Competition policy dilemmas: time for a new direction

As fruitful as it has been, National Competition Policy has hit the policy wall when it comes to network businesses. It can no longer cope with the fact competition, while a great remedy for entrenched poor performance, can not transition infrastructure from better to truly efficient.

Sorting telecommunication, rail access and the perennial difficulties with electricity, requires some real policy bravery - not more lame efforts like government appointments to the Telstra board.

In the 1990s, I worked with an American consultant on the possible vertical separation of Queensland’s coal railway. He couldn’t fathom why one would split track from trains and mandate open access. No one in the US would dare risk the hand-in-glove relationship between infrastructure and operations, even if it did facilitate competition.

What was the Government’s objective - competition or an efficient service? Ten years on, and it’s clear they aren’t necessarily the same thing.

Structural reform and open access to natural monopoly infrastructure has driven out inefficiencies typical of closed shops. What happens, however, when the competitive threat has done its job? Do regulators back off? Does legislation refocus on the higher goal of efficiency? Do politicians start putting the value of competition into perspective?

By and large, no. There are some exceptions, like the Prime Minister’s infrastructure review recommendations last year (note, though, the attempt to quarantine criticism of competition by inferring the problems were unique to “export” infrastructure) and Costello’s sotto voce on Fortescue’s request to access the Pilbara rail system. 

Regardless, such radical standpoints are difficult to sustain while basking in the original gains of competition policy and with the institutional framework still favouring competition. It’s sacrilegious to even contemplate abandoning a hitherto fabulous model, despite NCP being sold to the community as only a means to an efficiency end.

The value of vertical integration is its ability to marry the intimate network-operations relationship within the one company. It gives a single CEO the opportunity to assimilate and judge objective commercial advice on key operational and investment trade-offs.

For example, should the rail track be upgraded for a speedier service or the train set improved? Which train has priority? And what pricing structure maximises total revenue across the network as a whole?

The desire to minimise interface conflict between network and operations is the source of frustration with Telstra. After two decades of industry reform, federal cabinet concluded an internal relationship offered the best prospects of efficient infrastructure management. Unfortunately, this viewpoint is at odds with existing competition legislation and its push for multiple telecommunications providers. 

Unless Telstra is still inefficient, it makes no sense to encourage third parties onto a network, having just accepted the integration model as superior. It’s one or the other.

In electricity, this dilemma has been addressed by vertically separating transmission from generation, though this comes at a price.