Determining whether competitive neutrality principles should apply to a government activity involves several key steps, as illustrated in the below diagram.

The below questions and answers provide further guidance on these steps.

Competitive neutrality principles only apply to significant business activities, rather than regulatory or governance activities undertaken by a local government authority or government agency.

To determine whether an activity is a business activity, the nature of the activity and the contestability of the market in which it operates, are important considerations.

A business activity is one that involves the production of goods and/or services in a market that is, or has the potential to be, competitive.

Certain activities are not considered to be business activities for the purposes of competitive neutrality principles:

• isolated and one‑off transactions, as business activities involve repetition and regularity;
• regulatory or policy functions, or the imposition of fees and charges associated with performing such functions;
• taxing and licensing activities; and
• services provided and used solely by a government body, whether or not under a tied contract arrangement.

​The absence of current competition with other providers of the same goods or services does not automatically imply that an activity is not a business activity, as the government body may be setting artificially low prices and so preventing potential competitors from entering the market. For example, providing goods or services free of charge still means that the provision could be a business activity.

Similarly, the provision of a good or service that is considered to be necessary or essential, or involving an element of public service, does not of itself prevent an activity from being considered a business activity.

Once an activity has been determined to be a business activity, the next step is to determine if it is a significant business activity.

A business activity will not necessarily be significant simply because there is some actual or potential competition or a competitor alleges that it is adversely effected by that business activity.

Useful questions for assessing 'significance' are:

• What is the relevant market? (i.e. what is the product space and geographic area in which competition does, or could, exist)
• What is the size of the relevant business activity in relation to the size of the relevant market?
• What is the competitive impact (including the potential competitive impact) of the business activity in the relevant market?
• Is the business a major player in the overall market?
• If the business activity is the only local or regional provider of the service to the community, would competitors emerge if that business operated differently?

A defined financial threshold measure (such as turnover) is not a satisfactory indicator of significance, as it may not reflect the actual or potential impact of the business activity on other businesses, especially in small markets such as those within, and between, municipalities.

Similarly, the government body's expenditure or revenue from an activity relative to that body's total expenditure or revenue is not likely to be a useful indicator of significance.

Under competitive neutrality principles, the price for goods and/or services supplied by the significant business activity must take into account their full cost. This means that the price charged must reflect:

• the cost of the resources directly and indirectly used in the production of a good or service; and
• the additional costs that a private sector provider would incur.

This is known as full cost attribution.

There are a number of cost allocation methods that can be used to apply full cost attribution to a significant business activity: fully distributed costs, short or long run marginal costs and avoidable costs. The table below provides an overview of different allocation methods. The principal difference between these costing methods lies in their treatment of indirect and joint costs.​

The most useful methodology is likely to depend on the significant business activity in question. However, in most instances, the best method of allocating costs is likely to be by way of the fully distributed cost method.

The costing process under this methodology involves several steps outlined below.

Step 1 - Identify the outputs of the significant business activity

The first step is to identify the goods or services produced and delivered by the significant business activity for customers or users external to the government body.

It is important that these goods and services are clearly defined and identified to ensure that the appropriate costs are taken into account. This may involve identifying sub‑activities and cost relationships which are associated with the activity.

Step 2 - Determine the cost base

Once the relevant commercial outputs of a significant business activity have been identified, it is necessary to determine what information is currently available on the costing and pricing of those outputs.

To determine the cost base, all explicit costs (both direct and indirect) and the net competitive advantage of the significant business activity should be taken into account. Relevant information for this exercise may include:

• current financial reports for the significant business activity;
• any current cost allocation policy (for example activity based costing);
• agency overheads that are attributable to the significant business activity;
• an assessment of any costs that are not being allocated to the significant business activity;
• assets used by the significant business activity and the total assets of the government body;
• utilisation of assets that are also used by other units within the government body;
• policies on return on assets or equity; and/or
• any current pricing policy.

