purpose and perspective
The Exports and Infrastructure Taskforce (2005) made a number of recommendations designed to make the regulatory environment less oppressive for Australia’s export industries. The focus of those recommendations was on limiting regulation of export related infrastructure to actions likely to produce economic efficiency gains. Reducing the complexity of regulatory approval processes and removing conflicts between regulation at state and national levels were seen to be important. Also a priority was to speed up the regulatory decision making process.
The taskforce recommended that, ‘in regulating export oriented infrastructure, the presumption should be that commercial negotiation between users and providers would be the natural starting point, with only light handed regulation when needed, and heavier handed regulation as a last resort’. For cases where heavier handed regulation was needed, the taskforce recommended that the Council of Australian Governments (COAG) change the regulatory framework in a number of ways designed to reduce the complexity of the process and limit the time taken to reach a decision to a maximum of six months. Any appeal of a decision should be considered ‘on the documents’.
On a related issue, the taskforce recommended that each jurisdiction set up a ‘one stop shop’ for project facilitation and approvals. The taskforce recommended a series of planning and coordination initiatives, including facilitation of the development and operations of logistics chains, speeding up of planning under Auslink and extension of Auslink to include ports and shipping channels. It was recommended that work on harmonising road and rail regulations be given priority. The taskforce also suggested that Part IIIA of the Trade Practices Act 1974 be amended in order to protect vertically integrated, tightly managed logistics chains, especially those related to export industries, from third party access and thereby preserve their efficiency. Finally, the taskforce recommended that the Productivity Commission be asked to carry out an infrastructure audit, to be repeated at five yearly intervals.
developments in 2005-06
In response to continuing high levels of demand for Australia’s mineral and energy commodities, progress has been made on expansion of a number of regulated export logistics chains, particularly for coal. Some regulatory issues have also been resolved and, through COAG, Australian governments have committed to a broad program of regulatory reform.
specific bottlenecks and investment issues
At the time that the taskforce was set up, the abrupt, and largely unforeseen, increase in demand for mineral and energy commodities had given rise to a number of transport infrastructure bottlenecks both in Australia and elsewhere. The most evidently serious of those bottlenecks in Australia were caused by the combined rail and export terminal constraints on Hunter Valley coal exports and the capacity constraint at the Dalrymple Bay Coal Terminal. In both of those cases, temporary devices to ration available capacity have been in place for some time. Those devices have limited the queuing of ships, and thus have reduced demurrage charges.
In mid-May 2006 there were moderate queues of ships at Dalrymple Bay and Gladstone (thirteen and fourteen ships respectively) with waiting times between ten and sixteen days. Four ships were waiting to be loaded at Hay Point and three ships were queued at Newcastle. There were no queues at Abbot Point, Brisbane and Port Kembla.
The Senior Officers Group (Australian Government 2005) pointed out that export volumes were less than the declared capacity of the Hunter Valley coal chain and that this loss of export potential was symptomatic of capacity rationing systems. However, it is not a simple matter to determine the short term effects of the rationing system, given that capacity usage will be determined by several factors, including mine throughput and overall demand for coal. For example, from January to May 2006 the annualised outloading rate at Newcastle was 81.7 million tonnes, which was significantly below system capacity, possibly representing constraints on mine capacity. Work on longer term resolution of capacity constraints is under way in both the Hunter Valley and Dalrymple Bay.
Hunter Valley coal
The major rail infrastructure expansion in progress is the Sandgate rail flyover, to be completed early in 2007. Some increase in effective system capacity was provided in the second half of 2005 by additional rolling stock and three head loading at Port Waratah (HVCCLT 2006). In November, Port Waratah Coal Services (2005) announced the commencement of an expansion program on Kooragang Island that is designed to take total Newcastle port coal export capacity to 102 million tonnes by the end of 2007.
In August 2005 the New South Wales Government selected the Newcastle Coal Infrastructure Group as the developer and operator of the Port of Newcastle’s third coal loader. The group plans an initial capacity of 30 million tonnes a year for the facility by 2009 (Newcastle Coal Infrastructure Group 2006).
