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Build it and we'll pay

By Mark Christensen - posted Tuesday, 16 August 2005


Finally, the Feds are starting to appreciate how hard it is to keep everyone happy when it comes to infrastructure.

The states have been wrestling for years with the difficulties now surfacing with the planned sell-off of Telstra. Competition is an admirable thing. But as Queensland and other states have found, bringing it to bear on infrastructure can bring on serious policy headaches.

Networks are about maximising the totality of the system and capitalising on the nebulous benefits that arise when you co-ordinate the parts in the interests of the whole.

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Queensland Rail, for instance, can expedite a particular train but in doing so may create several unseen penalties for others within the network. Striking the right balance requires delicate judgement.

Competitive pressures, on the other hand, promote self-interest and a tendency to believe all decisions can be objectively quantified. An independent operator like Pacific National has little concern for other trains or the viability of the branch line running to Quilpie.

This can put a network manager like QR or Telstra in a jam. Others only see and understand their piece of the puzzle, yet the prices and investment they demand must account for the big picture.

This is further complicated by the fact our beloved economic principle of user pays does not really work for infrastructure. The cost of incremental use is miniscule compared with upfront capital expenditure. Hence, there’s a massive gap between total network costs and the marginal cost of using a road, making a call or running a train.

Someone has to determine how such costs are recovered and shared around.

Economic theory tells us it’s best to charge on the basis of capacity to pay, as this minimises distortions in how people behave. Business and high-density residential users are unlikely to change their decision if charged a slightly higher price. Potentially at least, they also benefit from a more expansive network - you never know when you might need a phone in the bush.

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The political sensitivity associated with sound infrastructure pricing is why we have traditionally had publicly-owned, vertically-integrated monopolies. A lack of transparency actually helped Queensland fund regional rail and electricity networks by capitalising on “captive” coal companies and big energy users.

Was this a bad thing? Not necessarily. Such price discrimination (as it’s called in economics) is an accepted method for funding infrastructure.

Despite this, Queensland has recently forfeited millions in monopoly rents as part of National Competition Policy (NCP) reforms. This may not have been such a good idea. It’s distinctly possible, for example, that booming coal exports have not been influenced one iota by NCP-inspired reductions in rail and port charges.

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First published in The Courier-Mail on August 4, 2005.



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About the Author

Mark is a social and political commentator, with a background in economics. He also has an abiding interest in philosophy and theology, and is trying to write a book on the nature of reality. He blogs here.

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