The above information will provide the basis for the initial assessment of whether the significant business activity is at least recovering direct costs as well as whether major pricing adjustments will be necessary.

Calculating Explicit Costs

The calculation of explicit costs requires the calculation of the direct, indirect, fixed, variable and joint costs (whether fixed or variable) associated with the significant business activity and its outputs.

• Direct costs are those which can directly and unequivocally be attributed to a significant business activity. They include labour (including on-costs) and materials used to produce the good or service.
• Indirect costs are those which are not directly attributable to a significant business activity and are often referred to as overheads. They can include 'corporate services' costs such as the Chief Executive Officer's salary costs, financial services, human resources, records management and information technology.
• Fixed costs are costs which do not vary with the output of the product or service. Rent and capital are usually fixed costs in the short run.
• Variable costs vary with the volume of output of a good or service and typically include direct labour and materials.
• Common or joint costs are costs that are incurred to produce the product or service but also relate to other activities.
  

When calculating these costs, it is important to consider proportional costing. That is, when a cost is incurred for various purposes by a government body, only some proportion should be attributed to the significant business activity.

Evaluating the net competitive advantages of public ownership

It is recognised that private sector organisations may incur certain costs in providing a good or service that government businesses may not. These costs reflect the competitive advantages of government ownership and should, therefore, be added to the costs actually incurred by the significant business activity to determine the competitively neutral cost.

These costs generally fall into two main categories: capital costs; and taxes and other charges.

Capital costs include depreciation and the required rate of return on the investment of funds in capital goods, land and financial assets. The concept of opportunity cost is discussed later.  

For those significant business activities with a significant capital input, it may be appropriate to calculate the required rate of return on capital on the basis of the Weighted Average Cost of Capital (WACC) methodology to ensure that costs are materially correct.

For those significant business activities which have only minor capital inputs, a single standard rate, such as the 10 year Commonwealth Treasury bond rate, can be used to represent the risk free rate of return.

Taxation costs include income tax, stamp duty, land tax, council rates and payroll tax. Loan guarantee fees also need to take into account the lower cost of debt to government businesses.

Other charges and advantages which should be taken into account include:

• exemptions from various Commonwealth, State and Local Government taxes;
• exemptions from laws that affect private sector operators in the same business;
• access to tied clients: that is, clients from elsewhere in the public sector that are unable to access alternative suppliers; and
• the ability to cross-subsidise commercial activities from government-funded activities.

It should be noted that these costs do not necessarily have to be incurred: they may be considered as notional costs.

Step 3 - Determining a competitive neutral pricing level

Pricing refers to the process of determining an amount at which goods or services will be exchanged in the market place. While cost is a consideration in pricing, optimal pricing policies will also fully reflect additional market and competitive considerations.

Pricing should be reviewed regularly to ensure that changing business environments and circumstances are taken into account.

A number of different issues need to be considered as part of this step:

• The time period to recover competitive neutrality costs through pricing: To ensure that prices reflect commercial considerations, and that capital and other longer term costs are included in the cost base, a medium to long term perspective should be taken.
• Ensuring a commercial rate of return: A private sector organisation has to incorporate into its pricing structures; the cost of debt; and a return to its owners commensurate with the risks assumed by them in investing in the business. Government bodies incur a similar opportunity cost. The purpose of allocating a return on capital employed is to explicitly include a cost that is implicitly assumed by the government body. The opportunity cost of capital is a function of the value of the assets employed by the government body in providing the good or service and the required rate of return on those assets.
• Pricing in a competitive market: In a competitive environment, market forces strongly influence the price of an output. These market forces provide an incentive to government bodies to improve the efficiency of operations. If the market sets a price that would not fully cost recover over the medium to long term, this indicates that the supply of that output by the government body is probably unsustainable. If this is the case, the following options should be considered:​
  
  • reducing costs by productivity and efficiency gains or improvement in service provision;
    
  • outsourcing the supply of certain inputs or input services;
  • identifying any Community Service Obligations (CSOs) and seeking separate funding for those obligations; or
  • ceasing supply of the output.​
    

Competitive neutrality does not have to be applied where a Community Service Obligation (CSO) has been identified and funded. For more discussion on CSOs see: Community Service Obligation Policy and Guidelines for Local Government in Tasmania. November 2000. Department of Premier and Cabinet Local Government Division.

