The
report by the Expert Panel of its
Inquiry into the Competitive Neutrality of the National Broadcasters released earlier this month features the following 'Key points'-
• This Inquiry is about whether the National Broadcasters—the Australian Broadcasting Corporation (ABC) and the Special Broadcasting Service (SBS)—are competing fairly with the private sector. The National Broadcasters have pursued new opportunities in changing media markets and new competitive circumstances have emerged.
• Most significant competitive pressures for news, entertainment and advertising are coming from giant international companies. Nonetheless, the National Broadcasters are forces in Australian markets, with their competitive weight enhanced by secure funding at a time of higher commercial risk, supported by relatively high productivity growth.
• Competitive neutrality seeks to ensure that competition is not distorted by public entities taking inappropriate advantage of government ownership. It is not intended to prevent public entities from competing, nor to relieve discomfort from competitive processes which are bringing benefits to consumers as they rapidly adopt and enjoy new services.
• The Commonwealth’s Competitive Neutrality Policy (CNP) is focussed on government trading corporations and its relevance to the National Broadcasters is more limited. Nevertheless, the National Broadcasters operate under a best endeavours approach to competitive neutrality.
• With respect to their business activities (with user-charging), the National Broadcasters are abiding by a best endeavours approach to competitive neutrality. It is unlikely to be front of mind but mostly conforms to good internal business organisation. There is no evidence that costs are not appropriately allocated. And prices are generally set to market rates.
• Different regulatory circumstances facing the National Broadcasters, compared to the private sector, represent Parliamentary decisions which are difficult to bring to financial account.
• Some improvements in transparency and internal procedures are possible. The separate Treasury review of the CNP may clarify improvements arising from the recommendations of the Harper Review of Competition Policy.
• Beyond the application of the competitive neutrality management guidelines to business activities, the question arises as to how competitive neutrality principles about competing fairly without distortion might apply to the free services delivered by the ABC and SBS.
• Free ABC and SBS services are having some competitive impact. Submissions included complaints about the ABC’s online news service and SBS’ multi-channel and streaming services. But the National Broadcasters are established and funded to provide free services. So long as they operate within their statutory Charters they are operating in the public interest.
• Submissions questioned whether the ABC and SBS were operating within their Charters. The Charters are written very broadly, and reporting against the Charters is not detailed or robust enough to settle doubts. Accountability is difficult, especially as there is no opportunity for Charter complaints to be addressed.
• Given their market shares, and other factors, this Inquiry considers the National Broadcasters are not causing significant competitive distortions beyond the public interest.
• While the National Broadcasters are not prohibited from competing, some improvements in the way they interact with markets should be contemplated.
The Terms of Reference were contextualised as
Government businesses compete with the private sector in a number of markets. The Commonwealth Competitive Neutrality Policy requires that government business activities should not enjoy net competitive advantages simply by virtue of their public sector ownership. At the same time, competitive neutrality principles do not imply that government businesses cannot be successful in competition with private businesses.
Both National Broadcasters provide important services for the benefit of the Australian community in line with a legislated Charter. Some aspects of this they undertake or deliver in competition with private sector operators. It is timely to consider how the national broadcasters operate in modern media context and whether the ways they compete with the private sector are appropriate. These policy issues have not been reviewed in depth since the 1997 report by Bob Mansfield considered the way in which the national broadcasters conduct business activities within the confines of competitive neutrality principles. It is also timely to conduct this Inquiry in concert with the wider review of Competitive Neutrality Policy being undertaken by the Treasury.
The specific Terms were
This Inquiry will explore the practices of the national broadcasters and advise the Government on whether they are operating in a manner consistent with the general principles of competitive neutrality.
The Inquiry will consider how Australian Broadcasting Corporation (ABC) and Special Broadcasting Service (SBS) operate within the markets of which they are part and the basis on which they are competing with the private sector. This should focus on:
• the application of competitive neutrality principles to the business activities of the ABC and SBS, including in operational decision making and risk management
• the cost structures of business activities
• the regulatory obligations for ABC and SBS compared to those for private sector operators, insofar as this these relate to competitive neutrality principles
• the adequacy of current compliance and reporting arrangements, and
• complaints and accountability mechanisms operated by the broadcasters, insofar as they relate to competitive neutrality principles.
The panel will also make observations on the role of national broadcasters in the modern media environment.
The Executive summary states
This Inquiry ... was launched by the Minister for Communications in March 2018 following concerns raised with the Government by Members of Parliament and Australia’s commercial media industry focussing on whether the National Broadcasters are operating appropriately in the modern media environment.
