ACCC perspectives on transport issues

Speakers: 
Mr Rod Sims, Chair
Conference: 
Australasian Transport Research Forum
30 September 2019

ACCC Chair Rod Sims addresses the Australasian Transport Research Forum on the ACCC’s perspectives on a number of transport issues, in particular the importance of having the right regulatory frameworks in place to ensure transport infrastructure projects serve the interests of the community.

Transcript: 

Check against delivery.

Thank you for the invitation to speak today.

I have been involved in transport issues, on and off, for a very long time.

I am a former Chair of the Rail Access Corporation and the State Rail Authority of NSW; I chaired the 1991 Commonwealth/State senior officials group that agreed harmonised road pricing and standards; and I was, for a time, the Deputy Secretary in charge of transport in the old Department of Transport and Communications in the early 1990s.

In a country as long and as wide as Australia, where the distance between cities and towns can be so extreme, transport is always going to play an integral role in the economy. Yet when annual budgets are handed down, and policy is considered, the transport sector can, at times, be neglected and/or treated as a cash cow.

Hopefully this is changing. There is a lot of investment in transport infrastructure at present, and transport policy is gaining increasing attention.

While it is good to see this much-needed investment in the transport sector, it is important the right frameworks are in place to ensure this investment, and the infrastructure projects, best serve the interests of the community.

As the regulator, it’s our role to help to foster an environment conducive to investment, not only for the operators of the infrastructure, but just as importantly for the users of that infrastructure.

Today, I will speak to:

  • the importance of reforming the funding of roads
  • desired changes to the protection for shipping lines coordinating their behaviour
  • significant recent mergers in transport and logistics, and
  • appropriate regulation for transport hubs in particular ports and airports, particularly in the context of privatisation.

1. The importance of reforming the funding of roads

Many of you have heard me talk about the need for Australia to reform the way it funds roads.

On one hand, it is disappointing that I am still talking about this some decades after the reform journey started, and after reform in other similar sectors has delivered huge benefits.

Having said that, it means that the roads sector still offers a significant opportunity.

There are many problems with the way that roads are funded:

  • State road agencies manage assets with long lives, yet have to wait for budget night each year to find out how much funding they will get for the next year.
  • The revenues collected from road users are not linked to the funding that road agencies receive. Instead, these revenues go into consolidated revenue.
  • Many road users do not even know that they are already paying for using the roads. This makes it impossible to build the case for change.
  • The amount each road user pays has only a weak link to how they specifically use road services. And because payments are made through fuel excise, these revenues are beginning to drop off as vehicles become more fuel efficient and disappear altogether if the car is electric.
  • Too often the allocation of road spending reflects political imperatives rather than the needs of road users.

Overcoming these problems would provide billions of dollars of benefits to Australians. Users would get better road infrastructure and funding would be more sustainable and fairer. Importantly, we can avoid falling into the trap of thinking that we can just build our way out of congestion.

Encouragingly, some work is underway.

As you all know, last year the Transport Infrastructure Council, which comprises state and federal infrastructure ministers, requested proposals on how to reform what heavy vehicles pay for using roads.

In less than two months, ministers will receive this these proposals and determine how to proceed with them.

Importantly, hypothecation is front and centre. Heavy vehicle operators will know that any payments they make will return to them in the form of better roads. This is vital for ensuring confidence in the reforms.

Another element is that heavy vehicle charges are to be set on an independent basis. It has been suggested that the ACCC takes this role. Having an independent agency determine charges can promote confidence in the scheme. Industry will know the charges reflect underlying spending on roads, avoiding the common criticism that the charges reflect a ‘tax grab’.

Also, part of the proposal is to introduce a form of external scrutiny over where road agencies spend their dollars. Any spending on projects judged not to meet national road standards will not be recoverable through heavy vehicle charges.

I hope that these reforms will be adopted.

Granted, they represent small steps on the reform journey, particularly as they only relate to heavy vehicles. Even then, they don’t extend to replacing today’s fuel-consumption-based charges with more sophisticated charging models that vary by a truck’s mass, distance and location.

But change in the right direction is extremely welcome. And these proposals lay the essential foundations for further reform.

2. Protection for shipping lines coordinating their behaviour

The liner shipping industry is as essential to the Australian economy as the roads. It facilitates transport for our exports and imports to and from our global trading partners.

A notorious provision of Australia’s competition law, known as Part X, provides broad exemptions from competition law for registered shipping lines to coordinate with each other in transporting cargo to, or from, Australia. Back in the 1970s, Part X was included in the law to address a concern that Australia, being geographically remote, was not sufficiently attractive as a destination for international shipping lines.

However, the recent Harper Review of competition law, along with many others before it, found that Part X is outdated and unnecessary, and that it should be repealed, with the ACCC to introduce a narrower ‘class exemption’ as a first step to its repeal.

Internationally, a lot of other countries had similar broad shipping exemptions, but over the years, more and more have concluded that allowing cartel behaviour by shipping companies comes at considerable cost to the local economy. As a result, several countries have scaled back or entirely removed their equivalent liner shipping exemptions.

