Effective Competition – pro what!

What is your politics can be a confronting question. It is getting more difficult to answer the question – What do you do? If you answer too honestly it might make the next question even more confronting: Are you a pro-market forces person or a pro-business person? Initially the difference may not be obvious. But, there is a world of difference if you want to influence a result. The reason is a result requires someone to intervene to give you an edge in the competition for a position in the market. Whereas to get an outcome you might support effective competition to ensure the benefits of what you offer to the market are maximised.

As does happen when you start talking about something, along comes a story that illustrated the point very well, and being it is a political story relevant to today, it is worth making a reference to it: The message relates to whether we will we see more rent-seeking or less under Abbott, more of what The Economist magazine calls “crony capitalism”? Read more: http://www.canberratimes.com.au/comment/abbotts-choice-competition-v-cronies-20141019-1189dm.html#ixzz3GcjBa2XF

The opening lines being: “It’s still too soon to tell whether the Tony Abbott’s government is pro-market or pro-business, but so far the evidence for the latter stacks higher than that for the former.

The difference turns on whether the pollies want markets where effective competition ensures benefits to consumers are maximised and excessive profits minimised, or markets where government intervenes to limit competition – often under the cover of claiming to be protecting jobs – and make life easier for favoured businesses.”

Of course the background to this Canberra Times story is:

“Abbott and his ministers’ intemperate attacks on the Australian National University for its decision to “divest” itself of a few million mining-company shares for environmental or ethical reasons are a worrying sign.

Investors shouldn’t enjoy freedom to choose where they invest, regardless of their reasons? ANU is different from the rest of us even though its investment funds come largely from private donations and bequests? This from a government keen to complete the de facto privatisation of universities?

What is ANU’s offence? Bringing ethical considerations into investment? Or sounding like it believes climate change is real and we should be doing something real about it?

Abbott attacked ANU’s decision as “stupid” and believes “coal is good for humanity, coal is good for prosperity, coal is an essential part of our economic future”.

If ever there was an industry whose early decline could be confidently predicted – as it is being by hard-headed investors and bankers the world over – it’s steaming coal.

Yet Abbott seems keen to change the rules of the formerly supposed bipartisan renewable energy target in ways that, by breaking long-standing commitments to the renewables industry, would cost it billions and blight the future of its employees, all to provide the government’s coal and electricity industry mates with temporary relief from the inevitable.

The biggest problem with governments “picking winners” is that they quickly regress to picking losers, helping industries against which technology and other forces have shifted to resist the market’s pressure for change that would – almost invariably – make consumers and the economy better off.”

This where we think it gets really interesting: The review on competition policy is being considered. It becomes even more important to understand whether you are a pro-market or pro-business person. When you support the innovation of ideas you need to know whether the IP is protected when you make available for the market. It is the point of where you commercialise and the particular area where sound competitive principles are most important. It is where the regulation of intellectual property, such as patents, copyright, trademarks and plant breeder rights is critical.

Note we said ‘regulation’ and this implies that a form of government intervention in the market is needed to limit competition with owners of the patents and so forth for a limited period. It’s a necessary response to prevent market failure. However, another problem exists also – how do you encourage continuous improvements to incentivise new knowledge and ideas that progress the benefits?

No easy answer is the response. Maybe just too hard!

The Canberra Times article goes on the say: ” This makes it ripe for rent-seeking: pressuring politicians to extend the monopoly periods retrospectively (despite the lack of public benefit), to allow loopholes that permit phony “ever-greening” of drug patents that would otherwise expire, to limit poor countries’ access to life-saving drugs at realistic prices and to ignore blatant gaming of IP laws by two-bit operators that have never created anything.

Most of these excesses are at their worst in the United States with its easily bought legislature. The information revolution has made IP one of America’s chief export earners. And the free-trade preaching Yanks have made advancing the interest of their IP exporters their chief priority in trade negotiations such as the present Trans Pacific Partnership deal.

As always, we have a tendency to give the Yanks whatever they want. Trouble is, as Harper points out, Australia is and always will be (and should be, given our comparative advantage in world trade) a net importer of intellectual property.”