Queensland coal
or Queensland’s export coal industry there were several significant regulatory decisions taken in 2005, both on the Goonyella coal chain specifically and to rail access more generally. First was the approval by the Australian Competition and Consumer Commission (ACCC) of a capacity rationing system for exports from the Dalrymple Bay Coal Terminal. The ACCC gave temporary approval for the scheme to begin on 29 April 2005 and final approval for a longer period, in December. The rationing scheme does appear to have reduced queuing, with a consequent reduction in demurrage. However, mine capacity continues to exceed system capacity, with mines such as Blair Athol ramped back because of system constraints.
Second was the Queensland Competition Authority’s April 2005 final decision on the access regime to the Dalrymple Bay Coal Terminal. That has allowed some progress on a set of investments to expand capacity at the terminal. For rail, the authority handed down its final decision on Queensland Rail’s 2005 Draft Access Undertaking, December 2005, rejecting the draft. Queensland Rail is required to submit a revised document for the authority’s approval. That process is currently under way and is expected to result in a new undertaking from July 2006.
Progress has been made on a diversity of private and public sector projects to expand production and reduce system constraints in the production and transport chain. These include works on:
In addition, the Queensland Government has requested a report on the proposal to connect the Goonyella rail corridor (that services the Hay Point Coal Services and the Dalrymple Bay Coal terminals near Mackay) to the Newlands corridor that is connected to Abbot Point.
grain railways
Rail transport of grain has not suffered from abrupt, or sustained, bottlenecks but there have been problems associated with failing rail infrastructure and diversion of grain to road transport. In this context, two significant sets of commitments have been made over 2005-06 — one to upgrade a number of the New South Wales restricted lines, another to rationalise and rejuvenate the Eyre Peninsula rail system. Work is expected to commence by October 2006 on the latter project.
iron ore
Not all recent regulatory determinations can be regarded as having a positive impact on either export values or economic efficiency. In November 2005 the National Competition Council issued a draft declaration on BHP Billiton Iron Ore’s Mount Newman rail line. As is discussed further below, if this declaration is carried through, significant economic damage is likely to result. It is of concern that the NCC made a recommendation without conducting an economywide benefit–cost analysis to determine whether declaration would be in the national interest. Given the inefficiencies and delays that have arisen in the operation and expansion of multi-user infrastructure in the Australian coal export chain, it is likely that the application of such a test would demonstrate that declaration of the Mount Newman rail line would impose considerably more costs on the Australian economy than any benefits it may confer.
COAG response to recommendations of the Exports and Infrastructure Taskforce
At its 3 June 2005 and 10 February 2006 meetings, COAG reached agreement on a number of initiatives of direct relevance to export infrastructure. Those initiatives fall into three categories — regulatory changes under National Competition Policy; transport reviews and decisions; and a group of individual decisions related to the taskforce recommendations.
In response to the taskforce recommendations, COAG reached agreement in principle at its 3 June 2005 meeting to:
> speed up long term planning under Auslink
> extend the reach of Auslink to cover ports and shipping channels
> produce infrastructure reports for each jurisdiction every five years
> work toward harmonising road and rail regulations
> establish ‘one stop shops’ for project facilitation.
It was also agreed that the Commonwealth should facilitate the establishment of logistics chains coordination groups for systems of national importance. Agreement has since been reached that the first infrastructure audit is to be completed by January 2007, although work is still in progress on the appropriate framework for the reports.
On export infrastructure regulation, COAG agreed at its 10 February 2006 meeting on a presumption that commercial negotiation between provider and user be the starting point. For those cases where regulatory intervention becomes necessary to set access arrangements, key aspects of what was agreed involve:
> inclusion of objectives clauses promoting economically efficient investment in, operation of and use of infrastructure in all third party access regimes
> consistency of principles for determining access prices
> binding regulators to a maximum six month decision period, and
> more simple and consistent rail access regulation with the Australian Rail Track Corporation access undertaking as a model.
It was also agreed that state and territory access regimes would undergo a certification process to be completed by 2010 and that the regulation of port, port authority and associated handling and storage facilities be reviewed in each jurisdiction. On broader issues of regulation, agreement was reached on an effort to harmonise regulation and ensure competitive neutrality.
