Competition key to restoring Australia’s productivity

Speakers: 
Mr Rod Sims, Chairman
Conference: 
Infrastructure Partnerships Australia Conference, Sydney
4 September 2015

Addressing the Infrastructure Partnerships Australia Conference in Sydney, ACCC Chairman Rod Sims discusses how the proposed Harper competition reforms can boost national prosperity and help turn the tables on many years of poor infrastructure policies and practices. He presses the need for road reform outlining a way ahead that is "entirely doable and saleable" with two steps. Mr Sims also warns against privatising infrastructure assets with the wrong objective in mind and discusses the regulation of monopoly infrastructure.

 

Transcript: 

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Introduction

I am delighted to be here today. Australia’s Infrastructure is vitally important for our productivity and living standards, as we all know.

While I am, of course, disappointed by Australia’s declining productivity, I cannot say I am surprised by it.

Poor infrastructure policies and practices on too many fronts and over too many years have contributed, closely linked to the fact that Australia has lost a good deal of its pro-competitive culture that it gained from the 1990’s National Competition Policy.

Indeed, it is easy to conclude that Australia treats its infrastructure sectors poorly. We see policies that prevent competition in coastal and liner shipping, inadequate dedicated rail freight paths, a poor policy framework for road investment, limits on supply and competition in urban water, costly past rules for energy network regulation, limits on infrastructure competition in many areas, and I could go on.

Into this environment comes the Harper Review of competition policy. It is extremely timely, and has important recommendations on many fronts.

The Hilmer reforms of the 1990’s were forecast to, and I believe did, boost Australia’s GDP by an enormous 5.5 per cent.

The Harper competition reforms can also boost our national prosperity significantly.

There is, of course, the usual pushback from those who benefit from the status quo; for example from taxi drivers and owners (opposing taxi industry reform and moves to encourage innovative passenger transport services), the maritime unions (opposed to freeing up coastal shipping), the Business Council of Australia (opposed to a workable misuse of market power provision), and so on.

As with the Hilmer Review over 20 years ago, the Harper reform agenda benefits from its breadth, as it dilutes this opposition with change able to occur on many fronts.

The Harper Review had a lot to say relevant to infrastructure. It recommended important and wide-ranging reforms in energy, water and transport.

Today I want to discuss just three topics, largely covered by the Harper Review, but which deal with topics that if not addressed will do further harm to Australia’s future productivity and prosperity.

My first topic is road reform. We have major and growing problems, but there is a way ahead which can gain wide consensus.

Second, I will deal with issues relating to how governments privatise assets with the wrong objective in mind.

Thirdly, and related, I will raise concerns with the costs that will follow if we allow our infrastructure owners to engage in monopoly rent extraction.

The pressing need for road reform

Our road policy framework has at least three problems.

First, the revenue raised from road use does not flow directly to the entities that build and maintain our roads.

Road users currently contribute to the cost of roads through state charges such as registration and licence costs, and through the Australian Government’s fuel excise.

Indeed, the Productivity Commission has found that the combined taxes and fees paid by motorists for road use is roughly equivalent to the annual expenditure on roads. In this sense road users are already paying for the cost of Australia’s roads.

In fact, and it is not widely known, the effective fuel excise paid by heavy vehicles used by business is set based on past road expenditure. It is an explicit road user charge.

Some call the rebate of this road user charge for off road heavy vehicle use a subsidy. It is not. Why pay a road user charge when you do not use the roads?

Further, an early rationale for the petrol excise paid by motorists was that it was a road user charge. Why else is petrol excise at such a high level?

Despite these actual or implied road user charges the money raised goes into general revenue; money for roads is then funded from general revenue where it competes for funding with schools and hospitals.

Why should roads compete for funding when they are in many senses self-funded?

This situation leads to sub optimal funding for roads.

The second problem is that the road user charges are, to the extent there is a link, such as with heavy vehicles, set based on past road expenditure.

Shifting the focus from this historical cost approach to more of a forward-looking approach would allow for more efficient long-term planning for road provision.

This can be likened to other infrastructure sectors, such as rail and telecommunications. In these sectors forward-looking long-term plans and forecasts about demand are developed and used to determine economic costs and annual revenue requirements.

In short, road plans would more explicitly be based on need and economic value to justify the future level of road user charges.

The third problem is providing better signals for road use. Mass distance charging and congestion pricing, for example, would see us making much better use of the roads we have.

Some attempts at road reform start with congestion pricing. This is the wrong approach, and also brings the inevitable political backlash.

The best place to start is to set all the road user charges, particularly all petrol and diesel excise, based on future road funding needs, and passing the money raised directly to those who build and maintain our roads.