In addition, competitive neutrality measures do not have to be applied if it can be demonstrated that their application would not be in the public benefit.

What may constitute public benefit will vary from case to case.

In general, an activity or action can be defined as having a public benefit if, on the whole, it can be demonstrated that the benefits it provides to society outweigh the cost of the activity or action to society.

This definition is a net concept – that is, there is a need to determine whether the total benefits of some action or activity outweigh the total costs. Public benefit should not be taken to simply mean that some benefit will accrue to some parties as a result of the action or activity.

It is important to note that there must be an overall benefit to society. It must not be confused with 'private benefit' – that is, instances where an activity or action produces a benefit to a specific sector or sub-group of society but, overall, may be detrimental to the whole of society.

The following matters may be relevant when assessing the public benefit of a significant business activity:

• government legislation and policies relating to ecologically sustainable development;
• social welfare and equity considerations;
• government legislation and policies relating to matters such as occupational health and safety, industrial relations and access and equity;
• economic and regional development, including employment and investment growth;
• the interests of consumers generally or a class of consumers;
•  the competitiveness of Australian businesses; and
• the efficient allocation of resources which allows for third party effects.

This is not an exhaustive list of relevant issues and other matters may be considered in a public benefit assessment.

Local governments, under section 72(1)(caa) of the Local Government Act 1993 are required to provide a statement of the operating, capital and competitive costs in respect of each significant business activity undertaken by the council during the preceding financial year, together with a statement of the revenue associated with that activity.

If a council has undertaken a public benefit assessment which concludes that it is not appropriate to apply competitive neutrality principles to a specific significant business activity, a summary of that assessment should be included in the annual report.

Complaints are able to be made to the Tasmanian Economic Regulator in the event it is considered that a local government authority or government business is in breach of competitive neutrality principles.

The process for investigating complaints is set out in the Economic Regulator Act 2009.

Upon receipt of a complaint, the Regulator is required to undertake a preliminary assessment to determine whether or not an investigation of the complaint is necessary or appropriate.

The steps taken by the Regulator in determining whether a complaint is justified are detailed in the Competitive Neutrality Complaints Guideline published by the Regulator.

Government departments and agencies are encouraged to document any competitive neutrality analysis and decisions, although the Regulator is not bound by such documents when investigating a complaint.

Under the Economic Regulator Act, the Regulator is to report, in its Annual Report, on any competitive neutrality investigations undertaken during the year.

Public camping for the purposes of competitive neutrality policy is the provision of temporary or permanent facilities or activities that attract, benefit or provide for overnight camping in a place owned or controlled by a government body, irrespective of whether a fee is charged for the use of any facilities provided.

A public place that is used for public camping, regardless of whether or not the government body intended for that place to be used for the purpose of public camping, is a public camping facility.

Public camping would include the following activities:

• The provision of facilities and/or services clearly intended to attract recreational vehicles (RVs)/caravan tourists to stay overnight in an area or specific location.
• The promotion of a place or facility, whether by advertising, signage, RV Friendly town/destination accreditation or some other means, that is owned or controlled by a government body and establishes a clear intention for the place or facility to be used for public camping.
• Allowing overnight camping to occur in a public place that principally serves another purpose (for instance rest stops) but also attracts RV/caravan tourists, in numbers and in frequency that are more than incidental, is considered to be the facilitation of public camping regardless of whether the government body intended for the place to be used for public camping or promoted the place for that purpose.

