1. INTRODUCTION
If economic regulation of transport were abolished altogether the gains would far exceed any losses. (1)
Despite differences over appropriate forms of ownership and the desirable level of government regulation, all parties in the transport debate claim to have the consumer's best interests at heart. Adequate evaluation of the cost and quality of service which the public receives now, or is likely to receive under alternative rules, should therefore go far towards settling the arguments.
1.1 REGULATION AND THE MARKET
Throughout this chapter, by "regulation" we usually mean "economic regulation" as exemplified by the Two Airline Policy, restrictions on road transport to protect government railways, and so on. Nothing we say should be taken to indicate opposition to bona fide safety regulations, to legislation such as the Trade Practices Act whose purpose is to prevent unfair trading and facilitate fair competition, or to taxes and charges which ensure that users of various modes of transport pay their share of the infrastructure costs involved.
Economists agree that free transactions in perfect competition will maximise economic welfare. In practice, competition is never perfect and transactions are never costless, and a laissez-faire policy is unlikely to produce an optimal result. Most arguments for public ownership and/or control of transport services are based on the imperfection of real as against theoretical markets.
On the other hand, government regulation and planning are never perfect either. Markets integrate a myriad individual preferences (among goods, services or activities) and signal changing demand or supply through price movements. In this sense markets are infinitely flexible information distribution systems, and their flexibility is such that they can be influenced, or distorted, but never completely controlled. One extreme example is the market in illicit drugs; another is the black market that accompanied wartime rationing and restrictions; another, more telling in the present context, is the way in which businessmen sometimes find it convenient to buy a ticket from Perth to New Zealand and disembark in Melbourne or Sydney, or buy a ticket to Indonesia and disembark in Darwin or Perth, simply to fly at a more convenient time.
The economy is a complex of interacting markets, and attempts to impose a particular form on any part of it have unforeseen and often serious consequences apart from what was intended. As von Mises and others have shown in theory, and communist governments in practice, this is because the volume of information automatically and diffusely handled by markets is too great for it all to be deliberately collected, assessed and acted upon by central planners -- yet without the information the planners and regulators cannot be expected to get things right.
In practice, then, the choice is between imperfect markets and imperfect regulation, in transport as elsewhere.
1.2 NATURAL MONOPOLY AS GROUNDS FOR REGULATION
A reason commonly given for regulation or government ownership within the transport sector is that the service in question is a "natural monopoly". A natural monopoly is a good or service which has constantly declining marginal cost of production: the larger the supplier, the more efficient. This means that the largest supplier in a market can in theory undercut all the others and eventually drive them out of business. Once the supplier has achieved this monopoly position, it can take advantage of it by raising prices and/or lowering quality to extract "monopoly rent" from the market.
Regulation may then be justified in order to eliminate excess profits by controlling prices and/or quality. Theory shows that the most efficient allocation of resources between economic activities occurs when each good or service is priced at its marginal cost of production. In the case of a natural monopoly, the constantly declining marginal cost means that the average cost is greater than the marginal cost: so the theoretically efficient price results in the producer running at a loss. This is used to justify government ownership and subsidisation of alleged natural monopolies.
In the name of stability and consumer protection, regulatory schemes for alleged natural monopolies generally include restrictions on entry to the industry. The practical effect is often not to protect the consumer from the exactions of the monopolist, but to shield the monopolist from market pressures.
Market pressures are exerted not only by the actual presence of competitive suppliers of the same good or service, but also by the prospect of a new supplier entering the market in question and by the existence of other goods or services that are more or less good substitutes.
For example, imagine a firm that runs a coach service between two towns, with no other operator for hundreds of miles. The firm has the route to itself; but if it raises its prices too high, it will create an opportunity for someone else to lease a coach and start a competitive service. Even if this does not happen, there are other ways of getting from one town to another (car, hire car or taxi, bicycle, airline, plane, and so on), and all these will compete with the "monopoly" coach service if it becomes too expensive.
Nevertheless, where a monopolist provides a good or service for which there are no close substitutes and where a new competitor would face considerable "sunk costs", monopoly rent can be extracted and there is a case for regulation -- but not regulation that excludes potential competition.
1.3 GOVERNMENT OWNERSHIP OF TRANSPORT ENTERPRISES
Any sort of commercial or quasi-commercial enterprise tends to be less cost-efficient if government-owned than if privately-owned. The basic reason for this is that government-owned enterprises are very seldom wound up or allowed to go bankrupt no matter how much money they lose: unlike ill-managed or unlucky privately-owned enterprises, they will not be forced out of business by more efficient competitors. This makes them better credit risks than their competitors and enables them to borrow money at lower interest. In addition, the enterprise's employees and suppliers can safely offer worse service and demand higher wages or prices than in the private sector, while the managers have less incentive to resist such demands. (2)
Even where a government-owned enterprise is ostensibly required to operate on strictly commercial lines, the fact of government ownership affects creditors' and employees' (and trade unions') assessments. Government ownership is a handicap in some ways and an advantage in others: but it makes fair competition with private sector rivals almost impossible.
1.4 OTHER ARGUMENTS FOR REGULATION
Like that based on natural monopoly, other arguments for regulation of transport systems claim to be for the benefit of the consumer; these regulations too tend in practice to reduce competition and thus actually tend to give the consumer a more expensive and less innovative service.
One reason often advanced for transport regulation is to "maintain stable conditions" in an industry. This is doublespeak for making life easier for current participants who are failing to meet competition either from new entrants or from a rival industry, and "maintain stability" is another way of saying "discourage innovation".
