be ahead of both the equivalent US and EU laws in making sure that competition, not competitors, is the focus.

Maybe the wording could be improved. But the ACCC suggestions clearly do not do this.

The US has partially overcome the problems that the ACCC wants to introduce through legal precedent. But their law is almost 100 years old. The ACCC amendments would throw out our own legal precedent and hope the Courts will ‘get it right’.

Why?

The Courts currently have guidance through the wording of the law and our legal precedent has become much clearer over the last two decades.

As for Professor Kaplow’s talk, I couldn’t help myself. I pointed out that the ‘missing link’ between power and conduct existed in Australia’s law. I am not sure that anyone else in the talk cared - it was in Europe and I think I was the only person from the Antipodes in the room.

It would, however, be ironic, if the ACCC got its way and had our law changed just as the rest of the world starts to catch up.

Let’s have a proper debate about the NBN to the bush

The cost-benefit analysis on the NBN has been released. While it “supports” the government’s multi-technology-mix (MTM) scenario over Fibre-to-the-Premises (FTTP), the best case is the ‘unsubsidised rollout’ scenario. So the real message of the report is that the NBN needs a complete rethink.

And, as noted in today’s Australian, this means we need an urgent debate about the future of the NBN.

The unsubsidised rollout scenario considers a single broadband provider that can charge a price up to 70 per cent of consumer value. It rolls out the network where it is profitable. Up to 93 per cent of premises get covered using a range of high-speed technologies. It is a proxy for the likely outcome if the former government had not dreamt up the NBN in the first place. The details are on pages 48 and 49 of Volume 2 of the report.

The 7 per cent that miss out under the unsubsidised rollout are outside the current fixed line footprint; about 700,000 premises in rural and regional Australia. Under the other NBN scenarios, these are premises that will be served by wireless or satellite broadband services.

It will cost about $4.8 billion, plus any tax ‘deadweight loss’ to bring broadband services to the last 7 per cent (table 3). This is about $7000 for each of the premises (p.12). The report calculates that this is well above the likely average willingness-to-pay for many households and businesses in these rural and regional areas. So any scenario that tries to bring broadband to the bush will literally burn a lot of money. The bush will get broadband but only at a price that it wouldn’t want to pay.

The willingness-to-pay figures will be disputed. But the cost-benefit analysis means that there are now a series of questions that the coalition government must answer before it continues the NBN folly.

First, is Australia happy to spend an extra $4.8b on the bush?

Second, if we are happy to spend this money, is it best spent on high-speed broadband? In particular, what would the residents of rural and regional Australia like, faster internet or something else?

Third, if the money is to be spent, how will it be funded?

There are no unambiguous right or wrong answers to these questions. But it is a debate that Australia needs to have.

I have no problem with spending an extra $4.8b in rural and regional areas if it creates valuable services. One of the principles that underpinned Australia’s federation was that rural and regional areas would not be left behind.

But the cost-benefit analysis shows that the current NBN proposal will channel $4.8b into services that cost more than the value they create. Better schools, hospitals, roads and community centres in rural Australia may provide better value for money.

But suppose the cost-benefit study is wrong?

Well, one way to find out is to ask the people in the bush. If, as a society, we want to spend an extra $4.8b on the bush, how would they like it spent? At its crudest, would each rural and regional household and business prefer the NBN to continue or to receive a once off payment of $7000 each from the federal government? It would be interesting to see what a vote would reveal! While some would prefer faster broadband, many, I suspect, could find better uses for the money.

If we do continue to build a rural and regional broadband network, how should it be funded? The present model involves an implicit tax on city broadband to fund rural and regional broadband services. The ‘tax’ operates through uniform national pricing. As I have discussed before, implicitly taxing city internet users to pay for rural and regional internet services is economic lunacy. We should raise the revenue in a transparent, least-cost way.

Table G1 of the cost-benefit study shows that having explicit government funding for internet in rural areas or incentives to back up private investment would bring Australia in line with a range of other countries, from Europe to the US to Asia.

The real message of the cost-benefit analysis is that we need to stop the current NBN process outside the existing fixed-line regions and have a real debate on how we best provide services to rural and regional Australia and how we fund those services. The National party should lead this debate and welcome it.