National Interest

Imagine this: you invest millions in a private rail line to get your goods to port, then along comes the government and tells you you have to share the track with rival companies. A few days ago, Federal Treasurer Wayne Swan declared that the mega-miners BHP Billiton and Rio Tinto must share their Pilbara rail lines with Fortescue Metals and other mining firms. This should allow new companies to open up deposits in the iron rich region. But does a victory for the market ideal of competition mark a defeat for an equally important capitalist principle - that private property is sacrosanct?

Transcript

Peter Mares: Here's a question: which is more important to the efficient running of the capitalist system: competition or private property?

A few days ago, federal Treasurer Wayne Swan declared that mega-miners BHP Billiton and Rio Tinto must share their rail lines in the iron-rich Pilbara region with rival companies. This is a big win for Fortescue Metals - which is challenging the dominance of BHP and Rio in the region - and for junior miners who want to open up smaller deposits but who claim that to do so would be uneconomic, if they had to build their own infrastructure from scratch.

For years now, the National Competition Council has been arguing that the rail lines should be shared and a recent High Court ruling supported that view. Competition is a cornerstone of a market economy - right? Yes. But what about private property rights, another free market fundamental? And in this case, the two appear to be in conflict.

The free market think-tank, the Institute of Public Affairs, has sided with the big miners. Alan Moran is the Director of the IPA's Deregulation Unit. Alan Moran, welcome to The National Interest.

Alan Moran: Hi, Peter.

Peter Mares: And on the other side of this debate is Megan Anwyl, Chair of the Northwest Iron Ore Alliance. That's coalition of emerging iron ore companies that want access to the existing rail lines. Megan Anwyl is also a former [WA] State Labor MP and she joins us from Perth. Megan Anwyl, welcome.

Megan Anwyl: Thank you.

Peter Mares: Alan Moran, why shouldn't BHP-Billiton and Rio Tinto be forced to share these rail lines?

Alan Moran: Well, it's simply a matter that they built the railway lines, they're their lines, and then if they're forced to share them then in future people will think twice about building railway lines like this. Had they been forced to share them on the basis - which some claim would be a correct basis - that they had contracted initially to provide haulage to third parties, then that would be a different matter. But that wasn't the basis on which they're now being obliged to actually extend the track uses to rival suppliers of iron ore. And it's simply a question of saying, 'Well, in that case, if in fact I have now to share my rail line, well why wouldn't I have to share a manufacturing plant, or an oil refinery or whatever else?'

Peter Mares: But the High Court decision was very narrow and it turned on the idea of whether or not the rail lines form part of the production process. It found they didn't, they were part of a transport process. Now, that's different to an oil refinery or an assembly line in a manufacturing plant...

Alan Moran: It is, but the regulatory agencies, the [National Competition Council] and the [Australian Competition and Consumer Commission] have aspirations to actually extend coverage, and they - quite rightly, I think - say that 'Well, what's the difference between a railway line and, say, an oil refinery?' For instance, Perth has got just one oil refinery run by BP, why wouldn't they say 'Well, you know, this is an essential facility, you ought to be toll-rolling, or making everybody's petrol who brings it to you, and we, the ACCC, will tell you what price to charge'. And then nobody else will ever build an oil refinery.

Peter Mares: Megan Anwyl, Rio and BHP had to build their own rail lines in the Pilbara. Why shouldn't other mining companies who want to mine there be expected to do the same?

Megan Anwyl: Well, other mining companies are building rail lines. Fortescue, or its subsidiary TPI, have done just that. I guess the point here though is it's very clearly good public policy to see a diversification of iron ore miners in the Pilbara. I don't think that the people that live and work in the Pilbara want to see five or six rail lines side by side, criss-crossing the land. There are very powerful reasons why that wouldn't be good, and I think it's really important...

Peter Mares: What are those reasons? I mean, are those reasons environmental largely, or... ?

Megan Anwyl: There are certainly some environmental reasons for that. I think just in terms of the impact on flora and fauna and so forth there is, I guess, from the point of view of public safety and there are probably a whole range of public policy reasons that it's just not a good idea... I think what's really important here is to understand that those rail lines were built on public land and that whilst the mining companies are paying royalties to governments for the minerals that they're exporting - largely not value-adding, just exporting - whilst they're paying taxes and royalties and so forth, at the end of the day these are national assets.

Peter Mares: Alan Moran, the big miners aren't being told to provide access for free to other companies... I mean, they're being told [that] the other companies will have to negotiate the access on what's called 'commercial' terms. So surely this is potentially a winner for BHP or Rio: they can actually make money out of this by earning a bit of extra income from the railroad. They've already, I'm sure, paid them off, they've been mining there for years.

Alan Moran: Well, they always could do that. I mean, it's a question of, in the end, yes, it's on commercial terms but the end product is that if you don't agree to commercial terms, then Mr [Graeme] Samuels will dictate those terms...