Another reason is to maintain the "viability" of an industry or enterprise: many country rail services cannot nearly match the service and low price of road transport (in spite of massive losses made good by the taxpayer), and governments reduce the visible cost to the community of maintaining these services by regulations that increase their use by limiting competition from road transport. Examples are road passenger services in NSW and grain and fertiliser cartage almost anywhere. Motives for such regulation are emotional and political: railways are major employers in many country towns, and closing a line sometimes is, and can usually be presented as, a major blow.
Similar arguments defend the provision of transport services to remote communities. This may be a desirable social objective, but not necessarily one best achieved by regulations that limit competition and result in a less efficient industry for everyone. Both this and the previous argument for supporting unviable services boil down to subsidising some sections of the community (railway workers, some people in country towns, people who live in remote areas and can afford the subsidised air travel, and so on) at the expense of the taxpayer in general (and of people denied the use of the cheapest form of transport in particular).
The approach in this area should be as follows:
The welfare of the community in general is best served when resources are used as efficiently as practicable. This requires rational pricing of goods and services (including transport services) related to their marginal cost. Market forces tend to bring this about automatically in a deregulated system.
If it is desired to subsidise people in particular disadvantaged groups, it is economically preferable to do this visibly and directly. The nation is better off giving displaced railway workers a retraining allowance and helping them to find other jobs, rather than indefinitely subsidising inefficiently-run and unneeded branch lines (one must also ask if there is anything special about railway workers -- or any other particular group -- to justify favouring them over unemployed people generally: see the Trade and Industry chapter). If no one finds it profitable to provide an air or bus service to some isolated centre, but government feels such a service is essential, then it should ensure that it is provided. It should do this not by offering a monopoly of profitable routes to an operator who agrees to serve the unprofitable one, but by calling for tenders to provide a service and selecting the cheapest adequate one, paying the subsidy visibly from the budget.
Not all safety regulations are free of objection: it is extremely difficult to write regulations that provide a satisfactory balance between the conflicting ideals of perfect safety and maximum efficiency, and the regulators' inclination is understandably to play safe. One effect of this is to inhibit innovation and waste resources by the enforcement of inappropriate regulations. Another is that the regulations have not always been kept up to date with modern technology and practices, so much so that some old regulations may be positively dangerous. Safety regulations should be subject to continual critical review both inside and outside the regulatory body: it is regrettable that recent criticism from the general aviation industry seems to have been unsympathetically received by the Department of Aviation.
1.5 WHEN TO DEREGULATE
In practice, regulation and government ownership seldom eliminate monopoly rent: instead of appearing as visible excess profits to the monopoly's owner(s), it tends to be captured by the workers and managers in the form of high pay or, more often, formal and informal perks, or simply less tight management than in enterprises facing more competition. The evidence increasingly suggests that the economies of scale that characterise natural monopolies are usually outweighed by the inefficiency that characterises organisations (government or private-sector) protected from the discipline of the market.
There is much evidence of this. In theory, for instance, a natural monopolist should oppose regulation because its purpose is to deny him monopoly rent; an efficient natural monopolist by definition does not need protection from competition because his economies of scale enable him to undercut any potential competitor. In practice, however, an alleged natural monopolist invariably resists moves to remove his statutory protection from competition. This suggests that either (a) his is not a natural monopoly or (b) his enterprise is so inefficient as to outweigh his economies of scale. In either case benefits can be expected if competition is allowed.
The Government's policy should be to deregulate and, if a single |
1.6 PRICING
In transport more than in most industries, differential pricing (charging different prices to different consumers for superficially identical services) is necessary for efficient use of resources. Three passengers side by side in an airliner are from one point of view all consuming the same journey from Melbourne to Sydney: but one also bought the right to make or alter reservations at short notice; another bought only the promise of a flight on that day; and the third stood by at the airport in the hope that the airline could sell a vacant seat at the last minute. As Taplin puts it:The pricing of joint products in transport cannot be understood until it is clearly recognised that the provision of service at one time is an entirely different product from the provision of the "same" service at another time. Similarly, carriage in one direction is a different product from carriage in the opposite direction. If the loadings are unequal at the two times or in the two directions, it is discriminatory to charge as much for using the transport facility when it is less occupied as when it is more fully occupied. The explanation of this need to charge less in the off-peak or less for the back-haul is that it is the peak (or front-haul) user who imposes on the operator the need to install the last (marginal) unit of capacity and so should pay for it as part of the marginal cost charge. This is simply an extension of the principle that costs will be covered, in a constant-returns-to-scale industry, if customers are charged marginal costs. (3)
This is what happens in a competitive industry. For example, in interstate trucking, fairly stable differential charges by direction of haul have emerged from the working of a free market. In a semi-competitive environment, one of the best examples of rational joint cost pricing is the seasonal peak/shoulder/low season pricing system adopted by Qantas and other airlines.
This applies also to charges for facilities such as airports: it is aircraft movements in peak hours that determine (or are limited by) the number of runways, size of terminal buildings, and so on. To handle very few extra flights at peak hours may necessitate a very substantial investment in facilities, whereas extra flights at slack times usually need no more than a few extra ground staff. The conclusion is that airport charges should vary with time of day to reflect the marginal, not the average cost of the facilities. Peak hours are peak because they are most convenient for airline schedulers as they attempt to match aircraft movement and passenger demand: only if airport charges are varied appropriately will airlines be forced to introduce them into scheduling and investment decisions.
The conclusion for policy is that, wherever possible, enterprises should be permitted to set their fares without restrictions other than those imposed by competition and fair trading legislation; the principal exceptions are monopolies, and firms with a large enough market share to engage in predatory pricing.