The National Broadcasters provide important services for the benefit of the Australian community in line with their legislated Charters. Some aspects of this they deliver in competition with private sector operators. In rapidly changing media markets the National Broadcasters have pursued new opportunities and so new competitive circumstances have emerged. Most significant competitive pressures for news, entertainment and advertising are coming from giant international companies, the so-called FAANGs (Facebook, Apple, Amazon, Netflix and Google) placing advertising revenues of Australian media companies under pressure. (The FAANGs’ participation in Australian markets is part of a separate inquiry by the ACCC into digital platforms). Nonetheless the National Broadcasters are appreciable forces in the Australian market, with their competitive weight enhanced by secure government funding at a time of higher commercial risks and low returns. Their capacity to compete has been supported by a relatively high rate of labour productivity growth.
This Inquiry is asked to look at the National Broadcasters’ operations through the lens of competitive neutrality.
Competitive Neutrality Policy stems from COAG agreements on competition policies and seeks to ensure that competition is not distorted by public entities taking inappropriate advantage of public ownership.
According to the 1995 Competition Policy Agreement:
The objective of competitive neutrality policy is the elimination of resource allocation distortions arising out of the public ownership of entities engaged in significant business activities: Government businesses should not enjoy any net competitive advantage simply as a result of their public sector ownership. These principles only apply to the business activities of publicly owned entities, not to the non-business, non-profit activities of these entities.
The 1996 Commonwealth Competitive Neutrality Policy (CNP)—which details the application of competitive neutrality principles within the Commonwealth sector—notes that:
Competitive neutrality does not imply that government businesses cannot be successful in competition with private businesses. Government businesses can achieve success as a result of their own merits and intrinsic strengths, but not as a consequence of unfair advantages flowing from government ownership.
Competitive neutrality is not intended to prevent public entities from competing, nor to relieve discomfort from competitive processes which bring benefits to consumers.
Australian media consumers have rapidly adopted and enjoyed new services brought forward by competition.
The CNP is focussed on government trading corporations and its relevance to the National Broadcasters is more limited. Nevertheless, the National Broadcasters operate under a best endeavours approach to competitive neutrality. Here competitive neutrality is intended to cover the business activities of the ABC and SBS. ... The Panel drew on these investigations in assessing the detailed responses provided by the National Broadcasters to a range of specific and general questions about their competitive neutrality practices. Submissions from other stakeholders were also relevant.
The Panel referred to four tests:
1. Have there been complaints to the Australian Government Competitive Neutrality Complaints Office (AGCNCO)?
2. Are there specific examples of significant pricing or other market distortions?
3. Do the average market shares of the National Broadcasters signal material competitive impact, and have there been significant changes?
4. Do the National Broadcasters have internal processes for proper cost allocation and market entry?
With respect to their business activities, the Panel concluded that the National Broadcasters are abiding by a best endeavours approach to the CNP. These matters seem unlikely to be front of mind for the National Broadcasters, but the requirements mostly seem to correspond to good internal business organisation.
Thus costs are separately identified and allocated, and prices are mostly set to market rates. Tax and debt neutrality have little relevance.
Regulatory neutrality presents a more complex picture. There are strongly divergent views around the relative weight of the different regulatory arrangements faced by the National Broadcasters, compared to private sector businesses. But the Panel concluded that these have been set by Parliament and therefore represent decisions in the public interest.
The cost burdens of these different regulations are difficult to bring to useful financial account.
Moreover, there have been no competitive neutrality complaints about the National Broadcasters put this century to the Government’s complaints agency, the AGCNCO, and market shares of the National Broadcasters do not show significant change (although this may change in a rapidly changing market with new services).
Some improvements in competitive neutrality transparency and internal processes are possible and warranted. The separate Treasury review of the CNP arising from the Harper Review of Competition Policy may clarify competitive neutrality reporting requirements.
The Panel considers that the National Broadcasters should continue to abide by the CNP on a best endeavours basis.
A wider relevance of competitive neutrality principles?
Beyond the application of the CNP to business activities, the Inquiry’s Terms of Reference invite the question as to how competitive neutrality principles might relate to the whole of the services (free services) provided by the ABC and SBS. The Harper Review called for a potential broadening of the competitive neutrality principles stating:
Government business activities that compete with private provision, whether for-profit or not-for-profit, should comply with competitive neutrality principles to ensure they do not enjoy a net competitive advantage simply as a result of government ownership.
The Treasury Review of the CNP may throw further light on this but in the meanwhile the Panel has been asked to make an assessment with respect to the National Broadcasters.