The following types of activities would NOT be classified as comprising camping activities:

• The provision of basic public services and amenities (such as public toilets, picnic areas, barbeque facilities, playgrounds, drinking water fountains and open-air cold water showers at entrances to beaches) for the benefit of the local community and visitors.
• The availability of unrestricted free parking on the side of a public road or in a public carpark in isolation.
• The provision of a dump point, in absence of a facility for overnight camping. However the provision of a dump point at a location that incidentally attracts a number of RV/caravan tourists to park overnight on a regular basis may be considered to be the facilitation of public camping.

While many of the factors mentioned above do not singularly constitute a public camping business activity, where there are multiple services, facilities or activities combined, there is a much greater probability that public camping is being provided or facilitated.

If the definition of 'public camping' is met, then it is considered a 'business activity' for the purposes of competitive neutrality policy.​

The test for determining whether the provision of a public camping facility is a significant business activity is based on a quantitative market share threshold.

For each public camping facility, the government body must assess the total number of non‑powered camping sites within a geographic market area of 60 kilometre drive from the public camping facility (the relevant market). If the facilities are in separate locations within the geographic market, the government body must aggregate the total non-powered public camping sites.

If the total number of non-powered public camping sites provided by the government body is more than 10 per cent of the total number of non-powered camping sites within the geographic market, the government body must declare it a significant business activity and prima facie, apply full cost attribution principles.

These arrangements principally relate to the provision of non-powered overnight camping facilities. However, if a public entity provides powered camping sites, the number of powered camp sites are to be included in the total number of public camping sites in the geographic area

Under these circumstances, competitive neutrality principles do not need to be applied. However, given the subjective nature of the exercise, if an estimate falls just below 10 per cent, a prudent approach may be to conduct a public benefit assessme​nt regardless, or apply competitive neutrality principles. 

A government body must conduct a robust and objective public benefit assessment to substantiate any claim that the public benefit would not be served by applying cost recovery pricing under competitive neutrality principles to a particular public camping facility.

For more guidance on public benefit assessments, refer to the earlier general questions and answers:

• What constitutes a public benefit?
• How do you undertake a public benefit assessment?

The following list of considerations, whilst not exhaustive, can be used to assist in determining whether there is a net public benefit from not applying cost recovery pricing competitive principles to a public camping facility:

• promotion of competition in an industry, such as tourism;
• consumer choice;
• economic development;
• innovation and business efficiency;
• industry rationalisation;
• employment growth or the prevention of unemployment in efficient industries or particular regions;
• assisting efficiency for small businesses (for example, by providing guidance on costing and pricing or marketing initiatives which promote competitiveness);
• improving the quality and safety of goods and services and expanding consumer choice;
• supply better information to consumers and business, thereby permitting more informed choices in their dealings at a lower cost;
• address any externalities that affect community welfare, such as noise levels or risks of motor accidents;
• promote equitable dealings in the market;
• promote industry cost savings, resulting in contained or lower prices at all levels of the supply chain;
• implement desirable community standards with the minimum impact on competition in the marketplace; and
• improve environmental protection.

Where the facility is provided free of charge, the costs of implementing and operating a pricing system may also be taken into account. 

​The following guidance is not intended to constrain or limit the information a government body may wish to provide in support of its public benefit assessment. It simply outlines the minimum details that should be provided to demonstrate that the appropriate policy and stakeholder considerations have formed part of the assessment of net public benefit.

1.    Describe the nature of the significant business activity​

As a preliminary step, the government body should identify any public camping facilities that fall within the market share threshold that have special or unique circumstances that may result in the site not being a substitute, or being a very weak substitute, for facilities provided by commercial caravan park operators in the market. If the government body can demonstrate that a particular site is not a substitute, or is a very weak substitute, for the commercial provider's service, the anti‑competitive harm on the commercial operator of not applying cost reflecting pricing is likely to be lower. This is a factor that can be included in a public benefit assessment on whether to apply cost reflective pricing at that particular site.

2.    Clearly identify the policy objective for undertaking a public camping business activity

Policy objectives refer to those which are endorsed by the Government, a Minister or a local government body. Supporting documentation could be in the form of a Ministerial policy statement or a formal resolution of a local government.