There need be no fiscal winners or losers because, as just stated, currently road funding roughly equals the level of all taxes and fees paid by motorists.

Let’s not complicate the road reform agenda.

With these changes, we then have the best platform for a range of other road reforms later on.

This is entirely doable and saleable.

Motorists will pay no more. As I have said, no level of government need lose out.

These types of road reforms have the full support of the AAA, with its seven million members. This is because the AAA knows this basic reform will give us a much higher quality, more responsive and better maintained road network.

Privatising for efficiency, not maximum sale value

Private owners will usually operate assets more efficiently and at lower cost than government owners. It follows that privatisation should benefit the economy.

With most governments facing fiscal challenges, however, there is a temptation to privatise to maximise proceeds. This is fine if there is a competitive market, or there are sound regulatory arrangements in place.

With many infrastructure assets these requirements are not in place.

Some of Australia’s key infrastructure assets, including significant ports and railways, are likely to be privatised in the coming years. The value of the assets to be sold is likely to be high and governments have begun announcing projects they will invest in as a result of the profits generated from these privatisations.

This creates a strong incentive for governments to structure their privatisation processes in a manner that maximises the sale price they receive. In order to maximise sale prices, governments will have little incentive to closely examine whether the market structure and regulatory arrangements that will apply post-privatisation are conducive to competition and appropriate outcomes.

But the immediate financial benefit comes at a cost of an effective ‘tax’ on future generations.

For example, while privatising two potentially competing assets as a package may increase the sale price (as compared to selling the assets to separate owners) this increased sale price would be received at the expense of competition. In the longer term, a less competitive market structure will lead to higher priced and lower quality goods and services for consumers.

We are also concerned about the selling of monopoly or near monopoly assets without appropriate access and/or pricing controls, such as Part IIIA undertakings or robust State or Territory access regimes. When privatised, such assets will result in the transfer of market power to private hands.

Without appropriate pricing and access mechanisms in place prior to the sale, there is a strong likelihood that under non-government ownership users of privatised infrastructure will face higher prices and restricted access.

In the ACCC’s experience, the access undertaking provisions of Part IIIA of the Competition and Consumer Act 2010 (Cth) are effective in facilitating efficient use of, and investment in, infrastructure and competition in related markets. The level of regulation can be tailored to the level of market power held by the acquirer or operator – but importantly, would include a negotiate/arbitrate mechanism for dispute resolution.

Infrastructure assets have been sold in past years with anti competitive market structures and gaps or poor regulatory frameworks. This will damage Australia’s future economic performance.

Let us not add further to the problem with our future asset sales.

Access regulation of monopoly infrastructure

The last area I would like to address today is access regulation of monopoly infrastructure.

This is an area of particular concern to the ACCC because natural monopoly infrastructure can act as a bottleneck in the supply chain, hindering competition and productivity in upstream and downstream markets.

As I have just mentioned, I am concerned about the selling of monopoly or near monopoly assets without appropriate access and/or pricing controls in place. When privatised, such assets will result in the transfer of market power to private hands.

It concerns me when the argument is made that economic regulation is not required for such assets because any monopolistic pricing amounts to a pure transfer of economic rents between parties within the supply chain.

On this issue, the Productivity Commission noted in its 2013 inquiry into the National Access Regime that the transfer of economic rents between parties within a commodity export supply chain could occur without any impact on the supply decisions of existing suppliers.

This seems to suggest that policy makers should pay no attention to the ability of a bottleneck monopolist to extract rents from upstream or downstream firms in a commodity export supply chain.

I take a different view.

To produce or extract an important commodity like coal requires a major sunk investment in mining equipment and infrastructure. These sunk investments give rise to what are known as “quasi-rents” which are subject to the threat of hold-up.

The threat of expropriation of rents by a monopoly service provider in such a situation does not merely result in a pure transfer. Rather, the threat of such expropriation can limit future investment and innovation by the upstream firms.

What miner would invest in reducing its extraction costs if it knew that the lower extraction costs would simply be met by higher transportation charges? More generally, what miner would invest in its mines knowing that the benefits of that investment could be expropriated by a monopoly somewhere else in the supply chain?

This effect is, of course, not just limited to mining. The threat of expropriation of rents by a monopoly service provider may also discourage Australian farmers from investing in, for example, farm machinery or new seed technologies.

This is an illustration of a more general point that should be more widely recognised. Monopolies can be harmful in that they can limit investment and innovation in upstream or downstream industries.

Monopolies, therefore, generally require effective economic regulation

Closing remarks

To conclude, this conference presents an excellent opportunity to focus on how reforms to infrastructure can contribute to restoring Australia’s declining productivity.

I hope I have provided a few extra ideas.

Thank you for your time.

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