The National Broadcasters questioned the relevance of a wider application of competitive neutrality principles. They have received no guidance as to a wider application. (Indeed, the Panel can find no evidence that they received the guidance about the best endeavours requirement foreshadowed by COAG in November 2000 for just their business activities). But in any case, in relation to the general principles of competitive neutrality, the ABC points to the requirement in its Charter to take account of the services provided by the commercial and community broadcasting sectors. Similarly, SBS refers to the requirement in its Charter to contribute to ‘the overall diversity of Australian television and radio services’ and to take into account the contribution of the ABC and the community broadcasting sector.
Free services offered by the ABC and SBS are having some competitive impact.
The Panel's finding are
Competitive neutrality principles (Chapter 2)
1. A best endeavours approach by the National Broadcasters to the application of the Competitive Neutrality Policy to their business activities continues to be appropriate.
2. More generally, the general principles of competitive neutrality are relevant to the other forms of market participation by the National Broadcasters.
The media landscape (Chapter 3)
3. The media landscape is likely to continue to change rapidly, creating new forms and points of competition, which may continue to impact adversely on some commercial organisations. It is worth noting the proposed merger of Fairfax and Nine Entertainment is a response to these pressures and may be indicative of further market consolidation.
4. Rapid market changes are resulting in an increase in the instances in which the National Broadcasters are ‘rubbing up’ against a range of domestic private sector competitors.
5. Major sources of competition in media markets are likely to continue to be international companies with resulting impact on all domestic media organisations.
The role of the National Broadcasters (Chapter 4)
6. The National Broadcasters have adapted to the challenge of change by extending the range and type of their services, taking full advantage of market developments and technological innovation, to the benefit of the public.
7. In order to comply with their Charters, the National Broadcasters seek to maximise their reach by being significant providers of content across all platforms. Their capacity to do so is limited by their budgets.
Application of the Competitive Neutrality Policy to business activities
Cost allocation and pricing
8. The Panel notes that the National Broadcasters generally price to market and there is no evidence that they are not appropriately allocating costs.
Regulatory neutrality
9. The Panel notes the differences in the regulatory arrangements for the National Broadcasters and the private sector. However, the Panel is unable to bring regulatory comparison to useful financial account.
10. The Panel notes that the Australian and Children’s Screen Content Review, currently with Government, is considering the content elements of the regulatory regime as it applies to commercial broadcasters and any decisions will follow from that review.
Taxation neutrality
11. The Panel notes that to the extent that taxation issues are relevant to Competitive Neutrality Policy relating to the National Broadcasters, the evidence is that the National Broadcasters in effect comply with competitive neutrality requirements.
Debt neutrality
12. The Panel notes that to the extent that issues relating to debt are relevant to competitive neutrality, there is no evidence that the National Broadcasters do not comply with competitive neutrality requirements.
Operational decision-making and risk management
13. The Panel notes that the evidence is that operational decision-making and risk management are appropriate, deriving from conventional business practices, and therefore conforming to competitive neutrality requirements.
Competitive neutrality complaints and accountability mechanisms
14. The Panel notes that there is an independent complaints process in place for competitive neutrality that has not been used this century with regard to the National Broadcasters.
Conclusions regarding the application of the Competitive Neutrality Policy to business activities
15. The National Broadcasters are meeting the best endeavours approach to the Competitive Neutrality Policy (which applies to their business activities), insofar as best endeavours has been defined.
16. With respect to the cost allocation methods used by the National Broadcasters for their business activities, there is no evidence that they do not conform with the Competitive Neutrality Policy. Pricing to market is evidence of no significant competitive distortion. This has been confirmed by independent consultants.
17. The average market share of commercial activities of the National Broadcasters are not large, have not increased markedly over time, and do not give rise to concerns. Nonetheless, competitive impacts may still occur in particular sub-markets.
Competitive neutrality principles relating to other market distortions
Online news
18. The Panel finds that in relation to the provision of online news services, the ABC and SBS are behaving in accordance with their Charters. These services also comply with the general principles of competitive neutrality.
Terms of trade with content providers
19. The Panel notes that the issues raised in relation to ‘terms of trade’ are essentially contract issues and do not relate to competitive neutrality. However, there may be scope for the National Broadcasters to improve the way they interact with market participants to ensure transparency and good business practice (see Chapter 8).
Advertising and marketing of own services
20. The Panel notes the National Broadcasters are able to promote their services online. This is consistent with the way they have always promoted their radio and television services to ensure the widest possible audience reach. The Panel considers normal competitive interactions are occurring, and there are no concerns for competitive neutrality principles.
21. The Panel notes there is nothing in the National Broadcasters’ Charters, nor in the general principles of competitive neutrality, that prevents them from promoting their own services. The Panel notes that in the context of the Competitive Neutrality Policy, competitive advantages arising from size are not considered a concern.