This section is the public policy justification for why a government body considers it is appropriate to provide public camping facilities.

For example:

• Setting up a dump station to prevent tourists from dumping sewage on land, in stormwater drains or in waterways.
• Providing an off-road safe location for RV and caravan parking to prevent tourists parking on the roadside in dangerous places, in front of residences or where they cause traffic congestion.

3.    Identify all affected stakeholders and their interests/concerns

In the context of public camping, affected stakeholders are likely to include (but are not limited to):

• the public (ratepayers, local residents and visitors);
• commercial caravan park operators;
• local businesses, including tourism/hospitality businesses, grocers and other retailers, service providers; and
• tourists.

When identifying stakeholder interests and concerns, it is important to link stakeholder interests with the policy objectives that are addressed by undertaking the public camping activity (for example public safety or environmental protection), the benefits created (for example, tourism attraction, increased competition and consumer choice, economic development and local employment or tourism spending) and any adverse or negative impacts, such as the anti‑competitive detriment to commercial caravan parks. Where negative impacts are identified, the analysis should include any steps taken or proposed to be taken to minimise or eliminate these impacts.

4.    Details of public consultation and market research undertaken

Public consultation, both general and targeted towards affected stakeholders, is a mandatory component of any public benefit assessment. The public consultation should be carried out for the purpose of the public benefit assessment, rather than a general consultation intended for another purpose.

As the public benefit assessment will be made publicly available, the preparing government body must consider that it will be publicly accountable for the appropriateness of the public consultation. This component of the public benefit assessment should detail the method of consultation undertaken, including how it was advertised, how submissions and feedback were received, whether a public meeting or hearing was held, and a summary of the feedback/submissions received and how this was considered in the development of the final decision regarding the public camping activity.

5.    Demonstrate that achievement of the stated policy objective would be jeopardised if full cost attribution pricing was implemented.

For example:

• Charging a fee for the use of a dump station may disincentivise the use of the facility and thereby do nothing to prevent pollution.
• Charging a fee for public camping may disincentivise the use of the public camping facilities, thereby failing to achieve the objective of preventing overnight parking in undesired locations.
  
  

6.    Determine the best available means of achieving the overall policy objectives, including an assessment of alternative approaches.

In this assessment, the government body should identify other means of achieving the overall policy objectives, including the proposed option of providing or facilitating public camping, and assess the relative merits of the alternative approaches. The determination of the best available means may involve a qualitative assessment of the priorities assigned to – and by implication, the trade-offs arising from – the competing policy objectives.

For example:

• Alternative approaches to stop pollution may be to issue environmental notices, infringement notices or introduce by-laws to prevent tourists from dumping sewage on land, in stormwater drains or in waterways. Assessments of each option might reveal that one or another is cheaper or more expensive to implement, or more or less effective to monitor and enforce.
• Introducing and enforcing parking restrictions in certain locations to prevent problem parking or by-laws to restrict the occupation of RVs and caravans in public places could be alternative options to providing public camping. Both options may be cheaper than establishing and maintaining camping facilities and would alleviate the need to apply competitive neutrality principles. Alternatively, the cost of implementing cost reflective pricing and employing staff to monitor the grounds and collect fees could outweigh the benefits of neutralising the competitive advantage of providing free camping, whereas prohibiting parking and not providing an alternative may deter visitors from the area altogether.

The public benefit assessment should be undertaken in consultation with the affected community, including businesses that would be adversely affected by unfair competition, through an open and transparent process.

The government body is best placed to determine, on a case-by-case basis, the level, nature or scope of the consultation having regard to the complexity of the issues and the impact on the community.

The public benefit assessment should demonstrate sufficiently how the government body has taken into account the feedback received from its consultation.

At the conclusion of the consultation, the processes and outcomes of the consultation should be documented through an updated public benefit assessment and be made publicly available. Information that is commercial-in-confidence may be excluded, provided a statement specifying reasons to support the claim is noted in the public documentation.

