Member Article

Over much of the last decade it has been widely reported that Australia's export infrastructure is in a state of crisis. The focus of these concerns has been the supply chain serving the multi-billion dollar coal export industry. Lengthy ship queues became a symbol for a lack of planning and investment in rail and port infrastructure.

This issue lost much of its prominence as commodity prices tumbled and the demands on the supply chain eased. But prices are now rebounding and the ships are coming back. The concern then is whether effective steps have been taken to encourage the investment required to avoid a repeat of the conditions that prevailed in the middle of the decade.

Proposed reforms to the national access regime

Governments have not ignored this issue. In 2005 the Australian Government commissioned a review of Australia's export infrastructure led by Dr Brian Fisher. The following year, COAG produced the Competition and Infrastructure Reform Agreement which, among other things, endorsed objectives and pricing principles for access regimes, binding timeframes for regulatory decisions, and procedures to expedite merits reviews.

Several of these reforms are now before the Federal Parliament in the Trade Practices Amendment (Infrastructure Access) Bill. The Bill amends the national access regime in Part IIIA of the Trade Practices Act 1974 (TPA) to impose timeframes for regulatory decisions on the National Competition Council (NCC), the Australian Competition and Consumer Commission (ACCC), and the Australian Competition Tribunal (Tribunal).

The Bill will also allow access providers to submit an access undertaking to the ACCC containing 'fixed principles', locked in for a period that extends beyond the life of the access undertaking. While an access undertaking might operate for five years the ACCC could, for example, approve an asset valuation methodology for a much longer period, thereby enhancing certainty and lessening regulatory risk.

But perhaps the most significant changes are amendments to allow investors to seek a 20-year exemption from regulation for new infrastructure projects. This exemption would take the form of a determination stating that services to be provided by means of a proposed facility (ie. a facility on which construction has not yet commenced) are ineligible to be declared.

In many respects, an application for an exemption is similar to an application to have a service declared under Part IIIA. An application is made to the NCC, which must make a recommendation to the relevant State, Territory or Federal Minister. The Minister's decision is subject to merits review by the Tribunal. As with a declaration application, the NCC and the Minister must apply the declaration criteria, which can be found in section 44H of the TPA. These include whether access to the service would materially promote competition in an upstream or downstream market, whether it would be uneconomical for anyone to develop another facility to provide the service, and whether the facility is of national significance. As with a declaration application, the question is whether each criterion is satisfied.

However, the difference is to be found in the end result of this analysis. In the case of a declaration application, a service is to be declared if each criterion is satisfied. By contrast, an exemption is to be granted if it is found that at least one of the criteria is not satisfied.

The objective of these amendments is described in the Explanatory Memorandum in the following terms:

'The ability to seek an upfront decision on whether a service would satisfy the test for declaration will enhance regulatory certainty for potential investors in major new infrastructure facilities.'

Regulatory certainty and encouraging new investment

Any reforms that enhance regulatory certainty and facilitate new investment are to be welcomed. As far back as 2001, the Productivity Commission, in its review of the national access regime, recommended changes to Part IIIA to enable investors to seek a binding ruling that their facilities could not be declared. This was seen by the Productivity Commission as a way of facilitating new investment by reducing regulatory risk. The need for a similar regime was identified in the 2002 COAG Energy Market Review and introduced into the gas pipelines access regime in 2006.

However, with the proposed amendments to Part IIIA of the TPA there is a catch - investors who seek an exemption must demonstrate that their project does not satisfy the criteria for regulation under Part IIIA. Put another way, an investor will only get an exemption from regulation if they can show their project would not qualify for regulation in the first place. This means investors take a risk if they seek an exemption. If their application is refused there will be a decision, on the public record, which says their project will satisfy the test to be regulated. Investors who are unsure if their project will qualify for an exemption may prefer not to seek one, and instead scale their project to meet the demands of their existing customers, with only limited capacity for future growth.

There may be other ways to create more powerful incentives by recognising the value of new infrastructure investment and lowering the bar for protection from regulation. For example, when the Productivity Commission first recommended the creation of an exemption regime in its 2001 review of the national access regime, it also canvassed the possibility of providing 'access holidays' for new infrastructure which satisfied a lower threshold of being 'contestable'. Alternatively, an exemption regime could be modelled on the ACCC's authorisation process under Part VII of the TPA. When the ACCC is asked to grant authorisation, the issue is not whether the conduct would contravene a provision of Part IV of the TPA, but whether there is a net public benefit that would justify the grant of an authorisation. Similarly, Part IIIA of the TPA could be amended to allow for an access holiday to be granted for new infrastructure if the development would produce a net benefit to the public.

One of the most difficult challenges in regulation is to guard against monopoly behaviour while still creating the conditions where investors are willing to develop new infrastructure capable of not just meeting the needs of existing users, but accommodating future growth. The lead times involved in developing new infrastructure mean that industry will continue to play catch up if new infrastructure investments are only made once demand has materialised.

The best way to cater for future demand for infrastructure is to encourage investors to build this additional capacity up front. The Australian Government is proposing to amend the national access regime in an attempt to facilitate this sort of investment, while still ensuring there is access to essential 'bottleneck' facilities. Only time will tell if it has succeeded.