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Queensland Rail sale can't afford to tank

Yesterday outside Brisbane's Parliament, a mob of unhappy unionists protested about the prospect of privatisation - in particular, the public sale of Queensland Rail. They were concerned about their jobs - a number of which ultimately will be under threat once this vast business lands in private hands.
By · 10 Mar 2010
By ·
10 Mar 2010
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Yesterday outside Brisbane's Parliament, a mob of unhappy unionists protested about the prospect of privatisation - in particular, the public sale of Queensland Rail. They were concerned about their jobs - a number of which ultimately will be under threat once this vast business lands in private hands.

At a more civilised venue this week another bunch of protesters, dressed in suits, also vented their frustrations at the Queensland government's move to privatise the rail network.

These were the management representatives of the 13 large coal companies. They are opposed to Queensland Rail being privatised in a structure that houses the freight business - which operates wagons that run on the tracks - and the actual tracks. In other words, an integrated wholesale and retail rail business.

They understand that if privatisation takes place in this structure it is going to cost them more to haul their product. And they are right about that.

Back in the Queensland Parliament, the government was finalising contracts for the appointment of investment banks to manage the

$7 billion float - the largest since Telstra. The banks are Credit Suisse, Goldman Sachs JB Were, Merrill Lynch, RBS Morgans and UBS.

The management of Queensland Rail has been busy pushing its message that selling this integrated freight-track business or wholesale-retail business is far more valuable a proposition than breaking it into its component parts.

This view will be supported by the investment bankers advising the government. They will also be looking for a piece of the action in selling this stock to a wide investment community.

All these constituents have an agenda. Of prime concern should be the national interest, which is all about ensuring that there is plenty of capacity built into the rail network to handle the sale of more coal. This requires capital to be spent on rail to haul it to port.

Queensland Rail's chief, Lance Hockridge, needs to maximise profits from this business and understands that this requires charging coal producers more for freight. He argues more profit equals more expenditure on capacity.

The rail lines that service the Queensland coal industry are subject to some price regulation, but deals are done above the regulated price. And even better deals could probably be achieved in a privatised environment.

The coal companies say an integrated freight and track business will come at the expense of competition. Less competition for QR is good for its profit.

Once privatised there will be a far greater incentive for Hockridge to maximise returns from QR and rid the industry of what he describes as a level of subsidisation that the coal companies have received under government ownership.

The track business is an infrastructure business which has ordinary but reliable returns. Hockridge's job will be to improve on these and turbocharge the returns from the freight operations.

Having an above-the-track freight business using QR's own track is a fabulous money-making recipe. And a business that can demonstrate a way to improve profits, whether by boosting prices or cutting costs out of a previously fat, government-owned business, equates to a better sale price.

The coal industry draws the analogy between this integrated rail model and the Telstra structure, where ownership of wholesale and retail assets has been such a problem that the federal government is now attempting structural separation.

Hockridge argues there are not the same competition concerns because the large coal miners have enough muscle to negotiate with the infrastructure owner on favourable terms.

Instead, he says the company needs make sufficient guaranteed returns so that it can undertake capital investment to bolster capacity. In other words the real goal is capacity, not freight rates.

Put another way, if an integrated Queensland Rail charges monopoly rents it can invest in capacity.

Not surprisingly, the coal industry reckons it has a much bigger vested interest in investing in capacity.

As such it has put a proposition to the government to buy the track that carries the coal - an offer that the Queensland government will not even look at.

The Premier, Anna Bligh, clearly doesn't believe that competition is an issue and doesn't trust the motivations of the coal industry.

Queensland Rail backs its integration model using the analysis it commissioned from the former head of the competition regulator, Allan Fels. He appears to take the view that the coal companies will not be able to take a co-ordinated approach to access and investment in the infrastructure. He also reckons there is a difference between railway lines and telecoms.

Says Fels: "The central problem with rail investment in a structurally separated network is the co-ordination of different firms. In any infrastructure subject to compulsory access, access seeker and provider invariably have different views with respect to the appropriate level, type and timing of investment. Because of these differing views, multi-user facilities are often characterised by disputes concerning the necessity and timing of investment.

"Separation of above and below track functions has the potential to worsen the environment for investment. Structural separation is a costly remedy with the potential to undermine the efficient day-to-day operation of a rail network ... It is a remedy which has rarely been applied and is arguably not worth pursuing."

That's not how the coal companies see it. They say their ultimate aim is also certainty of capital investment to boost capacity.

They argue they have worked out the terms of an access regime that won't result in a conflict or the larger players denying the smaller or new entrants.

That might be true but some, such as Rio and BHP, have demonstrated pretty poor form on rail access. Fortescue has spent eight years attempting to get access to the rail facilities owned by the pair to carry iron ore in the Pilbara.

In the end it's all about vested interests but you have to wonder why Anna Bligh has refused to see whether the coal companies can come up with a better price than the float. That seems to make very little sense.

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