As mentioned above, the theoretical problem with monopolies is their capacity to draw monopoly rents from their captive markets, and the practical problem is that attempts to prevent this by regulation tend merely to divert the rent from visible excess profits to less visible "inefficiency benefits" for workers and managers. With private ownership, the owners' profit motive countervails this to some extent, but regulation of monopolies should not extend to protecting them from competition.
Predatory pricing occurs when a firm provides a good or service below cost in order to drive out or deter an actual or potential competitor. This is most easily done by an organisation that can extract monopoly profits from other services. Predatory pricing is not a problem unique to the transport industry, and should be dealt with under common trade practices legislation.
2. THE BUREAU OF TRANSPORT ECONOMICS
In spite of its highly qualified personnel, the Bureau of Transport Economics (BTE) has too few economists and too many engineers, operations researchers and other non-economic officers; it does not enjoy the same reputation for independent analysis, free from political pressures, as does the Bureau of Agricultural Economics. As transport is the object of more political chicanery than most areas of government, the objectivity, competence and public standing of the "auditor" is particularly important.
The Government should legislate to guarantee the BTE's The BTE should be given the economic resources to conduct further |
It should rely for macroeconomic forecasts on the reformed EPAC (see the Government and Administration chapter).
3. AVIATION
3.1 THE DEPARTMENT
The tradition and structure of the Department of Aviation favour continuing regulation. It has a long record of obstructing deregulation.
Incorporate the Aviation Department within the Department of |
3.2 MAJOR AIRPORTS
Airports experience widely differing demand from traffic at different times of the day. Efficient use requires that charges reflect the marginal cost of the use of the facilities. This implies in particular higher rates in peak than in off-peak periods. Theory suggests that noise limits, curfews and so on should be abandoned in favour of negotiated financial compensation of local residents by airport operators (many people would accept night operations in exchange for, say, double glazing, soundproofing and airconditioning -- or the cost of these in cash; others might hold out for a sum that would enable them to move to a quieter suburb). In principle this is the best way to balance the conflicting interests of airlines and travellers (minimum restrictions on aircraft types and schedules) and residents (a pleasant environment); in practice it is a counsel of perfection and transaction costs involved in defining, identifying and negotiation with those affected may well be prohibitive.
The progressively implemented policy of "cost recovery" actually followed by successive governments, however, has severe defects. It has not reflected the marginal costs to the system, and certainly has not discriminated rationally between users, so there has been inadequate incentive to users to minimise costs. Airport managements facing competition could not have maintained such an economically irrational pricing system.
Airports have been upgraded in Perth and Brisbane to satisfy political yearnings and Sydney airport with its attendant noise level has long been a political hot potato.
It is very likely that some airport facilities are over-supplied, having been built for political rather than commercial reasons. Over-manning and wasteful union demarcation are also prevalent. These unnecessary costs are built into air travel. Air traffic is price elastic and competitive airlines would have sufficient incentive to seek out less costly facilities in a system flexible enough to provide them.
The Hawke Government has established the Federal Airports Corporation to place operation of the major airports on a more commercial basis. The FAC lends itself to privatisation by selling shares to the public. Doing this, however, would deny the public the benefit of competition in everything but the raising of further capital.
Undoubtedly there are some economies of scale which go beyond the present size of major airports but airports are not in most services a natural monopoly. The traditional policy of one major airport per city provides the airports with a degree of artificial monopoly, but there are opportunities for competition between airports even when they are hundreds of miles apart. For instance, capital cities compete to be the first and last port of call of international travellers. All major cities have secondary airports which now handle general aviation traffic but which could in most cases also handle medium airliners.
Licences should be subject to regular, probably annual, renewal to provide an opportunity for public scrutiny of the airport's compliance with licence conditions. The legislation should require the Minister to issue licences for proposed new airports unless (a) he can show that the ordinary licence requirements will not be met or (b) a nearby airport objects on the grounds that flight paths to or from it and the proposed airport are too close together for safety and this objection is upheld by a Departmental inquiry. Questions of the viability of the proposed airport can safely be left to the people putting up the money, and environmental questions are best left to the State and local governments involved.
The Federal Airports Corporation should be divided into separate The individual corporations should be floated on the stock exchanges Airports should be licensed to ensure compliance with safety and noise Airport corporations should be free to set their charges as they please |
3.3 MINOR AIRPORTS
Present policies to achieve full cost recovery from general aviation and decentralise control of country airports should be continued, with greater effort made to relate charges to marginal costs.
3.4 DOMESTIC AIRLINE POLICY
Domestic aviation on the major trunk routes has for many years been reserved for Ansett and Australian Airlines by the Two Airline Policy. With this impenetrable barrier to entry, the two act as a single monopolist. As would be expected in these circumstances, aircraft, air crew and ground crew, are under-utilised (by comparison with what is achieved in the competitive US market) and staff and some suppliers are perhaps overpaid (by comparison with the amounts actually needed to attract them into the industry). An example of under-utilisation of staff is the way in which new aircraft which are flown by pilot and co-pilot in Europe and America carry three aircrew in the less crowded skies and fine weather of Australia.
Since deregulation in the United States, most travellers buy discount fares, air traffic has increased, there have been no statistically significant effects on safety, and although some services have been discontinued a greater number of new ones have begun. Many isolated communities enjoy more frequent services than they used to. The principal consequence of deregulation has been that more people travel by air. In the light of US experience it is difficult to argue that regulation of routes and services serves the air traveller well.