The public consultation process will provide the government body with valuable information to ensure the best overall policy option is identified to achieve the objective.

In these circumstances, the government body may seek from the Minister a Ministerial Statement confirming the conclusion that cost recovery pricing competitive neutrality principles should not apply, or not fully apply, to public camping in the specified location.

The Minister may issue a Ministerial Statement regarding a public camping facility.

Ministerial Statements seek to provide certainty to the government body responsible for the activity and the relevant local communities and businesses on the status of a public camping facility in relation to competitive neutrality policy.

Such Statements can exempt the facility from the application of competitive neutrality principles.  

The Minister will consider the public benefit assessment provided in support of a Ministerial Statement request by a government body. The Minister will issue a Ministerial Statement if satisfied that there is a net public benefit in not applying competitive neutrality principles, consistent with the Competition Principles Agreement – 11 April 1995.

A Ministerial Statement may specify more than one location or a Ministerial Statement may be issued for each location requested by a government body, at the Minister's discretion. A Ministerial Statement may also be subject to conditions, and be time limited.

A Ministerial Statement does not provide any exemption from any other legal obligations or liabilities of the government body in relation to the activity, including compliance with the Competition and Consumer Act 2010 (Cth).

In these instances, the full cost distribution method should be applied to determine an appropriate charge for the public camping facility.

For more guidance on this method, refer to the earlier general questions:

• How do you apply the fully distributed cost method?
• Once the fully distributed cost method has been applied, how do you assess whether the price associated with a significant business activity is competitively neutral?​

The following checklist is not exhaustive, but rather an indicative listing of the types of costs that a government body may need to consider. Depending on the nature of the services being provided, some government bodies may identify additional costs to be taken into account whilst for other government bodies some of the listed costs will not apply.
NOTES:

1. Financing costs

The market rate of interest should be based on the Reserve Bank of Australia's 90-day Bank Accepted Bill Rate / Small Business Loan Rate.

2. Tax equivalents

Tax equivalents are competitive neutrality costs as government bodies are not liable for Commonwealth income tax; ie to ensure that government bodies are operating on a 'level playing field' with private operators, a tax equivalent amount should be calculated and accounted for when identifying the costs of providing public camping facilities. Tax equivalents are calculated by multiplying the net profit from providing the public camping facilities by the Commonwealth corporate tax rate (currently 30 per cent) as follows:

Revenue

Less: operating costs

Less: capital costs

Less: competitive neutrality costs. ​

= Net profit before tax equivalent expense

Less: Tax equivalent expense (30% of net profit before tax equivalent expense)

= Net profit after tax equivalent expense

The net profit after tax equivalent expense should be equal to or greater than 0; if less than 0 it means that the price being charged is less than cost and, the price, therefore, breaches the competitive neutrality principles.

It is likely that government bodies do not have site usage data because they have either not monitored usage of the site or, for a new site, there is no history of usage.

Government bodies will need to estimate revenue to arrive at the net profit and calculate the tax equivalent expense as, in the absence of site usage data, revenue can only be estimated on the basis of the expected number of site visits in a financial year. ​

Consistent with the general reporting requirements imposed on local governments outlined earlier, local governments which provide public camping activities that comprise more than 10 per cent of the applicable market must report those activities in the relevant council's annual report. This is because, in these instances, the activity is taken to be a significant business activity for the purposes of competitive neutrality. This requirement applies regardless of whether full cost attribution principles are adopted in relation to that public camping activity or whether a Ministerial Statement has been issued.

If a council has undertaken a public benefit assessment which concludes that it is not appropriate to apply full cost attribution principles to a specific camping facility, a summary of that assessment should also be included with the relevant reporting under section 72(1)(caa) of the Local Government Act.

More broadly, councils are encouraged to report all public camping activities. This will assist the ongoing review of the application of competitive neutrality principles to public camping and ensure the right policy balance is maintained as circumstances and market conditions change over time.