Wrong Number: Resolving Australia's telecommunications impasse
by Henry Ergas
(Allen & Unwin, 2008, 256 pages)
The undermining of these crucial property rights in Australia has been the ugly underside of Australian economic reform over the last two decades. Reversing the position the ALP took to the last election, the Treasurer Wayne Swan has added his voice in support of the September 2008 High Court decision requiring BHP to provide rival iron ore miner Fortescue access to its Pilbara rail lines.
This High Court decision constitutes an important staging post in the 15 year march through private property rights. The September High Court decision confirms and entrenches Australia's problem with property rights. The Pilbara case, if allowed to stand, sets a precedent with enormous implications.
A LANDMARK CASE FOR PROPERTY RIGHTS
The importance of property rights in the legal, economic and social framework of liberal democracies is too often understated. Property rights are the key to ensuring efficiency in private enterprise economies. They embody an owner's ability to do what they please with their own property, and -- critically -- the right to exclude others from access to that property. It is this exclusivity that provides people the incentive to save and invest in property. Exclusive control by owners allows them the flexibility to use their property without having to negotiate and seek permission. Private property rights also prevent free riding, where users avoid paying the full costs. Free riding is endemic in socialised systems.
The basis for the High Court decision goes back to the 1993 Hilmer Report on National Competition Policy. Though paving the way for reform in opening up government monopolies, or, as they are popularly described, "essential facilities", to competition, Hilmer also brought private assets within the regulatory net. Recognising that forcing private firms to share their privately funded infrastructure with their competitors could deter private investment, the Hilmer Report excluded "production processes" from within the scope of monopoly assets that must be made available to all parties. This was justified on the basis that that new production facilities could always be built to challenge a monopoly. The subsequent legislation became Part IIIA of the Trade Practices Act.
If we were to apply this principle, for instance, to a car assembly line, which is itself a transport facility, we have the equivalent of a rival car manufacturer seeking access to the Toyota plant. Such an application would be ruled out only because that facility is excluded under the production facility caveat of the Trade Practices Act. But this is an arbitrary distinction and, indeed, the National Competition Council (NCC) has argued the exemption for manufacturing facilities should be revisited.
The National Competition Council takes its "competition" title as trumping all other facets of efficiency. In a wish to force the sort of competition it sees as ideal, it demonstrates a remarkable hostility to free markets. It fails to recognise that efficiency depends both on competition and on firmly defined and protected property rights. In its 2008 Annual Report, the NCC makes a naked grab for power in seeking changes to the Trade Practices Act that would give competition regulators even greater powers over vast swathes of the economy.
Even with current exemption over regulatory control for "production facilities", there are many areas of business which appear to be caught up in the socialisation net that the High Court decision reveals. These include other rail lines like BHP's Hay Point coal line in Queensland. This is integrated with BHP's mining and port facilities and as such has demonstrated advantages over the open access regimes in other rail-port systems. Also in the net are gas pipelines, and facilities like private hospitals, airports, theatres and sports stadiums.
THE TELECOMMUNICATIONS TRAP
But above all the decisions on the Pilbara rail lines have implications for the telecommunications industry. Implicitly, the High Court has confirmed the wisdom of Telstra refusing to build its fibre optic network without assurances that it would not be subject to regulatory seizure by the ACCC.
In his new book Wrong Number: Resolving Australia's Telecommunications Impasse, the regulatory analyst Henry Ergas conclusively demonstrates just how poisonous government involvement in telecommunications has been since Telecom Australia was partly (later wholly) privatised and full-service competition legalised.
Though new services have been introduced, and Telstra and its competitors have been on a ceaseless road of cutting out surplus costs, Australian telecommunications has remained stuck in a regulatory quagmire. The infusion of efficient new services that the competitive market was to bring has not met with expectations.
The price that Telstra must offer others for the use of its telecom lines is regulated, as are the service features and reliability of the lines. In addition, regulators set community service obligation payments between Telstra and other firms piggy-backing off their lines.
In all these cases Ergas demonstrates that the regulatory dice is loaded heavily against Telstra. The government and its regulator have treated Telstra as a vehicle through which its social policies can be pursued and has sought to force Telstra to provide a cheap piggyback to its competitors. Telstra has been required to cross-subsidise its mainline business with its profitable television, internet and mobile services. As Ergas says in his rather deadpan way,
Mandatory access converts assets from being regulated through property rules -- the owner can choose whether or not to allow others to use them -- to being regulated through liability rules, in which the owner has no right to exclude access but rather must provide it on terms determined by others. There is nothing that says that such a conversion will be efficient.
Australia's telecommunications regulatory regime has had adverse consequences. The influx of competition was expected to quickly bring about an upgrade of the Telstra copper network to one capable of handling high speed data -- alongside new networks built by Telstra's competitors.
Instead, as a result of the prices being held too low, we have seen the existing -- and aging -- network being maintained and only gradually improved, while Optus and a range of retail providers have preferred to use the Telstra network rather than build their own.