There lies our point: Australians have been one of the great inventors in the world. Yet something holds us back from being successful on our own country – Is it fighting cronyism!

 

Long view, short term bridging – selling the network asset

What do you know about NSW and Qld privatising their energy networks? Worst kept secret was the reply. ‘They’ intend to divest of the high cost responsibility as quickly as possible. Yet, when you speak to ‘them’ they are stunned that it is possible – the standard reply is it is a position statement to be tested, not ‘yet’ policy. Typically, the form of reply is: ‘we have not been told, but we have been asked to consider what would happen if’. Our immediate thought is it is more proof the public and sector is now saturated with ‘micro managers’ and their work is to be without purpose other than pedant corrections of the efforts the junior staff to innovate.

We now hear you say – how could synergy be possible in that sort of workplace? Reality takes over – it is not possible to have synergy as it involves a need for common purpose. In those sectors what is actually happening is the portrayal of a fictional character as being real. You see for the networks companies, they are operating on a model that has reached the end of its economic life. They must change to survive or to be counted as an asset. The secret word here is ‘asset’.

Co2Land org has always been told that if the bankable is present then there will be an opportunity for business. This is not meant to be a profound statement as such, but a good indication that in the background changes are afoot and plans are being set for change. Why is this important in this post?

The day after our discussion the following story was published 8 Oct 2014:

http://www.afr.com/p/special_reports/energy_security/strong_appetite_for_energy_sector_zmEISUe8FvDkd9uxACcK6M?utm_source=outbrain&utm_medium=cpc&utm_campaign=outbrain_amplify – Strong appetite for energy sector privatisations.

“This content is produced by Commonwealth Bank in commercial partnership with The Australian Financial Review.

Australia’s energy and utilities sector is moving towards its most significant period of privatisation since the Victorian and South Australian experience in the 1990s and early 2000s.

Subject to election outcomes, the governments of New South Wales and Queensland have indicated a desire to sell their mature electricity network assets in order to free up funds for new infrastructure projects.

Both states plan to privatise their electricity networks and in addition, Queensland may sell its power generation businesses.

Across the two states, six electricity network companies are being privatised, with Ausgrid in NSW the largest.

Each government has appointed advisers and indicated that if they are re-elected the process will begin almost immediately.

The NSW program is expected to end in the middle of 2016 and Queensland is expected to finish six to 12 months after that.

The scale of the programs with more than $50 billion in assets coming onto the market at the same time presents potential challenges, says Simon Ling, managing director Debt Markets Commonwealth Bank.

“Given both electoral cycles are running on similar time frames, there are market liquidity considerations and constraints depending on the size and the timing of the assets coming to market.”

Both states are engaging in asset turnover – selling mature assets now in order to invest in new assets for the future. They each have commitments for new road and rail infrastructure, and they also want to be able pay down debt.

Fortunately, the timing is beneficial. There is a lot of interest in the market from domestic and offshore super funds, pension funds and infrastructure investors.

However, given the scale of the programs there will be pressure on banks to accept a larger exposure than they would typically take on an interim basis, before longer term funding plans can be put in place.

In terms of the structure of the financing, Mr Ling says, “We expect that the arranging banks will have appetite for significant holds on most of the assets and the balance will be syndicated out to local and international banks with interest. There will also be a need for a short term bridging component to the bond markets.”

Challenges

In programs of this size it is important to appreciate the challenges faced by the governments and financiers.

For NSW and Queensland, the first order of business is certainty of execution. Governments need to be sure that there is enough liquidity in the market to get the deals done.

And of course the other big priority is to deliver the optimum price and return for their communities.

“That comes back to the question about sequencing,” says Mr Ling. “The governments are going to have to be sensible with sequencing because if they want certainty of execution and price tension they need to be careful how they bring this to the market.

“The good news, however, is that there is more than sufficient appetite for this.”

Domestic banks will run multiple teams supporting a number of key bidders in order to increase chances of successfully backing the eventual winners.

