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Who can make a complaint?
Can I discuss my possible complaint before formally lodging it?
Will the Government business know who made the complaint?
How much does it cost to lodge a complaint?
Is the investigation process independent?
Do I need to lodge a formal complaint?
Do I have to provide evidence information supporting my complaint?
What happens after an investigation is complete?
Is the government business required to follow the VCECs recommendations?
Can I get compensation if the government business is in breach of Competitive Neutrality?
What is the role of the Ombudmans?
How does Competitive Neutrality apply to childcare?
Under the new Competitive Neutrality (CN) Policy, any government business – including local government owned and operated childcare centres – can be "exempt" if it is shown that implementation of CN measures to the business in question is "not in the public interest". (See page 5 of A Guide to Implementing Competitive Neutrality (the CN Guide)).
Childcare is something of a special case in the application of CN which, in accordance with the Competition Principles Agreement, is to be applied across all significant publicly owned businesses. The Government recognises that childcare is often provided by local councils in response to specific community needs and public policy objectives. However, it is not always the case that the full cost of the provision of childcare is transparent and therefore recognised by councils or their constituents.
A key feature of the new CN Policy - Competitive Neutrality Policy Victoria 2000 - is the public interest test which allows government businesses to balance CN objectives with other policy objectives, including Best Value and the provision of childcare, in an open and transparent manner. Fundamentally CN is about making appropriate resource allocation decisions and a starting point for this is understanding the full costs associated with running the business. Assessment of cost should include the impact of any net competitive advantages, that is the net cost of advantages and disadvantages resulting solely from government ownership. The CN Guide assists agencies in determining the net cost of these advantages and disadvantages.
Publicly owned childcare facilities frequently operate in competition with private sector childcare providers. It is appropriate that in determining fees, the council considers the specific market or circumstances which the public policy objectives are addressing. For example are they providing subsidised childcare for all families, their own council employees or only disadvantaged families? This environment may change over time. Initially an area may lack any childcare facilities, so the council fills a void for all families. Over time private centres could be established, enabling the council to reconsider its priorities and tailor the policy in relation to childcare more specifically to the emerging community needs. Best Value principles will prompt the consideration of options in addressing these changed priorities.
The treatment of childcare under the Government’s new CN Policy requires the implementation of a public interest test prior to the application of CN pricing because of the inherent public policy issues associated with childcare. Under the new policy, for all other Government businesses, a public interest test is not mandatory and only applies where the activities of Government business may have broader social, environmental and other impacts.
The scope for childcare exemption from introducing CN pricing is stated clearly in the CN Guide. However, local councils can choose to apply CN pricing should they wish to do so after they have undertaken a public interest test. In undertaking the public interest test the council should explore a range of options, clarifying the public policy objectives, scoping the market, consulting all stakeholders (including competitors), identifying the costs/benefits of different approaches (including suggestions of stakeholders), and determining which option would most benefit the community. For example, two options might be to make a subsidy to aid low-income earners available regardless of which childcare centre (public or private) was used or have lower prices only for disadvantaged users of the council centres. Finally as noted in the CN Policy, the process and any subsidy provided should be transparent and publicly documented.
The first stage of the process of complying with Competitive Neutrality Policy Victoria is to determine whether the policy applies to the activity in question. The policy applies only to a business activity that is ‘significant’ in a relevant market.
2. Is an Activity a Business Activity?
Competitive neutrality is relevant only to significant government businesses. A public sector agency must make its own two-part assessment to determine whether, in each case, an activity is:
The first part of this assessment clarifies whether an activity is a business, rather than regulatory or governance activity. CN Policy applies only to the ‘significant’ business activities of publicly owned entities and not to the non-business, noncommercial activities of those entities. A business activity is characterised by some or all of the following features:
3. What defines a Relevant Market?
In order to determine whether a business is ‘significant’ in a relevant market, it is important to define the relevant market in which the business competes.
Although assessment of the appropriate market is vital, the definition of a market is not an end in itself. Market boundaries should be regarded as a tool with which to assess the particular question at hand of whether the activity is a significant business for the purposes of CN Policy (i.e. whether CN applies).
