Build it and we'll pay

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.

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.

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.

The Feds are now trying to come to grips with the same predicament.

Regional services would be far more manageable if Telstra still had a monopoly. Competition encourages cherry-picking of those customers who can justifiably contribute towards network development in remote areas.

It’s a chicken-and-egg quandary for Telstra - and QR. To offer a sustainable rural service, you must first shore-up the critical mass needed to capture network synergies and practice price discrimination. Your efforts to take a holistic view, however, are relentlessly undermined by competitors who convince city folk they should not subsidise their country kin.

As suspected by the Queensland Nationals, full privatisation will see Telstra pander more and more to self-interests at the expense of the network. The bush will become a burden for the budget and bureaucrats to sort out.

A large slice of responsibility for Australia’s poor infrastructure performance rests with those who framed NCP.

Legislated monopolies were put in place to protect those required to make difficult choices that benefit the network - not particular interests. Glaring transparency, brought about by aggressive competition and regulation, makes sensible pricing and investment decisions near-impossible. As seen with electricity - and potentially rail - in Queensland, the system is being hurled towards a short-term, narrow perspective that is in the real interests of no one.

Federal policy-makers failed to comprehend these risks when they kicked off NCP. The states are still paying for it. Hopefully, the Telstra situation will lead the federal government to finally acknowledge the flaws and set the scene for developing truly sustainable infrastructure networks.