Virtual deregulation of intra-state air services in South Australia has been a success. Since 1979 there has been a significant increase in the services offered in the South Australian air passenger market. New routes have been developed, old routes have increased frequencies, departure and arrival times have filled empty slots and passenger load factors are up. (4)
Like any monopolists, Ansett and Australian Airlines can use the excess profits available from their protected markets to price competitive routes below marginal cost. The Holcroft Report (5) described the manner in which Bizjets was driven from the service across Bass Strait in circumstances which would not have been tolerated in most other industries. The report went on to comment that: "What is tantamount to predatory pricing to drive out competition ... has received official endorsement despite the cross-subsidies involved, and conflicts with a 'nationally consistent approach' toward pricing policy."
Qantas and other international carriers are forbidden to carry traffic between Australian airports (except as part of their international routes). Flying half-empty jumbos across Australia is obviously wasteful. Use of this spare capacity would also offer travellers a wider choice of departure times.
3.4.1 The Two Airline Policy
The duopoly is preserved by Commonwealth legislation. Fares, capacity (number of seats times number of flights) and service are regulated in detail by the Department of Aviation and the Independent Air Fares Committee.
One result of the Policy is the notorious "parallel scheduling". When two airlines fly the same routes with the same equipment, the same number of flights, and the same fare structure, "in competition", economic forces impel them to fly at the same times: if one of them manages to change a flight to a more popular time it will steal passengers from the other, which can only retaliate by altering its own schedule to match. Parallel scheduling has meant that airports and terminals have had to be able to cope with aircraft two at a time (often with a long wait before the next pair of flights); this has required bigger and more expensive terminals, and more staff, than would be needed with single flights at more frequent intervals. Although the exact parallelism of scheduling has been diminished in recent years by the airlines choosing different aircraft and by a less inflexible fare-setting process, Australian travellers generally have a narrower choice of departure times than might be expected from the number of flights between major centres.
It is also clear from research done in recent years (see Taplin's paper and the Holcroft Report for details) that the Two Airline Policy, in achieving its objectives of ensuring a stable and reliable airline service and a guaranteed profit for Ansett, has also resulted in Australians having to put up with a more expensive and less convenient service than they would have had under a competitive regime. Among the contributing factors are: parallel scheduling; the many years during which the two airlines operated almost identical aircraft; and the many years during which discount fares were scarce and subject to very restrictive conditions. The effect of the restricted discount fares is that although full-price air travel in Australia does not compare badly with that in the United States, the actual cost to the average traveller has usually been much higher here than there. The argument does not, however, depend on any particular fare relativities, but on the way the Two Airline Policy has insulated the airlines from the forces which in a competitive market would signal travellers' preferred combinations of cost, comfort, frequency of service, and so on.
The Commonwealth Government does not have direct constitutional authority for the Two Airline Policy. Actual enforcement of the Policy is achieved by using customs legislation to prohibit the importation of large aircraft in much the same way as heroin and child pornography. An import permit is only granted if the use of the plane will comply with the Two Airline Policy.
3.4.2 Immediate Action
The Government's actions on coming to office should be directed to two ends: first, to set about making deregulation possible by ending the Two Airline Agreement, and second to improve the Two Airline Policy in ways that will both increase efficiency in the short term and reduce the shock of deregulation.
Ansett and Australian Airlines are protected from repeal of the Two Airline legislation by the Two Airline Agreement which guarantees them three years' notice of termination. Unless the Two Airline Policy is deemed unconstitutional by the High Court or the parties to it can be induced to tear it up, Australians must live with it for at least three years more.
As Australian Airlines is wholly owned by the Government, which can determine its attitude to the Policy, Ansett is the only party which could prevent deregulation if the Government wished it. Ansett is anxious to fly international routes but is prevented by the traditional Commonwealth policy that Qantas should be the sole international carrier (although minor exceptions have been permitted in the recent past involving routes to New Zealand and Timor).
Ansett fears unrestricted competition from a government-owned airline. The fear is particularly strongly felt because Ansett's predecessor, ANA, did face unfair competition from the government airline which contributed to its financial difficulties in the years before the establishment of the Two Airline Policy.
On taking office, the Government should set about ending the Two |
Ansett should be offered some attractive international routes in return for its consent. The proposal to sell Australian Airlines (see section 3.4) should ease Ansett fears of unfair competition. If Ansett does not agree within three months to an earlier termination, the Government should at once give the required three years' notice so that the Two Airline Policy will end in 1990 or 1991, and begin the necessary amendments to the legislation.
With regard to improving the operation of the Two Airline Policy in its last years, probably the most important action is to encourage more rational pricing. Changes in the fare-setting system and fare structure in recent years have improved matters, but the system still discourages marginal-cost pricing: for instance, the Independent Air Fares Committee (IAFC) does not distinguish between peak and off-peak loading.
If possible, alter the lAFC's guidelines to give the airlines more |
The Two Airline Agreement may restrict or preclude amendment of the IAFC legislation. The Government will have to seek the advice of the Solicitor-General.
3.4.3 Medium-Term Action
American experience indicates that partial deregulation gives rise to a separate crop of problems; fares, capacity and routes should be deregulated completely in one step. The notice necessary to terminate the Two Airline Policy is so long that there will be plenty of time for Ansett, Australian Airlines and the other airlines to prepare for the new regime. Ansett and Australian Airlines have such an advantage in size and experience that they are not likely soon to lose their pre-eminent positions, and we do not expect deregulation to produce disruption or immediate dramatic change.
Once the termination date of the Two Airline Policy has been decided, the Government will come under political pressure to ensure that uneconomic services to some centres are maintained, and it may not be able to resist all these. It should on no account promise to maintain service by any particular airline or aircraft type, or any particular frequency of service.
It is likely (judging from American experience) that most country routes now uneconomically served by major airlines with aircraft such as F-27s and F-28s will turn out to be profitable for smaller operators with smaller aircraft, and that many small centres will be served by more flights to more destinations. Nevertheless it is possible that some country routes may not be served after deregulation.