‘Commercialisation’ of SBS
22. The Panel notes that what has been exhibited by private sector organisations is competitive discomfort. As long as the National Broadcasters’ decisions are endorsed by their Boards and are subject to parliamentary review then, by definition, the activity is in the public interest.
Conclusions regarding competitive neutrality principles relating to other market distortions
23. The issues raised reflect increased competition generally in the digital space whether streaming services or online news services.
24. They also reflect a context of increased viewer demands and expectation along with the rapid take-up of new technologies.
25. As stated above, as long as the National Broadcasters are within their Charters then, by definition, the activity is in the public interest.
26. However, the Charters of both National Broadcasters are broad and open to interpretation by the Boards.
27. In relation to the matters under review by this Inquiry, both National Broadcasters would benefit from more public transparency around how they approach the issues of fair competition.
28. Accountability is difficult, especially as there is no opportunity for Charter complaints to be addressed.
Observations on the role of the National Broadcasters in the modern media environment (Chapter 8)
Capacity to compete
29. The Panel considers that the National Broadcasters should be able to adapt to new market opportunities in the public interest. However, choice will be limited by a finite budget.
30. The Panel notes that the amount of money being generated by SBS through advertising revenue represents a small percentage of total television advertising, and therefore, is not considered material.
31. Furthermore, following the Efficiency Review of 2014 the SBS budget was cut and the Government stated that SBS should make up part of the shortfall through advertising.
The associated recommendations are
Competitive neutrality principles (Chapter 2)
1. If decisions on the Review of the Commonwealth’s Competitive Neutrality Policy by the Treasury enhance competitive neutrality management guidelines or extend competitive neutrality principles more generally, then the National Broadcasters should conform to these requirements on a best endeavours basis.
2. At the same time, the National Broadcasters should be provided with guidance (as previously foreshadowed by COAG) as to how they should comply.
Issues raised by stakeholders (Chapter 6)
Radio broadcasters
3. The Panel notes that issues to do with technical regulation, especially licence areas, have not been fundamentally reviewed since their inception in the 1930s. The Panel has referred these issues to the Department for further policy consideration.
Application of the Competitive Neutrality Policy to business activities
Regulatory neutrality
4. The Panel notes that neither the Content Review, nor this Inquiry, address the content issues raised by commercial radio, and draws this to the attention of the Department for future policy consideration.
5. The Panel considers that a fresh approach to regulatory impact statements should be applied to decisions in prospect, to ensure regulations remain relevant, are consistent with competitive neutrality and are not causing market distortions beyond the public interest.
6. In relation to those matters that do not fall within the scope of this Inquiry, or other reviews currently underway, those matters should be referred to the Department for further policy consideration.
General recommendations regarding the application of the Competitive Neutrality Policy to business activities
7. As identified by the Ernst & Young Report, there are a number of areas where the ABC could improve its approach to cost allocation and pricing to enhance transparency and give greater confidence that its costing and pricing practices are aligned with competitive neutrality principles.
8. The National Broadcasters’ processes for commercial business activities appear adequate. However, changes should be made to ensure that there are processes in place for improved transparency, accountability and reporting.
Competitive neutrality principles relating to other market distortions
Dealings with smaller providers
9. The Panel notes that ABC Commercial, in collaborating with smaller companies, must observe best practice business negotiations to avoid appearance of unfair competition (see also Chapter 8).
Observations on the role of the National Broadcasters in the modern media environment (Chapter 8)
Transparency
10. The Panel supports the ABC’s commitment to improve transparency and accountability through its corporate plan and invites SBS to do likewise.
11. The Panel notes that the National Broadcasters’ annual reports are of necessity ‘backward looking’ documents. The Panel considers that the National Broadcasters should provide a statement of intentions covering how they intend to spend their funds in the future which would provide Parliament and the public with greater transparency and accountability of the expenditure of funds.
Charters
12. The Panel considers that the National Broadcasters should improve their reporting of Charter performance in the context of the general principles of competitive neutrality. If this enhanced reporting does not occur, the government should consider a way of managing complaints about Charter performance in this area.
Market entry and participation
13. The Panel is of the view that appropriate guidance from the Board would give some substance to the ABC's Charter obligation to take account of commercial broadcasters.
14. While SBS has no equivalent Charter obligation, there seems no reason why the SBS Board should not pursue similar benefits for the market.
Longer term funding framework
15. The Panel recommends that government considers options, drawing on the UK example, to give a longer term framework for the funding of the National Broadcasters, accompanied by increased transparency and accountability to the benefit of consumers and competition more broadly.
