THE DISTILLERY: Championing competition?

Karl Marx would have loved Australia. The sun, the sand, the egregious market consolidations. What a destination for a pale, catarrh-plagued European with an insight into unfettered markets' natural tendency toward monopoly. The healthy lifestyle and intellectual fury would have added years to his life.

To get a measure of how strongly Australia has come to resemble Marx's dystopian vision, today's commentary covers no fewer than seven major sectors and all are deeply marred by a serious lack of competition. This is not some fantastic coincidence.

Starting at the top, we have infrastructure. Adele Ferguson of The Age looks at a development in the bid for Transurban. "CP2 told clients yesterday that its managing director and co-founder, Peter Doherty, would step down from day-to-day activities due to health issues.” Counter-intuitively however, Ferguson concludes that this will result in CP2 increasing its involvement with Transurban: "With a bigger shareholding and a relatively new chief executive in Chris Lynch, CP2 would no doubt be champing at the bit for more say in how to extract potential. In any deal with the Canadian pension funds, this would no doubt be a condition of CP2's acceptance, given the offer is cash and scrip and the hope would be for CP2 to not only continue as a shareholder but increase its stake.” 

Ferguson concludes with a wrap of why infrastructure is squarely on theme for this column. "Because of the vastly different investment time horizons – decades for the pension funds, months or, at best, a year for conventional investors – Transurban is far more valuable to Canada Pension and Ontario Teachers than to most of the rest of its investor base.” Not to mention the steady cash-flows and economic rents one can extract from monopoly assets. Ferguson's conclusion is sobering. "The market clearly didn't appreciate the extent of the valuation mismatch until the Canadians' approach was disclosed. This can only throw shame on our own sovereign wealth fund, The Future Fund, which has $86 billion of funds under management. With this sort of money it could be a leader in infrastructure investment rather than investing in things such as overseas private equity funds.” Indeed. It's always better to own your monopolies.

Ian Verrender of The Sydney Morning Herald highlights and seeks to link three other consolidation plays: Rio and Chinalco, AMP/AXA and Sinochem/Nufarm. There is nothing illuminating in the piece. 

Stephen Bartholomeusz of Business Spectator does better with a focused analysis of the competitive pressures at work in just one sector: the banks. "The biggest threat to both Westpac and CBA as a consequence of their drive into home loans has been the potential margin squeeze as funding costs continue to rise without the banks being able to fully recover those costs through higher home loan rates. That had left them vulnerable to price competition from NAB and ANZ, for whom the consequences of sacrificing margin for share would be significantly less dramatic because of their far lower home loan shares. Westpac has turned that situation on its head. It will have a more profitable home loan book and can use that to both fund an attack on retail deposits and a more aggressive position in business lending. The more intense and costly competition for deposits makes it difficult, if not impossible, for the banks with the smaller market shares to significantly under-cut Westpac on mortgage rates ... The Westpac moves do suggest that the strategies of all the majors can now be dictated by Westpac and CBA ...”

Bartholomeusz goes on to suggest "The aggression does, of course, invite a response from politicians and regulators already concerned about the crisis-driven consolidation of the sector ... Exactly what the government could do to the banks isn't certain, but one only has to look at the legislation proposed to hobble Telstra to recognise that the potential for retaliatory measures is real.” Alas, no, in this column's view, the threat is not real. The government may prevent further consolidation, but nothing more can be expected. No son-of-Wallis enquiry is forthcoming. Neither the government nor media have had the courage to admit that the banks' offshore liabilities left the financial system insolvent last year, let alone opt for a discussion about busting up the banks. The merest mention of government-supported competitors sends the libertarian fringe into ecstasies of criticism.

Over at The Australian and Australian Financial Review, competition issues also bother  John Durie, Matthew Stevens and Alan Jury (Chanticleer). Each addresses the ACCC's decision to reject the Caltex bid for Mobil. All three make a big deal of the ACCC's move to expand its definition of collusive practices toward wider European and US standards. Such a move is welcome of course, though somewhat late. Only Durie makes this same point. "Having let an oligopoly form, it is very hard to stop price collusion, which is why it is better to stop the business combinations in the first place. Sadly, successive regimes at the ACCC have sat by watching the lion's share of Australian industry combine to form concentrated structures, maximising pricing power and minimising consumer choice.”

But Durie (and Stevens) also analyse the Caltex decision in the context of the recent decision on Woolworths' acquisition of Danks. According to Durie, "Woolies, of course, has recently won the right to buy hardware wholesaler Danks, after the initial ACCC thoughts on the issue were negative on the issue of treatment of independents. The lesson is now clear for corporates that ACCC statement of issues are really just testing the wind as opposed to giving any firm guidance as to the final decision.” And according to Stevens, "Most recently, for example, he [Samuel] accepted undertakings rather than stop Woolworths from taking out Danks as the first step in its hardware strategy. Many felt Samuel should have stopped that one. But Woolies bit back hard at the ACCC's aggressive statement of issues, saying it would see the regulator in court.” Both comments place the ACCC in a position of power, wrestling to maintain competition. The truth is worse. Sources tell this column that internally, the Woolies hardware expansion was called 'project oxygen'. In part this name reflects its real purpose, to deprive Wesfarmers of the cash-flow from Bunnings, which helps fund its Coles revamp. This strategy works best if the independent hardware operators also lower their prices, via Danks lowering wholesale costs. ACCC objections were nothing but PR. Woolies was the tail wagging the dog.

To get some idea of how we ended up in this concentrated pickle, a must-read today is an AFR op-ed by John Armstrong of the Melbourne Business School, who looks at the political philosophy of liberalism. According to Armstrong, the three principles of liberalism are "that individual responsibility is the central political issue”. Second, the "secure, widespread accumulation of private wealth ... [to] support independence of thought and action”. Third, is "the development of rational markets that track the true cost of production”. All principles this column agrees with but Armstrong reckons "Today, the great battle is around 'externalities' ... the real costs that are subsidised by nature or society”. This column reckons the challenge facing liberalism is more significant still. It is under assault from within by elites that purport to stand for its principles, yet practice corporate socialism, conflicts of interest and extreme personal enrichment.

In other comments today, Alan Wood of The Australian runs a sword through Michael Stutchbury by arguing that "monetary and fiscal policy are working in tandem, and both monetary and fiscal stimulus are being gradually withdrawn.” This column must also point out that Ross Gittins argued this weeks ago.

Finally, Glen Mumford has a very worthy piece in the AFR Market Wrap taking on the untouchable third rail of Australian economics: tax distortions in favour of housing. Mumford argues capital gains taxes could be shifted to suppress asset price bubbles and liberate monetary policy. Spot on. Only problem, of course, is that that would mean the government's electing to suppress asset values – unlikely given it's the working man's main hope of getting a share of the spoils.