From the termination date of the Two Airline Policy, there should be no |
Towards the termination date, as airlines work out their timetables, it may appear that some routes are thought unprofitable and are likely to lose their service. This will no doubt be brought to Government's attention.
The Government should then assess which of these routes are most important, on the usual grounds of marginal seats and coming State elections, and call for tenders to provide a defined service on a particular route for two years. The operator that demands the least subsidy should be awarded it and acquire the obligation to provide the service. The successful tenderer should not acquire exclusive rights to the route and should not be protected if another company elects to fly the route without subsidy (apart from ordinary trade practices restrictions on predatory pricing). Ordinary commercial aviation safety standards relevant to the aircraft and route must of course apply.
After deregulation of trunk routes, the possibility will remain of airlines cross-subsidising services on competitive routes by over-charging on intra-state routes on which they have State-government-awarded monopolies. If State governments wish to protect travellers on these routes they must either introduce more detailed monitoring of costs and prices, or deregulate. The Government should encourage the latter.
3.5 AUSTRALIAN AIRLINES
The Australian National Airlines Commission, which operates Australian Airlines, is wholly owned by the Commonwealth. It owns a fleet of modern aircraft and is profitable -- anything else would be surprising, given the protection provided by the Two Airline Policy.
In emergency, the aircraft might be valuable to the armed services. A system of subsidies designed to support the operation of aircraft suited to possible defence needs would, however, be less costly than government ownership. In a war situation, the government could requisition any Australian aircraft.
Australian Airlines and Ansett are both eligible to receive government guarantees for borrowings but Australian Airlines has less flexibility in its capital-raising than private enterprise. Until Australian Airlines can go bankrupt it cannot be subjected to proper commercial discipline.
Public ownership of Australian Airlines is a barrier to deregulation of the airline industry. Ansett, a party to the Two Airline Agreement, is protected from predatory pricing by Australian Airlines, but as shown in the Holcroft Report those outside the Agreement do on occasion suffer it from those within.
Australian Airlines is part of an expanding industry which, freed from government restriction, would expand further. Employment in the industry is virtually guaranteed for those who wish to stay in it. There is no reason not to maximise the return to the taxpayer by selling at the best possible price.
Sell Australian Airlines to the public by floating share capital through |
Exclude the possibility of a take-over by Ansett by incorporating a provision within Australian Airlines' Articles of Association to prevent substantial ownership by any person who is the substantial owner of another airline.
3.6 INTERNATIONAL AVIATION
Landing rights for foreign airlines in Australia and for Australia's international airline Qantas overseas are subject to bilateral treaties. These treaties restrict capacity. While the capacity restrictions are having little effect at present, they could do so in the future.
Australian domestic airlines are forbidden to compete with Qantas. Some international foreign carriers who have shown interest in serving Australia or in providing further service -- British Caledonian, South African Airways and Singapore Airways -- have been denied opportunities.
By comparison with the domestic airline system, international aviation is competitive. International travel is extremely price-elastic, and there are a wide range of different fares and packages, and much discrimination between peak and off-peak travel.
International carriers are forbidden to carry any but their own stopover traffic between Australian ports, although, as we saw in section 1.1, this ban is to some extent evaded. Because of competition on international routes, if international airlines were allowed to carry domestic passengers they would have no scope for predatory pricing: the competition to local airlines would be fair. (In fact they would have to bear extra costs of security and maintaining customs and immigration integrity with domestic and international passengers on the same aircraft.)
Allow international carriers to carry traffic between Australian airports, Announce a policy of negotiating further bilateral agreements |
3.6.1 QANTAS
Australia's international airline, Qantas, is a corporation registered in New South Wales but the Commonwealth Government is the sole shareholder.
In the competitive world of international aviation it is hard to see the need for a government-owned airline in a country like Australia. If Qantas vanished overnight there would be many foreign airlines eager to take over its routes (not to mention Ansett) and travel to and from Australia would hardly be interrupted.
The defence and security argument about the usefulness of heavy long range transport aircraft in wartime should be answered in the same way as for domestic aviation: it is cheaper to subsidise operators of such aircraft than for government to own and operate them itself.
Sell the Qantas shareholding to the public, probably in four equal |
3.7 GENERAL AVIATION
Deregulation of airports and of airline services will result in competitive pressures towards rational pricing of services and facilities, resulting in automatic "cost recovery" in large areas of general aviation. The Government should continue the policy of full cost recovery for the services it provides for general aviation: but in doing so it is under an obligation to provide the services efficiently, and not to impose unnecessary costs on the industry with over-elaborate, outdated or too rigid standards and
Without compromising on full cost recovery, the Government should |
3.8 AIR SAFETY
The Airways Division of the Department of Aviation is overstaffed and burdened with antiquated work practices. It imposes restrictions on pilots and aircraft which, in practical operating circumstances can have a negligible or even counterproductive effect on safety. For instance, a new light aircraft produced in WA seems unable to be licensed because it falls between the light and ultra-light categories; cropdusting pilots are required to have the skills and equipment to use major airports.
Changes to the regulations themselves are beyond the scope of this document: the point to be made is that the Government has a duty to taxpayers and users of aircraft to provide an environment from which effective and appropriate safety regulations can emerge.
The Airways Division should be disbanded. Faced with similar problems, New Zealand is establishing an Airways Corporation to regulate air safety.
Drawing on the New Zealand experience, the Government should |
4. SHIPPING
Australian shipping has been dominated by the maritime unions since Federation, its operating costs are high and the coastal trade is protected from international competition. Crew costs are among the highest in the world. The IAC has estimated that the total cost of crewing an Australian vessel is about 3.6 times the cost of a British vessel and nearly twice that of a Scandinavian one.