A number of transport specific initiatives were agreed at the 10 February 2006 COAG meeting. Those included a reference to the Productivity Commission to develop efficient approaches to road and rail freight infrastructure pricing. The commission is to report by December 2006. There was also agreement that the work toward harmonised rail and road regulation should be completed within five years. Improved safety regulation and standards for innovative vehicles designed to reduce road damage are included in the targeted changes in regulation. Further, there was agreement on coordinating transport planning and appraisal processes used for evaluating proposed road and rail infrastructure projects. As well, work will proceed on reviewing causes of urban congestion and options for managing it, with a focus on national freight corridors.
key issues for 2007 and beyond
Australian exporters face a wide range of infrastructure terms and conditions. Exporters of high value goods that are neither perishable nor bulky compete in the broader domestic economy for transport and other inputs. Their concern is that domestic markets work efficiently. Only at or near ports do they have export specific infrastructure concerns. On the other hand, for the exporters of bulk commodities, such as coal, iron ore and grains, specialised export infrastructure is essential as is an intermodal approach to evaluating the transport logistics chain.
Much of the port, rail and related infrastructure supporting Australia’s exports has elements of natural monopoly. In many cases it is impractical, or makes no economic sense, to have multiple systems. In cases where there are strong elements of natural monopoly, infrastructure owners could provide too little capacity and too low a quality of service in the process of extracting monopoly rents if left unregulated.
The presence of some degree of natural monopoly offers reason to consider regulation. Taken alone, it is not always sufficient to justify regulation, though. Of itself the act of regulating carries no guarantee of improvement. There are three reasons for that. First, there might not be that much of a problem in the absence of regulation. In that case, nothing of significance could be gained from regulation even if intervention were possible at low cost. Second, regulators sometimes make mistakes, just as market participants do. Even when there is a problem in the absence of regulation, intervention may not make the situation any better. Finally, regulation imposes costs. Staffing and supporting regulatory agencies involves the direct use of resources. As well, regulatory processes require often significant input of resources from existing and intending participants in the market. In addition, regulation of one facility may make investors wary of committing funds to other, similar, projects. A clear focus on achieving net benefits is required if the best is to be derived from regulation.
an economic efficiency objective
A core issue in facilitating the development of efficient infrastructure support for Australia’s export industries is the balance between action to limit the economic losses associated with extraction of monopoly rent by infrastructure owners and still providing incentives for investment in infrastructure. Much of the emphasis of Australian regulation has been on minimising the extraction of monopoly rent — so much so, that investment has not always been encouraged up to levels that are economically efficient. The issue was raised by a number of exporters, industry groups and analysts in submissions to the taskforce and other forums in the context of a perceived reluctance to invest by owners of regulated export infrastructure. Affleck (2005, p. 14) argues that there is ‘... indisputable evidence of endemic underprovision of infrastructure capacity in the Hunter Valley export coal supply chain ...’ This has been particularly the case for rail infrastructure.
The taskforce took the view that regulation of export infrastructure should be relatively light handed. A presumption that decisions should be made on the basis of commercial negotiation should be the starting point. A regulator, once involved, should avoid an emphasis on spurious accuracy. Instead, the emphasis should be on finding an acceptable range for the rate of return, service price or other parameter in question. In recommending this approach, the taskforce recognised the need for pragmatism in seeking to achieve economically efficient outcomes.
The Australian Government had already accepted the importance of including an economic efficiency objective in Part IIIA of the Trade Practices Act in its response to the Productivity Commission’s review of the National Access Regime (Australian Government 2004). Such an objective, and a requirement that the National Competition Council and the minister have regard to the objective when making decisions, is to be incorporated into the act through the Trade Practices Amendment National Access Regime bill, currently before the Senate. However, it is an open question whether the inclusion of the economic efficiency objective proposed will achieve the result recommended in the taskforce report. The proposal as drafted links the concept of economic efficiency to ‘promoting effective competition in upstream and downstream markets’ and is not therefore a simple unqualified economic efficiency objective.