While we are opposed to the broad exemptions given to the liner shipping industry through Part X, we understand the argument that some limited forms of co-ordination may be in the public interest by leaving no doubt that Australia is well served by efficient shipping. We have granted limited exemptions to some airline cooperation on the same logic.

As recommended in the Harper Competition Review, we have begun work on developing a discussion paper about a possible class exemption for liner shipping. This transparent, consultative process will allow all stakeholders to have their say, and will provide the opportunity for the ACCC to assess the public benefits and detriments of different types of cooperation between shipping lines. This process will also provide more evidence, and the new class exemption will provide further assurance, for policy makers when they come to decide whether to repeal Part X.

3. Significant recent mergers in transport and logistics

In recent months, you may have seen or heard my public statements regarding concerns about the increasing concentration of Australian markets.

More recently, there have been a number of high profile mergers in the transport sector that have raised significant competition issues.

One of the most significant recent transport mergers has been Pacific National’s proposed acquisition of Aurizon’s Acacia Ridge Terminal in Brisbane. This was part of the significant change that saw our East Coast intermodal rail freight market go, effectively, from two to one as Aurizon closed rather than sell its business.

We instituted proceedings in July last year alleging the acquisition would substantially lessen competition by raising the barriers for potential new rail operators to use Acacia Ridge.

The Federal Court heard the case, and in May this year they allowed the acquisition, relying on complex behavioral undertakings regarding access. However, the court indicated that if it had not been for the undertakings it would found a breach of our merger provisions.

We subsequently appealed the Court’s decision to accept the behavioral undertaking, focusing on the courts’ ability to accept undertakings in these circumstances.

I won’t say more about this matter given the pending hearing in February, other than the outcome of this appeal has fundamental implications for merger enforcement more broadly.

At a global level, the merger between Siemens and Alstom raised competition concerns here in Australia where the merged firm would have been by far the largest supplier of heavy rail signalling.

We heard from many industry participants who were concerned that the loss of competition could result in increased prices for customers, or lower levels of service, quality, or innovation, in particular for interlocking systems and ATP systems for heavy rail.

As with many of the global transactions we review, we liaised closely with a number of overseas regulators, including the European Commission. Prior to the ACCC concluding its review, the European Commission decided to block the transaction and this prompted the merger parties to abandon the global transaction. As a result, no final decision was ultimately reached here, but safe to say we had significant concerns.

4. Appropriate regulation for transport hubs

The way transport infrastructure assets are privatised, usually to maximise sale revenue at the cost of their efficient operation, has certainly been a hot topic for the ACCC over the last few years. And it is a crucial issue for Australia’s economy.

These hubs are critical gateways for people and goods and are often monopolies. Yet they are usually privatised with little or no regulation or, worse, with mechanisms to remove competition to them.

The resultant monopoly pricing is ultimately paid for by users and consumers, which damages the productivity of Australia’s economy, and impedes growth and international competitiveness.

Moorebank

A current example is the Moorebank Intermodal Terminal, a freight precinct we consider will be nationally significant infrastructure. Here, effective regulatory arrangements are key to prevent anti-competitive behaviour by a monopoly.

The Sydney Intermodal Terminal Alliance, or SIMTA, wholly owned by Qube holdings, has a 99‑year lease to operate the terminal.

Given the prominence and likely growth of the Moorebank Terminal, we are concerned that, both now and in the future, SIMTA will have both the ability and incentive to charge monopoly prices, or frustrate access to Qube’s competitors.

We consider, and have stated publicly, that the envisaged contractual approach for open access to the Moorebank Terminal is flawed.

A contractual approach does not involve a well-resourced and independent third party that could:

  • robustly assess the regime against an objective set of criteria, and
  • enforce obligations on behalf of users in the event of a breach.

As we see it, the downfalls of the contractual approach are deeply troubling, given the key role the Moorebank Terminal is expected to play in the Australian economy. Our view is that open access is best achieved via an access undertaking.

Since publicly stating our concerns, we understand Qube has been considering amendments to its open access regime. I have also very recently received correspondence on this from the Moorebank Intermodal Company, with whom we will further engage.

NSW Ports

Where the ACCC considers that privatisation deals are likely to breach the competition law, we will take enforcement action.

We currently have a case in the Federal Court stemming from the NSW Government’s privatisation of the ports of Botany, Kembla and Newcastle.

In December last year, the ACCC instituted proceedings against NSW Ports, the operators of Port Botany and Port Kembla for making agreements with the State of New South Wales that the ACCC alleges had an anti-competitive purpose and effect.

The 50-year agreements, known as Port Commitment Deeds, were entered into when the NSW Government privatised both ports in 2013.

These Port Commitment Deeds oblige the State of NSW to compensate the operators of Port Botany and Port Kembla if container traffic at the Port of Newcastle is above a minimal specific cap.