Shipping is not a natural monopoly. Neither in the size of ships nor the size of shipping lines is there evidence of the continuously falling marginal costs which characterise them.
4.1 PORTS
Without effective communication and market pressures, the priorities set and decisions made by shippers, forwarders, port authorities, terminal and depot operators, customs agents and carriers result in what can only be described as a chaotic situation ... Clearly the need exists to increase productivity and improve industrial relations in the stevedoring industry ... There is a need for firm, publicly available commercial guidelines on the pricing policies and operations of port authorities ... (6)
Ports are controlled by State legislation and so are not directly subject to Federal policy. Most are run by self-financing autonomous authorities. Port installations tend to be under-utilised. Industrial relations are among the worst in the world and cause shipping and potential foreign customers to shun Australian ports. Port costs are among the highest in the world.
Habits and attitudes are deeply entrenched. Although some improvements of a technical nature are achievable, substantial improvement is likely to depend on those who cause costs being in some way made to bear them -- until an entirely different set of incentives prevails on the waterfront. This is best achieved by breaking down the monopolies as far as possible.
Competition between ports is limited by geography, and further limited by the pattern of land transport systems in the hinterland. These in turn have been influenced by non-economic factors including inter-State rivalry and protection of State railways. Nevertheless there is some scope for competition among ports to handle bulk exports (coal, grain, sugar especially) from areas from which land transport costs are similar; the benefit from such competition is greater if it is accompanied by deregulation or at least marginal-cost pricing of the land transport involved.
Within ports, there is scope to lease or sell wharves, container terminals and bulk facilities to private competitive operators. The principal barriers to a more competitive waterfront are industrial and political.
The Government should encourage implementation of the Task Force The Government should use Commonwealth powers under Section 96 |
We envisage, among other things, the sale or long-term lease of terminals and the lifting of restrictions on land transport which effectively prevent competition between ports for, say, wheat produced in the Riverina.
4.2 THE AUSTRALIAN NATIONAL LINE
The Australian National Line (ANL) is wholly owned by the Commonwealth Government. It was established because, following the Second World War, the Commonwealth found itself owning ships which it could have sold only at a book loss in the depressed shipping market of the time. Since then it has expanded and contracted without any meaningful review of its purpose.
An Australian merchant fleet may have beneficial externalities relating to national security and defence. If this is the case, a system of subsidies designed to support the purchase or operation of ships suited to possible defence needs would be less costly than government ownership of shipping lines. Such subsidies have been widely used by maritime nations; they were behind the rapid conversion of British cruise ships to troop transports for the Falklands war. The constitutional defence power enables the government to requisition privately-owned ships and facilities in wartime.
Recent legislation has given ANL more independence from government control, but it is still not on a strictly commercial footing. For example, ANL is eligible to receive government guarantees for its borrowings. Even if no specific guarantee were afforded a particular debt there is always the implied guarantee that government will not default on quangos' debts. On the other hand, ANL has less flexibility in raising capital than a private firm. It is subject to some extent to ministerial approval of the freights it charges and the dividends it pays the government. Most importantly, until ANL can "go broke" it cannot be subjected to proper commercial discipline.
Although the legislation is designed to force ANL to make a commercial return, it is likely that future governments would accept less rather than force liquidation. So long as this is believed to be the case, ANL management is in an impossible bargaining position when faced with unions or governments which demand that it undertake uneconomic activities.
Over recent years, ANL services have been significantly rationalised. A "capital injection" of $160 million from consolidated revenue improved its gearing ratio. In 1984-85 it declared a respectable profit and paid the first dividend for 14 years. Nevertheless, ANL is still carrying accumulated losses of $110 million, and survives after a history of losses which no private concern would have survived.
There is no good reason to regard operating a shipping line as a valid, let alone a necessary, function of government.
Technically, the recent legislation has paved the way to disposal of ANL as a going concern, and rationalisation and recent profits compensate to a large extent for the earlier poor commercial record. ANL is now in a position where it could be sold off.
The Government should float ANL as a public company. |
Opposition to this would to some extent be undermined if a significant proportion of the equity -- up to a third, say -- were given as ordinary shares to the line's employees in proportion to length of service. This would provide employees with an incentive to improve industrial relations and eliminate restrictive practices, a state of affairs which should increase the attraction of the line to potential investors.
4.3 COASTAL SHIPPING
Coastal traffic (including voyages between Australia and Christmas and Cocos Islands) is reserved for Australian ships and crew. Although it serves an island nation with all major population centres on the coast, Australian coastal shipping has failed to match competition from road and rail, being left only with bulk cargoes and freight across Bass Strait. An example of its inordinate cost is the transportation of Christmas Island phosphate (for the purposes of the Navigation Act, the island is part of the coast of Australia). Recent evidence showed phosphate rock shipped from Christmas Island to Australia costing $30 per tonne, while phosphate rock shipped half way round the world from Florida cost $16 per tonne. The same Christmas Island phosphate could be carried to New Zealand in third-country ships for about $10 per tonne.
Part VI of the Navigation Act, which came into force in 1921, effectively gives Australian-owned and Australian-manned vessels a monopoly of the coastal trade, a monopoly from which probably only the maritime unions have benefited. The right to regular voyages on Australian coastal routes is dependent on a licence which is in turn dependent on meeting a set of conditions which would be economically crippling to a foreign ship-owner. McLean provides evidence of industries which have failed to materialise and of competitive advantage lost on account of the inordinate cost of Australian coastal shipping, which has not only priced itself almost out of existence but has also seriously eroded the competitiveness of other industries. (7)
Part VI of the Act was intended to help Australia build up its own merchant marine and thereby have a maritime presence in the Pacific area. It has not fulfilled this objective even at the enormous cost it has imposed on other sections of the economy.