The potential effect of not having an efficiency override in Part IIIA, and in related state legislation, can be illustrated by the case of disputed access to BHP Billiton Iron Ore’s Mount Newman rail line. In June 2004, Fortescue Metals Group Limited lodged an application with the National Competition Council to declare the Mount Newman line under Part IIIA of the Trade Practices Act. In November 2005 the council issued a draft declaration for the line for third party track access. They argued that the declaration would introduce competition into the markets for iron ore haulage and iron ore tenements in the southern central Pilbara region (NCC 2005). BHP Billiton is the owner and sole user of the service from the line, in the absence of a declaration for access to the rail line but it is legally obliged, by a state access regime, to haul iron ore for third parties.
Since BHP Billiton is free to introduce competition in haulage, but chooses not to because it can provide the service efficiently itself, there is no clear economic gain from introducing competition in haulage. It is also not clear that there are gains to be made from increasing competition in the market for iron ore tenements.
For an intervention to increase economic efficiency, any gains to be made from introducing competition into another domestic market through declaration would need to exceed the costs of that declaration. BHP Billiton estimates the present value of direct costs to it alone of introducing third party ore shipments at almost $1.7 billion (BHPBIO 2006). Those costs include the reduction in present value of net income from delays in BHP Billiton’s own projects, increased coordination costs and loss of rail slots on the Mount Newman line. In addition, it is estimated that the present value of lost taxation and royalty revenue would amount to $840 million. The estimate is based on assumed third party ore shipments of 45 million tonnes a year, based on an argument that
Fortescue and its joint venture partner would need to jointly develop both Mindy Mindy and their Chichester Ranges deposits in order to cover their own infrastructure costs, even given access to the Mount Newman rail network. The costs estimated by BHP Billiton are very significant and would probably substantially exceed the net present value of cash flows from the entire Mindy Mindy deposit (which is foreshadowed to operate at a rate of 5 million tonnes a year), although there would need to be some allowance for additional output that might result from other junior miners taking advantage of the declaration (if this is considered likely). Furthermore, the BHP Billiton figures contain no estimate of the dynamic costs of depressing the incentive for infrastructure owners to invest and do not take into account the wider costs to Australia that would flow from delayed/lost investment and/or reduced capacity, as the analysis is confined to the net cost to BHP Billiton.
The costs of declaration of the Mount Newman network would have been substantial, but it is unclear what benefits there would have been, if any. There is no comparative estimate of the potential gross benefit of allowing third party access, even for the Mindy Mindy deposit alone. In fact, as is pointed out by CRA International (2005), insufficient is known about the deposit to assess whether or not it would be economic to mine it under any rail access arrangement. Even if the Mindy Mindy deposit proved to be economic with access to rail infrastructure, an alternative to declaration already exists. The state based Rail Transport Agreement requires BHP Billiton to haul third party ore using its locomotives and wagons. Such an approach may potentially provide most of the benefits of access to the rail track provided by declaration without the wider incentive costs. In particular, the discouraging effect on potential investments in the Pilbara more broadly, and possibly beyond, that is a characteristic of declaration is largely missing from the state agreement.
Without the explicit inclusion of an economic efficiency override in Part IIIA, all that is required to support a declaration is a demonstration that an increase in competition will occur, even if economic efficiency is lowered. In fact, as the National Competition Council (2005, p. 66) points out in reference to an Australian Competition Tribunal decision on access to Sydney Airport, it is not even necessary to demonstrate that a potential third party entrant has a viable business.
Inclusion of an economic efficiency override and the requirement to undertake a benefit–cost analysis that takes into account the loss of efficiency may prevent one other possible problem. Although it does not use the criterion in its Mount Newman draft declaration, the National Competition Council (2005, p. 2) points out that Part IIIA requires that it be shown that a declaration would promote competition in a market, or markets, ‘... (whether or not in Australia)’. In other words, in another case, it could be sufficient to show that a declaration promotes competition in some foreign market. Yet in terms of the economic welfare of Australians, promotion of competition in markets outside Australia is of no value, at best. If anything, increased competition between Australian iron ore producers on export markets would reduce export prices at a consequent cost to the Australian economy. This matter was raised by the taskforce (Exports and Infrastructure Taskforce 2005, p. 39)
Among Australia’s export facilities, the Pilbara iron ore export chains stand out for the way that mine production, transport, cargo assembly and blending, loading and shipping are integrated. Relative to an integrated logistics chain with one owner, market processes with multiple owners of various parts of the chain often involve efficiency losses as a result of less effective coordination, particularly in those chains for bulk commodities. For many of Australia’s exports involving high value, low bulk goods it is not evident that there is a problem. For example, Everett (2002) describes the development of coordinated logistics chains in the competitive transport market that has grown as a result of deregulation of rail in Australia. Importantly, competition is also likely to give rise to efficiency gains in a number of other areas. For some major bulk commodities, such as grain and particularly coal, however, there are evident losses from lack of coordination under current structures.