Elements of Market Definition
While the prime focus of most market-related inquiries is on the product (the identification of substitutable goods / services in the market), other considerations include:
To make an accurate assessment of the relevant market one has to analyse:
Substitution between different products and services need not be between identical facilities in order to reach the conclusion that the businesses are in the same market. The matters for consideration are:
Different businesses will attract different catchment areas, i.e. the distance consumers are willing to travel to access the product or service. In regional districts these catchment areas may be larger than in metropolitan zones. Catchment areas are affected by travel times, access including public transport, and so on.
Temporal boundaries refer to the time within which new competitive constraints can develop. For example, while current businesses might not offer all the services/facilities of a particular business, over what time can (or could) they develop similar services/facilities? If the time scale is “too long” then it is unlikely that they are in the same market. The temporal dimension draws attention to the likely patterns of consumption and production in the longer run.4
Functional boundaries relate to whether the business operates as a producer, wholesaler or retailer. There is potential for competition at a different level of supply (manufacturing, wholesale or retail) to constrain market power. However, in general, aspects of product, geographical proximity and time are most relevant to the definition of a market for CN policy purposes.
Significance is not determined by expenditure on, or revenue from, an activity relative to the agency’s total expenditure or revenue.
Special Case of Monopolies
It is often the case that councils will establish services, infrastructure etc. because the private sector is unwilling to do so. For example, the market maybe small or the consumers may have a limited capacity to pay. This is a legitimate role for government. In such situations the public sector business becomes a regional monopoly. As such it is very significant in the market and should be very conscious of its pricing and the cost to the community of any implicit subsidy.
If the region has a growing consumer base over time the market may become viable for a private sector enterprise to enter the market. The pricing practices of the public business can act to encourage or discourage this new business to the region. Public sector resources are limited and need constant reassessment to ensure they are directed to priorities. The entry into the market of private sector providers can free up public sector resources to meet emerging priorities.
It is a requirement for government agencies to document the rationale for decisions made in the application of CN Policy. This is no less important when the ultimate decision is not to implement a CN measure, such as full cost reflective pricing.
In the event of a complaint, the Competitive Neutrality Complaints Unit would need to consider the documentation on the significance or otherwise of the relevant government business activity. Should a government activity that is the subject of a complaint be represented by its governing body as not to be a significant business, the rationale for such a position must be well documented.
1.The original statement that set out substitution as the key to market definition was provided by the Trade Practices Tribunal (since renamed the Australian Competition Tribunal) in 1976.
2.This description follows the tradition of introducing market definition in relation to price changes; although non–price substitution is also relevant.
3.Algie & Kewley, Market Definition: Competition Law and Practice, John Libbey, Sydney, 1998, p.2.
4.Application by Tooth and Co Ltd; Application by Tooheys Ltd (1979) ATPR ¶40-113 at 18,196.
5.Queensland Wire Industries Pty Ltd v BHP Ltd (1989) 167 CLR 177 at 187 per Mason CJ and Wilson J.
How to calculate cost of capital?
The cost of capital reflects the opportunity cost of funds provided to government agencies.
Government agencies are expected to earn a rate of return to cover the opportunity cost of capital.
It should be noted that capital markets generally use nominal rates. Any consideration of the Weighted Average Cost of Capital (WACC) relating to private sector usage needs to be made with the knowledge that any comparisons should be made with due consideration to differences in cash flows and the basis of the rate determination. Nominal rates require after tax cash flows. CN Policy uses before tax cash flows, and hence, real rates as the basis of the rate of return determination.
The real (before tax) rate of return on capital, based on a WACC for the purpose of competitive neutrality pricing, remains at 8 per cent. (2000)
NOTE: If the calculation of full costs includes an estimation of a commercial rent, no adjustment needs to be made for land or premises.
The agency should provide an estimate of commercial rent. This can be done through an examination of comparable rental properties, real estate documentation stating potential rental value of the premises or, should they currently pay rent, evidence that any existing rental contract is at arms length.
Step 1 Calculate the total asset base.
