money to be made from qr sale ???

Interesting times. Has to be some juicy morsels in here for AIO. These ops don't pop up often so be bold MR

From todays Australian




BHP Billiton has emerged as the money-bags behind the Queensland coal industry's bid to buy the state's coal freight network.

As reported in The Weekend Australian, an industry offer for the network was lodged with the Bligh government last Friday.

The offer is, in part, an attempt to derail plans for an initial public offering of Queensland Rail that would leave it with control of both the state's major rail service provider and the rail network it drives the trains on.

Intriguingly, while a consortium offer for the network has been long discussed, it seems Friday's offer was delivered by BHP alone.

It remains unclear who else is involved in supporting the offer, but it would seem to be informative that BHP chose not to directly involve BMA, the Queensland coal joint venture it owns 50-50 with Mitsubishi.



One of many intriguing aspects of BHP's intervention is that BMA remains QR's biggest, most faithful, best served and most seriously contracted client.

The point there is that if any customer was going to receive some sort of favourable treatment from an independent but still integrated QR, it would be BHP. And yet, through its direct intervention, BHP is telling the government that QR needs to be sold off separately and delivered to management independent of operator and customer.

While details remain scant, sources suggest BHP is effectively underwriting the transfer of QR's below-rail coal freight assets to the national rail authority, Australian Rail Track Corp.

ARTC would then manage the Queensland coal network as it does, say, the Hunter Valley's rail chain, where the authority has been increasingly successful at clearing the systemic bottlenecks and aligning capacity with mine output and export demand.

At the same time, it is understood that QR's increasingly successful new competitor in the coalfields, Asciano, has come under pressure both internally and externally to further disrupt the government's plans for an IPO by making an offer for the state's above-rail coal freight business.

Asciano management is said to be understandably reluctant to engage with such a strategy given it is only just beginning to gain traction in efforts to rebuild a commercial reputation heavily tarnished by its brush with corporate mortality through the first half of 2009.

Mind you, the risk that Asciano would have to deal with the complications of success would have to be pretty low. It would seem inevitable that a bid would be purely tactical given the regulatory issues that would certainly prevent it acquiring any of QR's business units.

At its core, just about everyone involved in the Queensland coal chain, other than QR's management and its only shareholder, the Bligh government, is concerned that the IPO of a rail network owned and operated by one of the two major competitors in the rail coal freight business will necessarily restrict the future network capacity.

In a submission to the ACCC, also delivered last Friday, Asciano argued that the sale of a vertically integrated QR would only serve to "sharpen incentives to discriminate against above-rail competitors".

"To date QR has not had purely commercial motives but has acted partly as an instrument of government policy," Asciano claimed. "A privatised QR would have a fiduciary duty to maximise its value for shareholders by, amongst other things, minimising above-rail competition provided it remained within the law."

Asciano foreshadows seeking the protection of Section 46 of the Trade Practices Act but notes that recourse requires patience, capital and the accurate detection of improper conduct.

"In addition, the outcome of this challenge would always be extremely uncertain with the effectiveness of some of these parts of TPA still to be proved. Indeed, probably the most relevant example, that of an integrated Telstra, requires specific TPA clauses to deal with the vexed issues of a vertically integrated player with an upstream monopoly."

Asciano complains that a collection of QR Network's access undertakings currently being reviewed by the Queensland Competition Authority do not effectively ring-fence the director and management of the below-rail business, QR Network, from obligations to its owner, QR.

The missive to the ACCC also asserts that the regime by which QR sets its prices remains overly opaque and customers of QR Network have to rely on the QCA to "ensure there is no cost shifting" from above-rail to below-rail.

Asciano goes on to identify five "practical methods" by which an integrated QR might discriminate against a competitor through its ownership of the below-rail assets.

Asciano says that although pricing is regulated by the QCA, the potential remains that QR could "inflate below-rail charges above cost and set its above-rail prices inclusive of below-rail below the level at which an efficient rail competitor could compete".

The company observed that QR could delay consideration of access applications, operate train control in a discriminatory manner, constrain access to facilities like maintenance and storage yards and vary network rules to "advantage one above-rail customer over another".

Most crucially, from the perspective of the coal supply chain, Asciano suggests there is a real incentive for an integrated operator to constrain "network renewal and capacity improvements".

"This will particularly be the case with a privatised QR," Asciano argues.

"QR and Asciano's customers are geographically differentiated. As a result it would be possible for QR to target its limited network investment at areas which would benefit its own above-rail customers. Below-rail investment or even pricing could be made conditional on agreeing an above-rail contract with QR.

"Asciano is aware of a recent instance when QR Network announced it was reducing an already regulatory approved below-rail tariff relevant only to a single coal producer on the same day it became public that the coal customer had signed an above-rail contract with QR