Bad faith drives desire for more competition

There is one difficult truth policy-makers and economists can’t accept when they rave on about competition policy - it’s built upon bad faith.

The desire to promote competition is based on a presumption business is intent on gouging their customers, being lazy or both. The notion they may exist to serve the community is put aside as we scramble to develop clever regulations designed to keep the dark side of commerce in check.

In this way, competition policy is a lot like religion. It’s fabulous at initially spurring us to do better and to consider the greater good. The market deity even rewards those who fulfil consumer expectations.

But once the initial improvements have been realised, the system struggles to deliver absolute perfection. Frustrated, it looks to justify its goal - efficiency, community, God - by employing various threats and retributions. Flawed interpretations of sacred scriptures such as the Wealth of Nations and the Road to Serfdom are made, holy decrees are mandated and the infallibility of regulators enshrined.

Over time, corporate life becomes a mechanical process devoid of the meaningfulness to which it originally aspired. And those put in positions of power can’t help but become sanctimonious.

Furthermore, any resulting inept commercial behaviour and sinfulness is countered with increasingly onerous and strict requirements. Nothing really improves, of course, while the cost of extensive controls slowly eats away earlier gains.

This slippery slope seems inescapable even when the irrational premise upon which it is based is exposed. To stamp out corporate evil, one must assume it exists, even if this leads us to institutionalising it in the process.

The impact of these dynamics and subtle psychological effects are most obvious where good faith is most essential for commercial success. Infrastructure falls into this category because relationships and gut-feel assessments play such a crucial role. There is no formula for determining the optimal requirements for a road system that must provide 50 plus years of service. Trusting commercial judgment is paramount for getting it right.

This is the source of the Federal Government’s consternation over telecommunications policy.

On the one hand, it wants Telstra exposed to competition because it doesn’t fancy trusting a dominant infrastructure owner. On the other, it sees the cost of various telecommunications minnows nipping at the heels of an organisation which would serve the community better if it could focus on the big picture and not have to worry about pointless distractions like open access to its network.

The physical or regulatory separation of natural monopoly infrastructure from those sectors that can potentially compete has been wonderful at improving the operational and investment efficiency of former monoliths in telecommunications, electricity and rail.

This effectiveness is now waning, however, because the bad faith implications are preventing the separate parts from behaving as an integrated whole. A network only exists to provide for its users, while these users are completely dependent on the performance of the infrastructure provider.

Competition, regulation and general cynicism denies such co-dependency is much more valuable than the artificial divisions engendered by competition. Only relationships internal to a vertically-integrated organisation can properly understand and capture more than the sum of the industry parts. Hence the decision to not structurally separate Telstra or direct Fortescue onto BHP’s railway: and why our electricity industry will never be truly efficient.

There are a number of challenging consequences from this. First, no amount of transparency can match Telstra’s integrated commercial assessment of the optimal investment and pricing package for the community. Access negotiations are becoming overly litigious because the mounting claims and counter-claims of who is right can’t be proved either way.

Second, an infrastructure owner, if operating at minimum cost, must always have an advantage over competitors wanting to use its network. Competition should improve network performance to the point where it renders itself ineffective. That is, dominance by an integrated infrastructure provider is a sure sign competition has succeeded.

The government won’t admit this because it would necessitate having faith in Telstra to make needed investments like Fibre To The Node on a monopolistic basis. Instead, ministers continue with the façade, lacking the courage to confront public perceptions that believing the best of business would be at a minimum naïve and at worst reckless.

The government can’t keep having an each-way bet. In deciding to keep Telstra whole, the government effectively confirmed competition inferior to vertical integration. To get the full value of this decision, however, it must also acknowledge the costly impact of the bad faith embedded in competition policy and mandated third party access.