Repeal Part VI of the Navigation Act and let the economy reap the |
The Navigation Act is, however, not the only or even the principal barrier to reform. Because of the inevitable bottleneck at ports and a long tradition of union solidarity and militancy the maritime unions have an exceptional opportunity to prevent changes which they do not like. This will be reduced as the ports are made competitive and by the recommendations in the labour market chapter which will have the effect of reducing trade union solidarity; but those changes will take time that Australia cannot afford in this critical area.
Actively encourage unions and employers in industries such as steel Subsidise golden handshakes for seamen who leave the industry. (8) Whenever practicable, encourage parties affected by waterfront strikes |
4.4 INTERNATIONAL SHIPPING
Shipping lines combine in cartels called "conferences". Customers are tied to conference ships with "loyalty rebates". The system is excluded from the ordinary provisions of the Trade Practices Act by Part X of that act. Academic opinion is divided on whether conferences benefit shippers, as against conference ship-owners. Price-fixing cartels are in principle undesirable as resulting in misallocation of resources and other inefficiencies; but conferences possess offsetting advantages in the special conditions of international merchant shipping, and these were judged by the industry task force which prepared the Liner Shipping Report (9) on the whole to outweigh the disadvantages.
The Australian Shippers Council (ASC) was formed to counterbalance the monopoly power of the conferences, but it is itself a monopoly and the incentives faced by its staff are likely to encourage them to protect past decisions rather than to seek greater efficiency through innovation. Even some ASC members have scant respect for the organisation's efforts and skills, and several shippers have negotiated their own shipping contracts outside the ASC.
A particular aspect of the Australian situation is that many major shippers, particularly the agricultural marketing boards, are themselves monopolies shielded from competitive pressure and thus have less incentive for cost saving than operators in a competitive market. The fact that some marketing authorities have gone outside the ASC may reflect credit on them or may indicate the extent of dissatisfaction with the ASC.
A Code of Conduct for Liner Companies (commonly called the 40:40:20 rule) has been negotiated within the United Nations agency UNCTAD. Under the Code, certain international trades would be subject to cargo reservation, whereby 40 per cent of cargo would be carried in ships of the exporting nation, 40 per cent in ships of the importing nation, and 20 per cent by third parties (crosstraders). Australian unions are demanding that Australia ratify the code.
Trans-Tasman trade is particularly unsatisfactory. It is effectively reserved for Australian and New Zealand ships by union pressure on both sides of the Tasman, with the complicity of successive Australian and New Zealand Governments.
The Government should proceed to implement the recommendations Consistent with the Liner Shipping Report, the Government should |
Little can be done directly to improve Trans-Tasman shipping unless the Government wants and is confident of winning a confrontation with the maritime, waterfront and transport unions, and can gain the support of the New Zealand Government. The recommendations made earlier for increasing competition in the ports and for partial employee ownership of ANL will in time produce much better industrial relations and working practices in these areas, which will reduce both the cost of Australian and New Zealand ships and the opposition to third-country ships. The policies presented in the Labour Market chapter will also help.
5. ROAD AND RAIL
Road and rail freight transport compete. Both are in effect subsidised, not having to pay their full costs. Railways show huge losses (a billion dollars 1983-84) which are paid by taxpayers; and although total expenditure on roads is more than covered by the fuel and other taxes which fall almost exclusively on road users, there is strong evidence that revenue from trucks is inadequate to cover the costs they impose on the system while there is an over-collection from cars.
5.1 ROADS
Investments in roads shows a high social rate of return -- higher than that for other transport facilities, with benefit:cost ratios typically of 2:1 to 3:1 for major projects. (10) Road funding is highly politicised, however, and the tendency is to allocate funds "fairly" between States and between road categories, rather than to attempt to spend the money where the greatest social return will result. Cost-benefit analyses of individual developments are never published, and details of funding arrangements give local authorities little incentive to evaluate the worth of particular roads against the total costs. It is therefore unlikely that each road development returns approximately the same social return or even that every road has positive returns.
In allocating Commonwealth funds for road construction, more |
5.1.1 Fair Competition between Road, Rail and Sea
In order for road transport to compete fairly with sea and rail, taxes must be levied on trucks which are sufficient to cover the cost of upgrading and maintaining the running surface they need. (A heavy truck causes vastly more wear and tear on roads than a car, and needs stronger bridges and deeper underpasses. The cost is out of proportion to trucks' extra fuel consumption, so fuel taxes alone will not achieve equity.) If at the same time railways are compelled to recover all of their relevant costs -- that is, the taxpayer subsidy is withdrawn -- then truckers' competitive position will not deteriorate. (The costs sunk in existing roads and tracks are not recovered.) The demand for freight carriage is sufficiently price-inelastic for the total volume to change very little. It may be difficult to persuade truckers that this is so: the best way is to convince them that the railways really will have to pay their own way. Road and rail cost recovery must be tackled together and by stages.
The Government should continue broadly along present lines with a Remaining Commonwealth regulations inhibiting competition between |
The Inter-State Road Transport Act 1985 and Inter-State Road Transport Charge Act 1985 provide a mechanism for levying interstate trucks and coaches, and the Inter-State Commission has at the direction of the Hawke Government recommended a charging structure and initial rates.
