Mon, 08 Nov 2010 - 10:07
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The Australian: Labor reverses the push for competition

THE Rudd-Gillard Labor government just does not "get" competition.

In policy areas as diverse as banking, telecoms and Julia Gillard's $16 billion school hall stimulus program, Labor's policies are failing badly -- and a core reason is Labor's indifference to competitive private sector markets.

In recent days we have seen record bank profits -- and banks increasing their home loan rates ahead of the Reserve Bank's cash rate.

When the cash rate was increased by 25 basis points last Tuesday, Commonwealth Bank increased its rates by nearly twice that amount.

Treasurer Wayne Swan blames "a culture of arrogance among the banks".

The real explanation is quite different. On Labor's watch, concentration in the banking sector has significantly increased -- reducing competition and increasing the pricing power of the big four.

According to RBA assistant governor Guy Debelle, the major banks' combined market share rose from 60 to over 80 per cent from 2007 to 2009.

During this period significant non-bank operators such as Wizard, Aussie, Rams and Challenger exited the home loan business or were acquired by the banks, while Bankwest was acquired by CBA and Westpac bought St George.

The banks say their rates are going up because they need to recoup increases in their funding costs. But in business there is no automatic relationship between your costs and the prices you charge your customers. It is only if you have market power that you can increase your retail prices with impunity.

In a more concentrated market, the banks now have significantly greater pricing power -- and Australian home loan customers are suffering.

It is a pity that the Rudd government did not think about the competition implications of the panicked decisions it took in 2008 -- decisions it said were necessary because of the GFC.

With its rushed introduction of a bank deposit guarantee of $1 million, Labor gave the big banks a competitive free kick.

Labor's wholesale funding guarantee further strengthened the competitive position of the big banks, as the credit union and mutuals peak body Abacus has told parliament.

The Rudd-Gillard government has reversed a 25-year trend of increasing competition in banking.

Now they are seeking to do the same thing in telecommunications. Over 20 years, bipartisan policy to increase competition in that sector has delivered clear consumer benefits, most obviously in mobile telecommunications.

More recently, there has been progress in fixed broadband competition thanks to "unbundling".

This is where a competitor rents Telstra's copper wire from the exchange to the customer's home, and combines this with its own electronic equipment installed in the exchange.

Over 1.4 million broadband services are now provided by Telstra's competitors using unbundling. This has produced lower prices -- and new services.

Unbundling-based competitors were the first to introduce the next-generation ADSL2+ broadband service and the first to allow a customer to purchase a broadband service without also taking a voice service (so-called "naked DSL").

But Labor's extraordinary broadband policy would turn back the clock, establish a new government-owned monopoly broadband network and shut down Telstra's access network.

Under Australian competition law, it is normally illegal for two companies to do a deal in which one is paid by the other to exit the industry.

Labor plans to change that law to allow its recently announced deal, under which Telstra will be paid $11bn to stop operating a fixed-line access network, leaving the field clear for the new government-owned monopoly.

A similar indifference to competition has contributed to the wasteful overspending under Labor's Building the Education Revolution.

When the NSW Labor government received $3bn from Canberra, for example, its approach was to divide the state up into seven regions.

Each of these was handed to a single large construction company, granting it in effect a regional monopoly.

Is it any wonder that prices paid on a per square metre basis for buildings under this program have been above normal industry benchmarks?

Competitive markets tend to produce the lowest prices and best outcomes for consumers.

Companies which charge too much cannot sustain themselves. The discipline of a genuinely competitive market is a much more effective tool for delivering public policy than any amount of regulation imposed by bureaucrats.

There has been a profound reversal under the Rudd-Gillard government.

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