For banks, the key risk is the large exposure they will have to take at the close of the transaction, given that the largest companies could require senior debt acquisition financing around $10 billion.

“Once again there is cause for optimism. Global demand for these assets means that ultimately the debt will be able to be placed widely around the world,” says Mr Ling.

Who will invest

Most of the demand for these assets will come from investors looking for low risk, stable assets and regulated cash flows to invest in. Offshore bond markets are also expected to be more receptive and active in this latest round of privatisation than compared to the Victorian and South Australian programs, for instance.

US private placement investors are very familiar with regulated assets in Australia and are expected to have a large appetite for these new opportunities when they come on the market.

In the US, UK and Europe assets such as these would appeal to local capital markets because there is a very highly developed long end to those capital markets. The long dated market in Australia is less developed, therefore core long term funding will be dominated by offshore investors who recognise the unique opportunity to invest in these high quality infrastructure assets operating within a stable regulatory environment.”

All this sounds so admirable, why are we suspicious? Well the answer may come in the form of the inquiry into the senate’s power price inquiry. The Business Speculator asked, “Is the Senate’s power price inquiry a useless witch hunt?” This story is by TRISTAN EDIS 3 OCT, http://www.businessspectator.com.au/article/2014/10/3/energy-markets/senates-power-price-inquiry-useless-witch-hunt?utm_source=exact

The story quotes: “The Senate has agreed to launch a far ranging inquiry into the effectiveness of regulation over monopoly power network businesses to assess the extent to which consumers may be paying too much for poles and wires.

In addition, it will also examine whether the arrangements for the connection and pricing of network services discriminates against households and businesses that generate their own electricity – for example, via solar PV systems. (The full terms of reference are provided at bottom.)

This inquiry comes on top of countless other reviews and inquiries, with timeline below, including a Senate inquiry looking into electricity price rises just two years earlier. This naturally draws the question, what will yet another inquiry possibly achieve?”

So CO2Land org asks is the result a forgone conclusion? Nothing more than a rubber stamp to say regulation will assure the new buyer will make money and the consumer continues to pay too much?

This is especially relevant when Ernst & Young also reported in the ABC on 13 October 2014, that “the Federal Parliament has announced a Senate inquiry to investigate whether the so-called gold plating of Australia’s electricity networks is artificially driving up the cost of electricity.

Up to 60 per cent of some household electricity bills can be attributed to network costs, which is the amount passed on to consumers for maintaining infrastructure such as poles and wires.”

We also feel it is important to know a little history – If you did not know Australia has in recent times had a non-regulated network in the east. How could this be possible? You see the regulatory rules were written for AC (alternating current) wires connections. DC (direct current) is not AC regulated. So what if we wanted to build DC lines? You could speculate it would introduce competition – assuming competition was welcome!

Another interesting matter is the preoccupation in the story ‘Strong appetite for energy sector privatisations’ with the bank on saying” “However, given the scale of the programs there will be pressure on banks to accept a larger exposure than they would typically take on” – And, “the unique opportunity to invest in these high quality infrastructure assets operating within a stable regulatory environment.”

Forgive us but what about the inquiry! A fair go? Or is it a means to the end!

 

 

Regulatory Response – Strengthened in NSW and Qld

Resource recovery is a hot issue – pun intended – the problem is most that say they do have methods rarely have solutions at a commercial scale. Often the excuse is the rules are at fault. There may be some truth in that claim even if in the main it is the systems that are at fault for offering concept grants as opposed to solution incentives in Australia that dominates the innovation space. If you think we are saying that at least one iconic institution might have a reason to delay innovation. That is not what is being said: It is being said regulatory response mechanisms are in need of a rethink. In particular we find evidence that regulatory response with policy on reuse, recycling, reprocessing and energy recovery, is not necessarily consistent with the most efficient use of the recovered resources opportunity.

As we seem to doing so regularly lately we can report NSW and Queensland are doing something about the rules around resource recovery that do not weaken the intention of the rules, and at the same time they encourage a more flexible approach to offset harm. It is done with new policy positions being taken that alter the regulatory response to issues. This change means the EPA of both states are responding to solutions that says show me it works and we will listen as opposed to it does not fit the guidelines sort of approach.