The total asset base is the sum of total current assets (eg working capital, debtors, stock) plus total non-current assets (eg
written down value (WDV) of physical assets) owned and employed in the production of relevant output, as shown
Step 2 Calculate that part of the total asset base used to produce the commercial proportion of the relevant output
for which a competitively neutral price is required.
This will involve multiplying the value of total assets by the percentage use of these assets in producing the relevant output for which a competitively neutral price is required. Where a specific asset (eg gym equipment) is used only for commercial activity the value of this asset should be excluded from proportional calculations and added in separately in full.
If the total assets are wholly used to produce the relevant commercial output, the rate of return percentage is applied to the whole base.
Step 3 Calculate the cost of capital amount.
Multiply the relevant proportion of the total asset base by the real cost of capital for the current year. For this
example, multiply the proportion of total assets (current plus fixed) by 0.08 (8 per cent).
Step 4 Determine the net cost of capital adjustment.
Subtract from the cost of capital amount (calculated at Step 3) any costs already associated with the funds
used to purchase assets.
This includes any interest owing on a bank loan to purchase assets as well as servicing costs arising from any government
capital charge (such as a financial accommodation levy). Alternatively the cost of assets purchased with a fully commercial
loan can be excluded from the asset base used for the cost of capital calculation.
Step 5 Add the calculated amount to the cost case.
Options for recreational centre
(1) *Include an estimation of a commercial rent
*For specific assets used in commercial activity (gym equipment) add in the value of the asset in full
(2) *Calculate the total asset base used to produce the commercial portion of the output.
The centre has taken out a bank loan for the gym equipment of $80,000 at a commercial interest rate of 12 per cent. As a consequence, the capital value of the equipment financed by that loan should not be included in the cost of capital adjustment. This means that the written down value of the gym equipment for the cost of capital adjustment reduces to $112,500.
Step 1 Calculate the total asset base.
Comment: The total asset based is $1,300,000. After deducting commercially financed equipment the relevant fixed asset base has a written down value of $997,500 plus the working capital amount of $100,000. However, while only 60 per cent of the fixed assets (land, building and equipment) have a commercial purpose, all of the cash in the bank is used as working capital for commercial operation purposes.
Step 2 Calculate the portion of the total asset base used to produce the commercial output.
$997,500 (land, buildings and gym equipment) x 0.6 +$100,000 (cash in the bank) x 1
$598,500 + $100,000 = $698,500
Step 3 Multiply the relevant proportion of the total asset base by the cost of capital for the current year:
$698,500 x 0.08 = $55,880
COST OF CAPITAL ADJUSTMENT IS $55,880
Example of Calculation
Total Asset Base: $1,300,000
Written down value $997,500
x 0.6 $598,500
+ Working Capital $100,000
Commercial Output $698,500
X 0.08 $55,880
COST OF CAPITAL ADJUSTMENT IS $55,880
Land Tax Rates
The following eight-point tax rate scale applies to the 2003 assessment year.
Total unimproved value Tax rates in 2003
0 - $149,999 Nil
$150,000- $199,999 $150 plus 0.1 cents for every $1 of the value that exceeds $150,000
$200,000 - $539,999 $200 plus 0.2 cents for every $1 of the value that exceeds $200,000
$540,000 - $674,999 $880 plus 0.5 cents for every $1 of the value that exceeds $540,000
$675,000 - $809,999 $1,555 plus 1.0 cents for every $1 of the value that exceeds $675,000
$810,000 - $1,079,999 $2,905 plus 1.75 cents for every $1 of the value that exceeds $810,000
$1,080,000 - $1,619,999 $7,630 plus 2.75 cents for every $1 of the value that exceeds $1,080,000
$1,620,000 - $2,699,999 $22,480 plus 3.0 cents for every $1 of the value that exceeds $1,620,000
$2,700,000 and over $54,880 plus 5.0 cents for every $1 of the value that exceeds $2,700,000
Hints on how to conduct a Public Interest Test?
This paper has been prepared to help local government carry out a competitive neutrality public interest
test, which gives the community, the best outcome and achieves competitive neutrality compliance. Under
CN policy, Councils are required to conduct a public interest test when the application of a chosen CN
measure would jeopardise Council's public policy objectives. Local government needs to be aware of the
close relationship between CN and Best Value, and ideally carry out one public interest test, that satisfies
both when reviewing services. This paper has been prepared by the MAV CN working party.