When the Port of Newcastle was privatised in 2014, they also signed a 50-year deed. This required the Port of Newcastle to reimburse the State of NSW for any compensation paid to operators of Port Botany and Port Kembla under their Port Commitment Deeds.

We allege that the Port Commitment Deeds make the development of a container terminal at Newcastle uneconomic.

If a competing container terminal cannot be developed at the Port of Newcastle, NSW Ports will remain the only major supplier of port services for container cargo in NSW for 50 years.

We are taking legal action to remove this barrier to competition in an important market: the supply of port services. This has significant implications for the cost of goods across the national economy, not just in New South Wales. The impact of any lessening of competition is ultimately borne by consumers.

The trial is scheduled to commence in October 2020.

Airports

Over the past year, the Productivity Commission has been looking into the regulatory framework for airports. To call it a regulatory framework is a misnomer; there is no regulation in it. Regulation was removed when the airports were privatised. Instead, it just involves monitoring the performance of the major four airports of Sydney, Melbourne, Brisbane and Perth.

We need a new approach to deal with monopoly airport charges. We have not argued for price regulation that can apply to other monopoly infrastructure in Australia, or to airports in other jurisdictions. Rather, we have proposed a solution under which airlines or airports can seek independent arbitration over airport charges if commercial negotiations between the two parties break down.

This very light-handed and flexible solution promotes effective commercial negotiations between airports and airlines. It encourages the party with market power to reach agreement, or else it would face the threat of an independent arbitrator determining the prices and terms of access.

In essence, this approach evens up the bargaining power imbalance between the monopoly and users.

Port of Newcastle declaration

I would like to finish today by talking about the lack of regulation of other vertically separate monopolies.

The Port of Newcastle is at the centre of recent developments in the tussle between Australia’s regulatory framework and the owners of essential monopoly infrastructure. The latter are clearly winning.

As you probably know, on 24 September the National Competition Council (NCC) made public its recommendation to revoke the declaration of the shipping channel service at the Port of Newcastle. On the same day, the Treasurer confirmed the statutory waiting period had expired and that, therefore, the declaration was revoked.

If as any legal processes play out the revocation stands, which I hope does not happen, this will mean the Port of Newcastle is now a monopolist without constraint.

A monopolist that controls this type of bottleneck infrastructure, operating without any regulation, has a clear incentive to maximise profits by raising prices even if this means reduced volumes or less use of their service.

It is bad for the economy when bottleneck infrastructure, at the end of a crucial value chain, is in the hands of a company with unfettered market power. A monopolist in that situation will always use its power; the question is only by how much and how often.

How is it that Australia, much more so than other countries we compare ourselves to, allows this?

We are deeply concerned about what this means for users of the service, as it will cause companies to limit investment in related markets as a result. In contrast, a declaration would constrain monopoly pricing and promote investment by providing a credible threat of arbitration.

Speaking more broadly, this is the first time the new declaration criteria, amended in 2017, have been tested, and we are now seriously concerned that the test for declaration means Part IIIA simply does not regulate monopoly infrastructure where the owners are not vertically integrated.

The National Access Regime under Part IIIA of the Competition and Consumer Act was established decades ago from the Hilmer Review when the key issue for monopoly infrastructure was denial of access because the vertically integrated monopolists did not want to face competition in upstream or downstream markets.

The Hilmer Review was clear that the proposed access regime was primarily aimed at vertically integrated monopolies.

Now, we are seeing issues primarily with non-vertically integrated monopoly infrastructure. Ports, airports, railways, for example. In these cases the issue is use of market power; not denial of access. These monopolies should be regulated.

Let me put it another way. If the only two ports in a region were separately owned and located right next to each other, would you want them to merge and become a monopoly? Of course not, and existing competition laws would clearly prevent that to avoid obvious damage to the economy.

With the Port of Newcastle, we already have a monopoly and it seems they are now completely unregulated. That simply does not make economic sense.

The broader risk now is that other non‑vertically-integrated monopolists will no longer consider declaration as any credible threat. Further, currently regulated monopolies, such as rail tracks, will seek to have their regulation removed. As a society, is this what we want?

If the Port of Newcastle and others like it cannot be captured by the current test, then the regulatory framework must be changed.

Just as under the Part IIIA access regime the test for vertically integrated monopolies is one of harm to upstream or downstream competition, for vertically separated infrastructure we may need a 'market power' test.

The ACCC has been considering the need for such a 'Part IIIB' provision for some time. The reasonable alternative is bespoke regulation as we have for electricity networks and gas pipelines, both of which are not vertically integrated. Either can work. Why regulate these monopolies and not others. Alternatively, why regulate energy monopolies but not transport monopolies?

Just as we do not want vertically integrated monopolies denying access to their competitors, we do not want non-vertically integrated infrastructure exercising their market power to raise prices to users and so damage the economy.

Conclusion

The ACCC is involved in so many aspects of transport. There are vital issues here. That is why I was delighted to accept the invitation to speak to you today.