The setting up of the Hunter Valley Coal Chain Logistics Team was a response to coordination problems and capacity constraints. To date, the gains from operation of the logistics team have arisen almost entirely from its focus on operations, rather than through its influence on investment patterns. It has been able to achieve an increase in effective capacity of the coal export chain of around 20 per cent through its efforts in modeling, scheduling and bringing the participants in the chain to view the system as a whole.
As part of the package agreed by COAG in February 2006, the Australian Government agreed to take the lead in facilitating the development and operation of similar logistics groups in other export chains of national significance. The Hunter Valley team operates largely at an operational, rather than at a long term planning, level. A reasonable question to ask is whether or not such groups should also have a direct hand in providing advice on infrastructure investment. The Hunter Valley Coal Chain Logistics Team was set up and has developed to facilitate effective operation of the coal chain. A natural consequence of an operational understanding of the system is an understanding of the likely future bottlenecks.
The Blackwater System Export Coal Producers Executive and the Goonyella Coal Chain Improvement Project have provided forums for coal companies and rail and port service providers to address both operational and longer term capacity issues on these key Queensland export coal corridors. Most recently, Queensland Rail Network Access, as the common element in all corridors, has assumed the central role for evaluating options for Queensland coal infrastructure expansion on an integrated, whole of system basis.
Some have argued that regulatory change is necessary to encourage cooperative efforts. For example, Pacific National (2005) argues for amendment of the ACCC guidelines for assessment of access undertakings. Affleck goes further in suggesting permanent change of Part 47 of the Trade Practices Act dealing with collaboration and cartel behavior. The purpose of the suggestion is to allow participants in export chains to cooperatively produce demand forecasts and investment plans. Whether such suggestions are practical is another matter. Companies competing in export markets often have strong disincentives for sharing price and market information.
In the coal industry, past achievements and current initiatives in addressing capacity constraints show that a great deal can be achieved within existing regulatory frameworks, as demonstrated in the Hunter Valley. Outside the coal industry, the ACCC approval of a joint venture between GrainCorp and AWB Limited to provide logistics services for export grain to the AWB and GrainCorp parent companies does not point to a severe constraint (ACCC 2005).
In considering whether a more formal relationship would be useful, there is also the question of whether better information, either forecasts or base cost information, would be provided by parties that have divergent, as well as some common, interests. Prospects for gaming are considerable, as each user and infrastructure provider is tempted to pass information through the screen of self interest before releasing it.
The type of gaming that might limit the effectiveness of attempts to coordinate an export logistics chain is also evident in the process of arriving at regulatory decisions. In order to establish the conditions for an access decision, for example, a regulator must gather information from competing parties. Always, the infrastructure provider and users are competing for shares of the net benefits of infrastructure provision. As well, the infrastructure users are competing in input and output markets. To each participant in the process, what matters is the individual share of net benefits, not the total economic gain. Therefore, each may have a strong incentive to provide information and argue a case with a particular slant.
Gaming involves direct costs in terms of the additional effort that all of the participants expend in arguing individual cases. It generally involves additional cost to the regulator, as well. Almost inevitably, the more intense the gaming, the longer is the decision process. The taskforce argued that the greater the discretion given to the regulator, the greater is the potential for gaming.
In principle, implementation of the agreed six month time limit on regulatory decisions should limit the undesirable effects of gaming, as should the agreement to limit information used in any appeals process to that already documented before the appeal. There is evidence of successful use of face to face workshops involving the infrastructure provider and users in reaching final resolution of outstanding issues. For example, the workshop approach was used by the Independent Pricing and Regulatory Tribunal of New South Wales to arrive at an agreed remaining mine life and range for the rate of return to Australian Rail Track Corporation assets on the Hunter Valley coal network (IPART 2005).
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brian s. fisher and roger rose