The purpose of a CN public interest test, is to gain appropriate public consultation on a range of costed
service delivery options for a Council service. The process is required to be open and transparent with
Council being able to justify that for any anti competitive arrangement it carries out, the service will
deliver a net benefit to the community. This test is not only about obtaining community consultation on
how Council currently provides the service. It may be necessary to challenge Council's current attitudes
and approach. Public interest tests require Council time, resources and money and need to be carried out
in a manner to give benefit back to Council.
To comply with CN, consultation must be sought from all other service providers in the catchment of the
local government service.
Dealing with Multi Function Facilities:
Some Council facilities such as leisure centres, provide a range of services. Some of the services can be
deemed significant C N businesses while others are not. The public interest test needs to be applied to
both the centre as a whole and to each of its significant services. Changing the delivery of one service
with in the centre is very likely to effect the operational outcome of the whole centre.
Typical future service delivery options
The public interest test seeks comment on a range of service delivery options for a significant business.
Each option needs to be identified and fully costed. Some of these may be not be in favor with the
Council. The options may include:
Consider all Past Public Consultation Processes
Relevant information, available from past public consultations, can be used in the current public
consultation process. Council may have consulted with the public during past:
Establish the market's boundary
Council needs to know the market boundaries for its service to:
The market boundaries can vary greatly. Leisure centre users may be happy to travel 70 Kms in country
areas but in Melbourne 5 to 10 Km is the norm. To establish where the service users come from, Council's
can use tools such as:
Extent of the public Interest process
Council's are required to approach this public interest process in a professional manner and complete an in
depth process, appropriate for the significant business. If you are uncertain as to the extent required for
your significant business, liaise with the CN unit.
Identify target groups in the market for consultation
This process must be open and public with advertisements being placed in all options of media. The
whole community should be made aware of the Public Interest Test therefore gaining open and public
opinion of the service being provided. It cannot be assumed that only those people using or intending to
use the service should be consulted. Council needs to establish a practical method for engaging the target
groups in consultation. This should be done by using some or all of the following:
all private and public service providers in the market's boundary
Other groups such as:
Identify the consultation package
This needs to be simple and practical and effective. Holding of public meetings is expected. Other
components of the consultation package can include:
Broad consultation will give a more balanced outcome. The expectation of the State Government's CN
unit is that Council's have approached consultation in a professional manner and have sought feed back
from a wide section of the community.
Identify the advertising package
Council needs to establish the simple and practical method for engaging the target groups in consultation.
Depending on the target group, it can use:
Contact with all other service providers
It is important that all other service providers in the market place are invited to participate in the process.
It is highly recommended that all invitation documentation is retained for proof of process should a
complaint be lodged. Personal contact with all other service providers, prior to the formal consultation
process can be very advantageous. Sit down and talk to them. Their participation in the consultation
process is not compulsory.
Strategies to attract attention to maximise participation
Community participation in consultation processes is often low. Higher community participation may be
generated by marketing possible "negative" options. It may include:
Public Meeting Strategies
Community consultation is a two way process. It is very important that the community including other
service providers are treated fairly, and feel that they have been treated fairly by the process. They must
have ample opportunity to put forward their views. Public meetings need to be structured to help achieve
an appropriate fair and balanced outcome. Each Council needs to choose strategies to suit their
environment. Consider the following suggestions for public meetings:
Information to be provided for open discussion
Council needs to, at least provide to the community the following information.
Close the consultation loop
It is good practice to close the consultation loop. Advise the final outcomes to all those have been
involved in the consultation process.
If in doubt seek help from others
The CN policy and implementation guide issued from the State Government are written in relatively broad
terms. When the policy is applied to specific local government services, many issues arise. When seeking
a solution to these issues, talk to other Councils and the State Government's CN unit. The MAV CN
working party members are also available to discuss issues with. There is no one simple generic solution
for applying CN to all Council services across the state.
Refer section 1.7 - Public Interest Test of the "Competitive Neutrality - Guide to Implementation".