Australian monopolies debate should give investors pause

The country's competition watchdog has come out strongly against a decision to remove it as the Port of Newcastle’s regulator, sounding caution about monopoly assets having ‘unfettered market power’.

Striking pronouncements this week by the chair of the Australian Competition and Consumer Commission on privatised airport and port assets are worth heeding closely.

In remarks to the Australasian Transport Research Forum, Rod Sims called the Port of Newcastle a ”monopolist without constraint”. This followed a ruling in the port’s favour from the National Competition Council that revoked its status as a ‘declared asset’, thus freeing it from ACCC regulation and giving it a free hand to set its own charges.

Coal producer Glencore had applied for the port to be given this status after its owners – the Macquarie-managed The Infrastructure Fund and China Merchants Port Holding Company – had raised access charges. Glencore’s application was initially successful. However, the decision was overturned after the port made a separate application to the NCC.

This gave federal treasurer Josh Frydenberg 60 days to uphold or reject the NCC’s decision. Instead, he decided to let the time lapse. This meant that the default position of the Port of Newcastle not being a declared asset took effect and the port will not be regulated by the ACCC. The only avenue of appeal left to Glencore is through the courts, and not to the NCC itself through arbitration, which will make it far harder for the company to achieve a successful outcome.

Referring to the Port of Newcastle, Sims said: “A monopolist that controls this type of bottleneck infrastructure, operating without any regulation, has a clear incentive to maximise profits by raising prices even if this means reduced volumes or less use of their service.

“It is bad for the economy when bottleneck infrastructure, at the end of a crucial value chain, is in the hands of a company with unfettered market power. A monopolist in that situation will always use its power; the question is only by how much and how often.”

This debate has echoes of the very public argument that has been playing out over Australia’s airports, with the leaders of Qantas and Virgin Australia sharing a platform on which they accused the privatised facilities of making “grossly excessive” profits.

The airports and their private equity owners fought back strongly, pointing to the large amounts they had invested in upgrading the facilities since privatisation as well as their planned spending. One investor in Australian airports told Infrastructure Investor that the airlines’ criticism was “unfair”. Another accused the carriers of hypocrisy by pointing to what they claimed were high fares and the large profits that airlines had themselves made in recent years.

It’s also valid to point out that a lot of the equity in Australia’s airports is ultimately owned by superannuation fund members, so returns generated on their behalf will benefit them in future.

Another industry insider we spoke to, who is not involved in Australian airports, suggested the debate was an “outlier” because the complaints were coming from corporate customers, not the public.

But this is a little disingenuous. There is undoubtedly some resentment among passengers over parking charges at Sydney Airport and the shocking lack of public transport infrastructure connecting Melbourne’s commercial business district with the city’s airport.

Investors should not dismiss what politicians and regulators – and yes, their corporate customers, even if the latter have strong vested interests in the debate – have to say on excessive profits.

As an investor in non-Australian airports put it to us: “There is a growing perception [among the public] that we are not adding sufficient value for money.” To improve quality, the investor said, people have to feel that asset owners care about them, that they provide good service and that they are not using a monopoly solely to acquire a dividend: “If it doesn’t change, the pressure on the governments to nationalise or to be tougher with infrastructure companies will grow.”

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