The privatisation of public infrastructure assets has gathered momentum in Australia since the turn of the century. Notable among these have been the Commonwealth Government's divestment of the national telecommunications provider Telstra and Kingsford Smith Airport (Sydney), and the NSW Government's sale of shipping ports and electricity assets.
Telstra was floated on the ASX in three tranches (1997, 1999 and 2006) as an integrated telecommunications market incumbent; meaning its wholesale infrastructure network business and its retail business were not separated and it dominated all of its markets. The Commonwealth Government's sale raised net revenue of $44.95 billion (ANAO 2008). Commentators opined that for the Howard Government maximising the sale proceeds trumped competition objectives, and this meant selling Telstra as one large company. Telstra continues to be the incumbent with high market shares: 51 per cent of fixed broadband services; 66 per cent of fixed voice (landlines); and 41 per cent of mobile phones (ACCC 2018).
A consequence of the Howard Government's decision not to structurally separate Telstra prior to its sale is the creation of the National Broadband Network (NBN). The NBN is designed as a wholesale-only broadband provider intended to level the playing field for retail service on-sellers competing with Telstra. The $45 billion from the Telstra sale is now increasingly surpassed by the NBN's costs of $51 billion and counting (ABC 2018).
Despite the activity and expense of the NBN, the quality of Australia's telecommunication services continues to trail comparable countries. The Organisation for Economic Cooperation and Development's (OECD) annual survey of telecommunications markets reports that Australia's broadband prices are among the highest in the OECD and it ranks Australia's average broadband speeds as 30th from the 37 OECD countries (OECD 2017).
Even with the poor state of our telco markets, it is still possible for the Commonwealth to potentially make matters worse if – after the expense and effort of the NBN exercise to right the competitive wrongs of Telstra's privatisation – it permitted Telstra to acquire the NBN. The result would be to consolidate Telstra's market position even further.
Nor are the examples confined to the Commonwealth. The State of NSW also provides valuable lessons in poor privatisation design resulting in uncompetitive outcomes. The NSW Government - primarily during the Baird Government – embarked on an active privatisation agenda. A few of the larger assets (by value) privatised since 2012 include:
- $16.2 billion from the 99-year lease of 50.4 per cent of electricity distributor Ausgrid
- $9.3 billion from the sale of 51 per cent of the Westconnex motorway to incumbent toll roads company Transurban
- $10.2 billion from the 99-year lease of 100 per cent of electricity distributor Transgrid
- $7.6 billion from the 99-year lease of 50.4 per cent of electricity distributor Endeavour Energy to a consortium led by Macquarie Group
- $4.3 billion from the 99-year lease for 100 per cent of Port Botany
- $760 million from the 99-year lease for 100 per cent of Port Kembla, and
- $1.75 billion from the 98-year lease for 100 per cent of the Port of Newcastle.
It is these last three privatisations – those of the ports of Botany, Kembla and Newcastle – that are of particular concern. Under the 2013 Port Commitment Deeds, the NSW Government agreed to pay compensation to the operators of Port Botany and Port Kembla if container traffic at the Port of Newcastle exceeds 10,000 containers, known as twenty-foot equivalent units or TEUs (adjusted by an annual growth rate). The compensation to be paid is equivalent to the wharfage fee the port operators would receive if they handled the containers.
Limiting the risk of competition from a container port developing at Newcastle would have the effect, all else equal, of increasing the investment appeal of the other assets. In December 2018, the ACCC instituted proceedings in the Federal Court against the operators of Port Botany and Port Kembla alleging:
...that making these agreements containing provisions which would effectively compensate Port Kembla and Port Botany if the Port of Newcastle developed a container terminal is anti- competitive and illegal...[as they are]...likely to prevent or hinder the development of a container terminal at the Port of Newcastle, and had the purpose, or was likely to the have the effect of, substantially lessening competition. (ACCC 2018)
By potentially hindering the development of a container terminal at the Port of Newcastle, competition among and investment by shipping, stevedoring and transport companies is stifled and freight costs remain higher. Thus, both industry and consumers are ultimately penalised through barriers to entry and higher prices respectively.
The key lesson is that by failing to adequately consider the industry and competition policy impacts of certain privatisations, Australian governments – State and Federal – have burdened consumers with markets featuring low levels of competition, high prices and, worst of all, little prospect of improvement due to high barriers to entry. Assets which present as future candidates for privatisation should be subjected to much more rigorous analysis of market impacts – such as ex-post market structures, shares and pricing dynamics – so that the design of privatisation processes can be improved to benefit both competition and consumers and not just the Treasury's bottom line.
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