Simply put, it's cheaper to piggy-back off a competitor's network than to invest in your own telecommunications infrastructure.
The lack of investment in fixed lines by Telstra or its competitors is because the regulator has been setting access charges to the network that are too low to cover costs. The regulatory framework that was supposed to encourage competition has instead become a major disincentive to invest in telecommunications.
This perverse consequence of third-party access requirements in the telecommunications industry has really come to the political foreground over the last few years, ever since Telstra announced it was going to implement a major upgrade to the whole network which would involve ripping up the copper wires and replacing it with fibre-optic cable.
Rather than seeing new profit oriented telecom networks, we have seen $3 billion of subsidies and another $4.7 billion foreshadowed to fund a high speed network that Telstra would have funded itself given an adequate regulatory holiday. Australia has forfeited the opportunity to replace the dead hand of regulation with an open environment for telecommunications investment, instead choosing to fall back on yet another round of political negotiation and taxpayer subsidies.
Ergas maintains that Australia has, as a result, fallen behind in the world telecom performance stakes. His book is a masterpiece of analysis of the decisions determining the performance of Telstra, and the uniquely dictatorial powers of the ACCC over the business's prices and performance characteristics. It is however light on in terms of specific comparisons with overseas telecom businesses performances and in providing empirical pointers to how things might be done better.
Ergas demonstrates how the regulatory arrangements for the telecommunications industry are far more aggressive than those confronting other infrastructure areas. Rather than being governed by the generic Part IIIA of the Trade Practices Act, telecommunications is regulated under Parts XIB and XIC. And these provisions give the ACCC much more intrusive powers to regulate, and limit the number of checks and balances the regulator has to comply with.
By comparison, Ergas argues that those industries that are covered by Part IIIA -- ports, airports, electricity networks, railways and others -- are in much better shape because of the decision to regulate infrastructure and the prices set for access are made by different bodies. Under Part IIIA, the NCC decides whether a firm should open its facilities to competitors and the ACCC then sets the price at which it must do so. Under XIB and XIC, the ACCC plays both these roles -- and has arguably a conflict of interest while doing so.
And from this, Ergas maintains, we have seen new investment and a general achievement of the goals set by competition policy.
But, as the High Court's Pilbara decision makes clear, simply separating the decision to regulate from the price setting function of the regulator would be no panacea to the telecommunications sector's regulatory impasse. Indeed, the NCC has proven to be, at best, a seamless variant of the ACCC (and a stepping stone for its officers to becoming ACCC Commissioners). Indeed, in many respects the NCC has proven even more inclined to force incumbent firms to share their property rights with others on onerous terms. Where advances have been made, notably in gas, these were due to a review panel taking a highly unexpected decision to overturn the pro-regulatory stance taken by the ACCC and NCC.
COMPULSORY SHARING IS FOR KINDERGARTEN, NOT FOR INFRASTRUCTURE
All these problems have stemmed from Australia's excessively wide definition of an essential facility under the Trade Practices Act. The United States, for example, does not allow access to be required simply because it is "uneconomical" to develop a further facility. (In 1993, the Hilmer Report itself recommended a stricter test than was actually legislated.)
Nor would the US regard a facility to be essential and subject to regulatory control when, as in the case of the Pilbara rail lines, there are three such facilities -- BHP's, Rio Tinto's and one owned by Fortescue itself, all of which could provide a basis for carrying other firms' ores commercially.
The present legal framework is the outcome of faulty analysis on the part of policy makers anxious to ensure access to facilities is not restricted by excessive business rivalry. But this has created a new form of investment risk. Firms will now be uncertain whether their facilities are to be opened to rival businesses on terms determined by a regulatory agency. And they will have an incentive to hold off making investment decisions hoping that a rival will move first and incur the risk of failure. Allowing government agencies to set the prices and conditions for a firm's property is a sure-fire way of suppressing new private sector investment.
The fact is that the Hilmer Report, and the competition policy to which it gave birth, has outlived its usefulness. Essentially the aim was to open up government owned facilities to other users and to remove all restrictions on the abilities of entrepreneurs to build new facilities.
But the idea was to get such facilities away from regulatory oversight as soon as possible, something which has demonstrably not occurred.
This is made worse by an unfortunate propensity of regulatory agencies to develop vested interests in self preservation and aggrandisement. Having abolished facilities with monopoly powers buttressed by government controls we now have created a regulatory monster that is devouring the investment incentives to build new infrastructure. The regulatory agencies are also bringing waste by oversighting their charges.
It is opportune to consider a review of the conditions that spawned the highly intrusive regime we have created in Australia to examine whether we would be better served by the sort of lighter regulation that the Hilmer Report had in mind and which prevails in the US and other economies.
The adverse situation was created by government legislation. It will require legislation to restore the private property rights necessary for private investment.
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