Mining access at a crossroad

More than ever, key infrastructure issues like regulated access, public-private partnerships and vertical separation are mired in conflict, with scant prospect of change.

The Pilbara railway operators, Rio Tinto and BHP Billiton, front the Australian Competition Tribunal this week to argue against Part IIIA access to its closed, vertically-integrated logistics chain. Expected to drag on until Christmas, one doesn’t sense the millions of dollars in fees and hours of precious management time will resolve anything of significance for investors, managers or the rest of us.

Rio and BHP claim legislatively enforced access by Fortescue will compromise their single-user operations. The argument hinges on the idea that the whole infrastructure chain - in this case, railways lines, train sets, port facilities, shipping lines - is greater than the sum of its parts. Because the nature of this synergy cannot be pre-empted, it’s paramount someone assume sole responsibility for making the subjective judgments needed to optimise the system. Access by other parties is permissible, provided they submit to the absolute authority of the incumbent.

This of course raises the legitimate policy issue of monopoly power abuse. In the case of the Pilbara, it’s about using mandated third party access to increase competition in the market for mining tenements.

In assessing the pros and cons it’s fair to assume that Fortescue, being a competitor, will be happy to disadvantage Rio and BHP by using regulation to put its needs before those of the network. Though they claim to be about efficiency, regulators are obliged to make competition the priority.

Crucially, the incalculable costs imposed on infrastructure managers, including the chilling effects on investment, are not formally recognised. It’s too confronting to acknowledge that legislated access, in effect, exchanges the possible inefficiencies of unfettered monopolies for the rent-seeking of third parties using regulatory bias to achieve subsidised access to the detriment of the whole system.

Maybe this is what some of the old hands in the state-owned utilities were on about when they expressed concerns over National Competition Policy during its roll out in the 1990s.

“But it makes no sense to separate the infrastructure and encourage competition,” I was once told by an insistent rail CEO. “They must all work together as one”.

As cynical reformers we assumed this to be an example of a monopolist protecting its privileged position.

In hindsight, glossing over the true costs of NCP and third party access was necessary. Australia’s infrastructure performance has benefited from greater transparency and competitive pressure. The availability of low-hanging fruit ensured most stakeholders across different infrastructure sectors focused on improving things to the benefit of all. But now the gains have been realised, and third party access is being applied to already-efficient facilities like the Pilbara, the tough philosophical questions that weren’t properly addressed, have come back to haunt us.

As Sol Trujillo found, no one wants to openly debate these big picture dynamics as they would call into question the validity of the current policy framework and put the jobs of thousands of regulators, lawyers and consultants at risk. It’s much easier for politicians and the ACCC to convince a fearful community that the tools of democracy, having succeeded with so much in the past, can solve any problem of their choosing.

The Pilbara access case could be a watershed for economic policy if Rio and BHP elevate the arguments above the usual legal head-butting.

An infrastructure-based supply chain - whether transport, telecommunications, energy or water - can be vertically separated or integrated, public or private, multi or single user, and still be efficient if, and only if, all the participants, big and small, make it about the whole and not themselves. If this is accepted, it then stands to reason that policies that actively promote self interests and competition, as Part IIIA does, will never achieve our goal. While the rhetoric says it’s purely a means to efficiency, the truth is managed competition always becomes a costly and divisive end in itself.

As very often in life, there is no final solution for infrastructure, only a tough choice between two mutually exclusive options. There’s the much-maligned do nothing, trust that the parties involved will, however unevenly distributed the negotiating power, work it out, or maybe not. Or, we can tolerate the institutionalised conflict and inefficiency caused by Part IIIA.

If we continue to opt for the latter, then let’s at least have the courage to admit to the consequences.