Definitely makes the outlook a little cloudy for AIO. At the...

Definitely makes the outlook a little cloudy for AIO. At the same time, the analogy with Telstra is a good one and you would be thinking twice about planting your hard earned in the Qld Rail float if there is the possibility of functional separation down the line. (excuse the pun)

As in the case of Telstra, govt's have shown they don't give a rat's @ss when it comes to shareholder concerns, bottomline will be their main concern, be it politically motivated.


14 Jan 2010

Karen Maley

Running Asciano off the rails

When it comes to selling off the crown jewels, politicians are always so dazzled by the dollars theyre about to pocket that all concerns about competition fly out the window.

Take Queensland Rail for example.

Anna Bligh is hoping to pick up a tidy $7 billion when Queensland Rails freight business is floated later this year, and the new company will take its place among the Top 50 stocks.

The float is being fast-tracked, in a bid to deliver a quick boost to the governments books and to put the inevitable showdown with the union out of the way by the 2012 state election.

And in its haste to get the deal done, the government has completely sold out on the issue of competition.

Its true there have been some concessions. A cap of 15 per cent on individual stakes in the company will stop any of the companys big four customers BHP, Rio, Xstrata and Vale from seizing control.

At this stage, the big four coal miners look likely to pick up a combined stake of around 40 per cent, while the government itself will retain an initial stake of 25 to 40 per cent.

But Bligh has completely piked it on the real competition issue.

The Queensland Rail freight business consists of two separate sections. One of these the rail track unit is a monopoly infrastructure asset. The other the rail haulage business is subject to competition.

The conflict in this model is clear and the new company will have every incentive to use its ownership of the track to block competitors in the rail haulage business.

And its main target will be Mark Rowsthorns Asciano, which has been winning market share in the states rail freight business.

Up until three years ago, Queensland Rail had an absolutely monopoly on the rail freight business in the state.

After a campaign spanning a decade, Asciano finally managed to break into Queenslands rail freight business, and last year it succeeded in moving into the states rail coal market.

Asciano now has about 10 per cent of the states freight market and you can be sure that the privatised Queensland Rail will not be keen on seeing this share rise any further.

The most obvious mechanism for cutting out competition is pricing.

The newly privatised company will likely over-charge for using its rail track, and use these super profits to undercut competitors when it comes to competing for rail haulage contracts.

But there are more subtle ways to sabotage the competition, such as restricting access to the rail track, or by failing to keep the track properly maintained.

Ascianos existing contracts all have performance clauses. Failure to meet certain performance standards would not only mean that Asciano would not win new work, it could very well have existing contracts terminated.

And customers fuming that their own deliveries have been held up will likely prove impatient when Asciano tries to explain that its performance failure was due to Queensland Rails faulty track.

But thats not the only issue worrying Queenslands big coal companies.

Theres also the problem of future investment in the rail haulage business.

You can be sure that the privatised Queensland Rail will be carrying as much debt as Blighs investment banking advisors think it is capable of carrying.

But Queensland Rail needs to invest as much as $15 billion over the next few years in building new track, and upgrading its existing lines to keep pace with the rapid expansion in Queenslands coal industry, which last year generated more than $40 billion in export earnings.

There is a huge question mark as to whether the newly floated company which will no longer have the support of a government guarantee will be able to access this sort of money.

Whats more, the uncertain competitive landscape will make Asciano think carefully before purchasing new rolling stock of its own to meet the forecast growth in the Queensland coal market.

But Queensland Rails future capital expenditure requirements is likely to be the last thing on Anna Blighs mind as she banks her $7 billion cheque.

One would have thought that the Telstra experience, and the huge difficulties associated in getting competition in Australias telecommunications industry, would be enough to deter governments from privatising businesses which own monopoly infrastructure assets.

And as Telstra shows, the only fair way to allow competitors to gain access to force the monopoly infrastructure assets to be separated into a completely separate vehicle to the operating business (see A coalition of Telstra's willing, December 18, 2009).

But Bligh is undeterred. The most that Asciano and the Queensland coal industry can now hope for is that there will be a major structural separation between the rail track operations and the rail haulage operations and that the new company is subject to big penalties for anti-competitive behaviour.

http://www.businessspectator.com.au/bs.nsf/Article/Derailing-Asciano-pd20100114-ZNRHE?OpenDocument&src=srch