Peter Mares: From the Australian Competition and Consumer Commission.

Alan Moran: Yes. And it's not just, I guess, the price; I'm not speaking for Rio or BHP, but it is a fairly integrated procedure, as I understand it. It's not simply the price; it's the fact that there would be then certain conditions which they would find somewhat onerous and that they have to... It's a very, very complex organisation. Even though it's a raw material, it has to be moved on time, blended at the ports and then to a ship at a fairly narrow window and it's one of those things that they would prefer not to carry anybody else's ore. But if they did carry anybody else's then it would simply be under conditions that they wanted to carry it under...

Peter Mares: But I'm sure, too, that Rio and BHP - which have dominated iron ore mining in that region in Pilbara - they have essentially had a duopoly there. They'd prefer not to have any competition either, they'd prefer there weren't other miners in there, and it suits them therefore not to let anyone else use their railway line.

Alan Moran: Maybe. But I think that we're talking here of a duopoly, but they've only got about 8 per cent per cent or 9 per cent of the world iron ore markets, so another competitor isn't that much of a problem for them. And of course, unless they merge, Rio and BHP themselves are very, very fiercely competitive one with the other; they certainly aren't co-operating in terms of markets.

Peter Mares: No. But BHP wants to take over Rio.

Alan Moran: Well, that's a different matter.

Peter Mares: No. But you can then have a monopoly in the Pilbara and monopolies... I mean, you're from a free market think-tank: monopolies aren't good, we know it results in lazy capital, in price-gouging, in all sorts of problems in the economy when there's a monopoly.

Alan Moran: Well, it's not a monopoly. It's a monopoly in the Pilbara, it's not a monopoly for the Chinese and the Japanese iron ore users there; it's in very fierce competition with the Brazilians and the Indians and South Africans and all these other things. And indeed, it's a very, very efficient organisation. Both companies are very efficient and they've been major assets in terms of the exports from Australia.

Peter Mares: Megan Anwyl, what BHP and Rio say they fear is that an open access regime - that is, if they share their rail lines - will lead to congestion; that their West Coast iron ore operations which are very efficient, as Alan Moran has just said, will end up like the east coast coal exports, that is rail trucks backed up waiting to unload at the port, harbours backed up with ships waiting to get the coal loaded.

Megan Anwyl: Yes. I guess what's important, though, is that we're not looking at, at this point anyway, of having some 27 or 30-plus players. As you've seen, some of the coal ports that clearly do have congestion on the east coast. It's also really important to understand that open track access - that is, allowing somebody else's rail rolling stock onto the line - is one option; but in fact these companies signed state agreements many decades ago that said they would haul the ore of their party miners and that just hasn't happened. So, I think very clearly some of the key political stakeholders have suggested that it might be a good idea to sit down and negotiate some outcomes rather than rely on what is going to, I think, be several more years of litigation around all of this. And from that point of view, very clearly these companies have legal obligations. But they're not meeting them.

Peter Mares: Alan Moran, that is a point, isn't it?, that when the Pilbara was opened up, certain agreements were made - with the predecessors, it must be said, of BHP and Rio, but they've inherited those obligations. They got certain privileges for the investments they made and there were certain obligations in return, including - as Megan has just said - carting other people's ore.

Alan Moran: That's quite true. There're two issues there. One is that they were obliged, I think to haul, rather than to allow their track to be used, which is a bit different. But they were obliged to haul other people's commodities, presumably at a price to be determined in the future. And I wouldn't have any difficulty with that. If they signed a contract, they may have felt it was under duress, the contract, but whatever it is they signed a contract, as major commercial companies, did so willingly, and then to be obliged to keep to the terms of that contract I think is perfectly legitimate. My problem isn't that. My problem is that these were not the grounds on which they're being obliged to provide this haulage, or this rail track. The grounds were that you have a facility here which we have decided is an essentially facility and therefore you have to use it. And the real problem is what it implies for any future investments.

Peter Mares: But if they weren't living up to the terms of their agreements, and another way has been found to enforce that opening up... I mean, it doesn't really matter, does it?

Alan Moran: Well, it matters in terms of other facilities. It may matter in terms of what the agreement was for BHP and for Rio and they would probably dispute some aspects of that. So, there is a negotiation in play there. But the real difficulty is in the future, because now if you set a precedent which says 'You have built this asset, we the government are going to decide precisely what the terms of usage are', then private companies are going to think very closely before they even do any investment again. And we're talking now about a shortage of infrastructure in Australia, and if we're not careful - with a decision like this - the only way that shortage will be resolved is as it was resolved in the past by the government building everything and we have inefficient infrastructure like some of the infrastructure you've mentioned already.

