A Compendium of OECD Recommendations, …

1 competitive Compendium OF OECD RECOMMENDATIONS, GUIDELINES AND BEST PRACTICES This work is published on the responsibility of the Secretary-General of the OECD. The opinions expressed and arguments employed herein do not necessarily reflect the official views of the Organisation or of the governments of its member countries. This document and any map included herein are without prejudice to the status of or sovereignty over any territory, to the delimitation of international frontiers and boundaries and to the name of any territory, city or area. OECD 2012 A Compendium OF OECD RECOMMENDATIONS, GUIDELINES AND BEST PRACTICES BEARING ON competitive neutrality OECD 2012 3 TABLE OF CONTENTS Executive Summary.

2 5 Chapter 1. Introduction to competitive neutrality and State-Owned Enterprises .. 11 Background and context .. 11 competitive neutrality and objectives .. 13 Notes .. 14 Chapter 2. Obtaining competitive neutrality : A Compendium of OECD Recommendations, Guidance and Best Practices .. 15 Streamlining the operational form of government business .. 15 Identifying the direct costs of any given function .. 20 Achieving a commercial rate of return .. 26 Accounting for public service obligations .. 30 Tax neutrality .. 38 Regulatory neutrality .. 42 Debt neutrality and outright subsidies.

3 53 Public procurement .. 56 Notes .. 65 Bibliography .. 70 Annex Overview of Relevant OECD Instruments, Best Practices and References Bearing on competitive neutrality .. 75 Boxes Priority areas identified for this paper .. 12 Recommendation 1 of the Council Concerning Structural Separation in Regulated Industries .. 17 Structural Separation: Sectoral 18 Excerpt from 1997 Regulatory Reform Recommendations .. 19 Relevant SOE Guidelines .. 21 Related Excerpts from the Best Practice Guidelines for Budget Transparency .. 21 Excerpts from Best Practice Guidelines for User Charging for Government Services.

4 23 Calculating full costs and factoring in competitive neutrality adjustments .. 24 Best Practice Guidelines for Contracting Out Government Services "Ensure Valid Comparisons" .. 25 Excerpts from the SOE Guidelines .. 27 Methods used to calculate rate of returns .. 28 Methods used to estimate performance of SOEs on the basis of cost of capital .. 29 Relevant SOE Guidelines .. 32 4 A Compendium OF OECD RECOMMENDATIONS, GUIDELINES AND BEST PRACTICES BEARING ON competitive neutrality OECD 2012 Methods for measuring the cost of public service obligations.

5 34 Excerpts from the Best Practice Guidelines on Off-budget funds and Tax Expenditures .. 35 Off-budget expenditure and state-owned financial institutions .. 36 Cross border issues and 40 Before and after tax rate of return targets .. 41 Relevant SOE Guidelines .. 44 Questions from the OECD Reference Checklist for Regulatory Decision-making .. 45 Relevant Principles and annotations from the 1997 Policy Recommendations for Regulatory Reform/2005 Guiding Principles for Regulatory Quality and Performance .. 47 Competition Assessment Toolkit .. 48 OECD Council Recommendation on Broadband Development.

6 49 Principle and Principle V on Financial Regulation .. 50 competitive neutrality addressed in the APEC-OECD Integrated Checklist on Regulatory Reform .. 51 Annotations to the Draft Recommendation of the Council on Regulatory Policy and Governance .. 52 Excerpts from the SOE Guidelines .. 58 Principles for Enhancing Integrity in Public Procurement .. 59 Excerpts from the Principles for Managing Ethics in the Public Service .. 60 Guideline 6 on Evaluating In-House Bids .. 61 Market Mechanisms in Public Service Provision: Example from the Transportation Sector.

7 62 Example from Waste Collection .. 63 Draft Principles From Lessons to Principles for the use of Public-Private 64 A Compendium OF OECD RECOMMENDATIONS, GUIDELINES AND BEST PRACTICES BEARING ON competitive neutrality OECD 2012 5 EXECUTIVE SUMMARY This report recalls the eight priority areas that need to be addressed by national authorities committed to the principle of competitive neutrality ( a level playing field ) between public and private providers of goods and services. The purpose of the report is to provide a full picture of the existing OECD instruments, and related good practices and guidance, which may have implications for competitive neutrality .

8 The report is structured according to the eight priority areas that were previously agreed by the Working Party on State Ownership and Privatisation Practices: the operational form of government business; cost identification; rate of return requirements; public service obligations; tax neutrality ; debt neutrality ; regulatory neutrality ; and public procurement practices. The below summary provides an overview of the coverage and directions of the existing OECD sources in each of these fields. The findings are further synthesised in the table following the section.

9 Streamlining the operational form of government businesses. An important aspect in addressing competitive neutrality is the degree of corporatisation of government business activities and the extent to which commercial and non-commercial activities are structurally separated. Separation makes it easier for the commercial activities to operate in a market-consistent way, but may not always be either feasible or economically efficient. Where individual enterprises are engaged in a combination of public policy objectives and more conventional business activities, questions often arise about the market-consistency of the business activities.

10 The main OECD instruments, guidelines and best practices deal with the following aspects of these issues: To level the playing field in regulated sectors, OECD recommends structural measures, separating commercial and non-commercial activities, to the extent that benefits outweigh costs. These recommendations are applicable to SOEs as well as other incumbents which maintain market power. (Council Recommendation on Structural Separation, Recommendation on Competition Policy and Exempted or Regulated Sectors and Report on Regulatory Reform.)