5.1.2 Fuel Taxation
The fuels liquefied petroleum gas (LPG) and compressed natural gas (CNG) do not pay road tax. This is the result of a deliberate policy decision to conserve petroleum at a time when it was believed to be in especially short supply. As well as the waste caused by the assumption that the price differentials the market would have assigned to the various fuels could be improved upon by politicians, the policy tends to subsidise vehicle owners who use the roads where they are most congested -- in the city centres. Very many taxis have been converted to gas; the consequent lower running costs and enhanced profitability have been capitalised into the market value of "taxi plates" in this restricted-entry industry.
Tax LPG and CNG for road usage at similar rates to petrol and diesel |
The tax will be resented by owners who have converted to gas but, as in so many like cases, there is no practical way to undo the damage caused by political hubris without hurting someone.
With full cost recovery from road maintenance tax on heavy vehicles and tax on LPG and CNG, total revenue from fuel and vehicles would be significantly increased. Depending on budgetary conditions, this may allow tax reductions elsewhere: public support for this would help the Government resist pressure from truckers and taxi-drivers. This opportunity should not be used to reduce fuel tax at least until the budget deficit is eliminated. Because of wide use and relatively inelastic demand, fuel tax is a better revenue-raising tool than many others.
5.2 RAILWAYS
The Commonwealth is responsible for the Australian National Railways Commission (ANR) which runs the interstate services from Broken Hill to Kalgoorlie and the non-metropolitan rail systems in South Australia and Tasmania. Most other remaining railway systems, including all urban passenger services, are in the hands of State Governments. There are some private railways (iron ore in WA, sugar in Queensland) which do not transport passengers or general freight.
Railways face competition from other modes, especially road transport, but a well-run railway is more efficient than road transport in carrying large amounts of bulk freight over long distances.
Railways have long been treated as a pork barrel from which uneconomic services are doled to attract votes from isolated communities and urban commuters. Particularly since the 1970s, they have not been required to cover their costs. Taplin writes:
Failure to let railways adapt to the competitive environment offered by the new road technology is one cause of the deficit problem [and another is] perseverance with country passenger services when independent bus operators, given the opportunity, could have provided better services and paid their way. The third major cause of the deficit ... is suburban passenger services. (11)
The freight services suffer competition from road transport which does not meet the full cost of the injury it does to the road system. Railway pricing does not reflect the different marginal costs of traffic in different directions, in different seasons and of differing urgency.
To maximise revenue the system would also need to discriminate between traffic of low and high price elasticity, varying its charges according to the cost to the user of alternative modes of transport and milking those with no realistic alternative. Unlike marginal cost pricing, discussed in the previous paragraph, this practice would probably not maximise community welfare. As we saw in section 1, however, regulations have attendant costs and side-effects, and if railways are otherwise competing freely with other modes of transport (in some cases even with other rail systems) regulatory control of price discrimination should only be introduced if the Government is sure that the welfare loss is greater than would be caused by the regulations themselves.
The urban rail services operate in a very different market from country services. Western Australia, South Australia and New South Wales have integrated urban rail passenger services into their urban public transport services. They still incur large losses.
Under the Australian National Railways Commission Act 1983, ANR has (at least in theory) considerable autonomy in deciding which rail services it provides and which it discontinues. The Government can direct ANR to provide particular services but ANR is entitled to compensation for losses on these "Community Service Obligations".
The Government should require ANR to achieve full cost recovery from |
The State rail deficits are major contributors to State budget expenditure. South Australian and Tasmanian country rail services are part of ANR and ultimately of the Commonwealth budget. The Grants Commission endeavours to recommend Commonwealth grants which equalise the various States' cost advantages and disadvantages. Were ANR to reduce or abandon uneconomic services in South Australia and Tasmania then the recommended grants to other States to enable them to provide comparable services would be reduced accordingly. Were the Commonwealth to adhere to the Grants Commission recommendation, pressure would automatically be applied to the States to reduce their uneconomic services.
It is to be expected that the Northern Territory Government, NT federal representatives and other interests will continue to ask for a railway from Alice Springs to Darwin. Almost everyone admits that such a railway would not pay for itself from ordinary commercial traffic; its usefulness for "defence" is put forward as justification for the Commonwealth bearing the inevitable large losses. This usefulness is undeniable although hard to convert into terms of cash.
Rough calculations suggest that it would be much cheaper to buy a large fleet of road trains and keep them in store against a defence emergency; they would also be a good deal more versatile than an Alice-to-Darwin railway.
The Government's policy with regard to an Alice Springs to Darwin |
ENDNOTES
1. John Taplin. This chapter relies largely on the work of Professor Taplin, particularly Australian Transport: Current Issues, Legislative Research Service Discussion Paper 5, Canberra, Parliamentary Library, 1982, and we wish to express our indebtedness to him. It should not be assumed, however, that the chapter is a fair summary of Professor Taplin's work, or that opinions expressed in it are shared by him.
2. See also the discussion of public and private sector efficiency in the Government and Administration chapter.
3. Taplin, op. cit.
4. D. Starkie and M. Starrs, "Contestability and Sustainability in Regional Airline Markets", Economic Record, September 1984.
5. Report of the Independent Public Inquiry into Domestic Air Fares, Canberra, AGPS, 1981.
6. Report of the Industry Task Force on Shore-Based Shipping Costs, Canberra, AGPS, 1986.
7. R. McLean, Australian Coastal Shipping: the High Cost of Protection, AIPP, 1984.
8. Along the lines recommended in Revitalisation of Australian Shipping (the Crawford Report on shipping), Canberra, AGPS, 1982.
9. Report of the Industry Task Force on Liner Shipping, Canberra, AGPS, 1986.
10. An Assessment of the Australian Road System, Canberra, BTE, 1982.
11. Op. Cit.
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