Hamstrung by regulation

Export coal bottlenecks and a growing sense of dread over the ability of disparate infrastructure players to act in unison is new grist for the privatisation debate. For it to be productive, however, supporters must be willing to also scrutinise the non-ownership constraints that limit performance, like commercial self-interest and National Competition Policy.

Private sector incentives generally mean less inefficient investment and operational decisions. While this is necessary, it may not be sufficient to achieve the collective efficiency required of the different components that use and manage infrastructure.

The limitation arises because an aggressive profit motive can compromise the absolute need to work together. While often lacking discipline in other ways, publicly owned enterprises generally have greater scope for harmony because their shareholder wants holistic solutions that benefit everyone.

Speaking recently as Chairman of the Minerals Council of Australia, Peter Coates, who is also head of Xstrata Coal, said “we want joint performance [of coal export supply chains] not individual profits”. Nice rhetoric, though one wonders if he really means it.

Australia has benefited greatly from pursuing free market polices that allow the flourishing of individual corporate interests. While this is great to a point, commercial self interests - most notably in the areas of infrastructure and coal export chains - can actually be put at risk if a business does not look to the common good.

It’s a simple but confounding proposition. The infrastructure whole is greater than the sum of the parts, be that a mine, railway or port. To share in these spoils, the individuals must first make an unqualified commitment to the team. When the parts sincerely acknowledge they’re utterly co-dependent, the whole is maximised, thus allowing each company to then also achieve the best possible result for itself.

Those who steadfastly support public ownership believe that privatisation compromises absolute efficiency because private sector corporations are incapable for making the leap of faith needed to secure this paradoxical outcome.

Another major hurdle to true efficiency is competition policy.

The success of our micro-economic reform agenda stems from the increased transparency created by competition, structural reform and regulation. It’s delivered a better picture of the relative performance of the component parts. While it was an admirable idea to pull infrastructure apart to promote contestability, including using a regulator as a proxy for competition, the architects of NCP didn’t really think through what needed to happen next.

Efficiency requires the parts to be somehow put back together again, either through common ownership or commercial incentives for co-operation. But no-one really dealt with the inevitable conflicts that would arise between separation and integration, and competition and teamwork.

Much of competition policy currently prevents infrastructure from effectively integrating and thus achieving optimal performance. Worse yet, NCP is currently being used in the Pilbara to disrupt an export logistics chain that is already efficient!

Policy advisors can’t embrace efficiency because their too attached to a competition policy that, while achieving much over the last two decades, is innately second-best when it comes to infrastructure.

They got it half right by allowing Telstra to remain vertically integrated, but now won’t allow it to capitalise on its efficient structure by rolling out a national broadband network which can be accessed on commercial terms only. The institutionalised fragmenting effect of the managed competition overseen by the ACCC condemns telecommunications to perpetual inefficiency. Telstra are prevented from making holistic decisions because that could kill off competition, while the industry can’t achieve commercial unity because non-Telstra players see the divisiveness of regulation as an easier option.

Regulation works as a similar barrier to coal supply chain efficiency. BBI, the private sector owner of Dalrymple Bay Coal Terminal, promotes the fact it receives a regulated price for providing capacity regardless of whether coal is actually moved through the port. It has no skin in the main game. DBCT’s key commercial risks are with the regulator and BBI is happy to keep it that way on behalf of its shareholders.

If the business community wants better access to Australia’s booming infrastructure sector through organic growth and acquisition, it needs to tackle the difficult philosophical issues concerning competition policy and the balance between corporate self-interest and those of the wider group - be that other parts of a coal export chain or the general public.

Ironically, some of the current political hurdles facing privatisation are actually manifestations of legitimate concerns over achieving absolute efficiency.