It is true some in our society just want to exploit with disregard to good environmental practice and some media might even exploit our emotions in the interest of their own agenda, and strong regulatory responses remain in need to counter same. For example we found a story of a notice that the NSW Environmental Protection Agency (EPA) has issued a clean-up notice to a fuel transport company in relation to environmental issues at its depot. The NSW EPA found “that fuel or a similar material had leaked or been pumped onto the ground” at the site. According to NSW EPA the clean-up notice requires Xpress “to immediately stop receiving or removing any waste and contain any contamination within bunds on site”. Source NSW EPA’s media release on 3rd September 2014. Clearly the regulatory response was appropriate for this matter.

Staying on NSW rules, on 10th September 2014, the Office of Environment and Heritage announced it was rethinking its approach to its major projects policy in NSW. The benefit said is it is a more flexible approach aimed to put an end to case-by-case negotiations by providing a standard method for assessing impacts and determining offset requirements. The new policy is likely to be followed by additional changes to biodiversity protection arrangements in NSW, which are currently undergoing a comprehensive review.

Also related to this policy approach is a Legally-backed accreditation scheme that is the offsets policy for major projects will be accompanied by a new accreditation scheme for consultants who administer the policy’s supporting framework for biodiversity assessment. The accreditation scheme will be developed over the next 18 months, while the new policy is being implemented. The policy will be given formal effect through legislation after the 18-month interim phase, and the accreditation scheme will also have legislative backing. During the interim phase, consultants using the assessment framework must be accredited under the NSW BioBanking Scheme, in accordance with s142B of the Threatened Species Act.

Importantly to above is that it has planning protections that do not allow empowered consent authorities to allow economically significant projects to proceed with watered-down offset obligations if normal requirements would have affected their viability. In other words discounting is not allowed. However, the policy will allow credits to be earned from ecological rehabilitation. The NSW Government’s response to public comments on the draft version says it is also open to allowing “other forms of post-development rehabilitation” to earn biodiversity credits.

NSW biodiversity offsets policy for major projects (NSW Government, September 2014)

Framework for biodiversity assessment

Report of submissions on the draft policy (NSW Government, September 2014)

Individual submissions on the draft policy

 

Now to Queensland where the media reports would have you believe there are no rules. We read that on 2nd September 2014 the Queensland companies are now subject to pay five times more for some infringement notice offences, and the Department of Environment and Heritage Protection can now issue notices for a wider range of infractions. The Queensland Government introduced the changes, which took effect from September 1, through a new State Penalties Enforcement Regulation. Several offences under the Environmental Protection Act will now incur an infringement notice penalty of $11,385, up from $2,277:

  • contravening an environmental protection order;
  • carrying out an activity without an environmental licence (known as an ‘environmental authority’ in Queensland);
  • failing to comply with an environmental authority condition; and
  • failing as the holder of an environmental authority to ensure compliance with its conditions.

That later is most interesting as it makes it much more difficult to outsource your responsibilities.

The report goes on to say: Infringement notice penalties for most other offences have more than doubled, with many rising from $2,277 to $5,692. New Environmental Protection Act infringement notice offences include:

  • failing to provide a financial assurance before undertaking an activity that requires an environmental authority or before engaging in small-scale mining (penalty of $11,385);
  • not complying with conditions of a licence ($11,385);
  • ailing to comply with a notice ($8,538); and
  • unlawfully causing material environmental harm ($8,358).

Failing to comply with a condition of approval in breach of the Waste Reduction and Recycling Act will now incur a penalty of $11,385 (up from $2,277). Penalties have also risen for infringement notices issued under the Water Act and several other acts. In 2012-13, the most recent year for which statistics are available, the Department of Environment and Heritage Protection issued 280 penalty infringement notices for environmental and nature conservation breaches, a big rise on the 76 notices issued in the previous year.

You see, it will not just disappear – the regulatory response continues.