Peter Mares: Megan Anwyl, if I can come back to you on this... The fundamental argument here that Alan Moran is putting forward is that if you force companies to share the infrastructure which they finance and they build, then what you'll get is a kind of capital strike - that is, companies won't invest in future infrastructure.

Megan Anwyl: I just don't think there's any evidence of that. And indeed this is not about a free ride for third parties. There is a very complex regime that's yet to be fully negotiated - I do accept - but it is all about defraying cost. At the end of the day, the owners of the tracks do not lose the overall operation of those; it's not as if they have to just, sort of, you know, fit in with everybody else, willy-nilly. What is important is that for two-and-a-half years in the state of Western Australia, under the State government, there's been efforts to negotiate a rail haulage regime which, of course, is different to letting other people's trains on your track. Two-and-a-half years later here we are. It's great that Alan thinks those negotiations could occur, but I'm here to say that in fact they're incredibly tardy and so, what we're really, I guess, fundamentally disagreeing about is whether or not this is good public policy. I believe a diversification of the mining industry is good for Western Australia and the nation.

Peter Mares: But if it is, and if you say it can all be done amicably and a deal can be reached that won't impact on BHP or Rio and their operations, won't impact on them badly, why are BHP and Rio holding out? Why are they going to the High Court? Why are they investing so much time and money in resisting an open access regime?

Megan Anwyl: Well, very clearly they don't have corporate cultures that embrace collaboration and I think that's pretty clear. And I guess, really, those questions have to be put to them. But I think we all understand that they've got commercial obligations to their shareholders and all the rest of it. The reality, though, is that as I keep coming back to, [BHP and Rio] signed their State agreements decades ago that would provide the haulage of third party ore and it just seems to me that it's quite extraordinary, really, that we're going to have several more years potentially of litigation. If you look at one of the earlier decisions around the Mount Newman line, which is a different one to these three that [Treasurer] Wayne Swan has just declared, that's now four-and-a-bit years old, that litigation. So, I just don't think it's in anyone's interest to avoid negotiation on this. But clearly, that's what's occurring.

Peter Mares: Alan Moran, it does seem a waste of everyone's time to spend all this effort in the courts... And it drags on. I mean, the ones who benefit are the lawyers.

Alan Moran: It's awful, it's an awful waste of time; fortunes are being spent on lawyers, as you know. But they feel very strongly that their interests would be jeopardised by it. I mean, I have no difficulty with somebody coming along and saying a deal is a deal, this is what the terms were, you must abide by the deal. But that isn't what's being said so far. And I do have very great worries and, like Megan, that in fact we would see this being the disincentive to investment. We've seen this already in terms of the Telstra situation, where Telstra has gone and said 'We want to build a $3-billion-something rollout of our broadband, but we can only do that if you can tell us what the conditions are. We will carry other people's material on this but we need to know what those conditions are before we do anything', because they feel that once they've done it, that they're trapped, they've spent their capital, it's in the ground and they are then at the mercy of the regulator.

Peter Mares: Yes, and the alternative argument from a consumer's point of view is that we know if Telstra builds this infrastructure and has the sole use of it, we know what Telstra's going to do with prices...

Alan Moran: Well, they may and they may not, but there are alternative ways...

Peter Mares: I bet they will!

Alan Moran: Well, they'll maximise their profits. But then Telstra will say, 'OK, well, you want that; as consumers, you build it. We will build it with our investors' capital.'

Peter Mares: Well, this then comes back to an argument to say 'Well, in fact, key infrastructure that is in the public interest should be built with public dollars and the government can make a return on it by charging Telstra and everyone else to use it'.

Alan Moran: Yes, but that's back to the 1950s, isn't it?

Peter Mares: Well, I mean, this is what you're saying. But, I mean, we're spending all this money on lawyers and all the rest of it to try and sort these things out, governments can borrow for this sort of investment more cheaply than private enterprise. They can, therefore - in theory, at least - build it more cheaply and they can turn a profit.

Alan Moran: I don't think governments can borrow more cheaply. But the whole point about it is we arrived at this situation because of the Hilmer Report in the 1990s saw that our government-owned infrastructure was very inefficient and everybody agreed it was very inefficient. In fact, we tried to find a way around it and in many ways we privatised things and it is more efficient now.

Peter Mares: Megan Anwyl, do you see a role for the State in actually providing this infrastructure and sharing it? Would that be a better outcome for the sorts of companies you represent?

Megan Anwyl: I think... and I've just attended a national ports conference in Queensland this week, and we've heard a lot about Infrastructure Australia and the proposals that exist. I think that Australian people would like to see more partnerships, but at the end of the day it's just probably not going to be feasible for all of the infrastructure that's required for the, for example, mining industries to be paid for by the state. So, I think what's important to note is that this could be the difference between whether some of these junior miners get off the ground or not in terms of their mines. And let's also bear in mind from a public...

Peter Mares: So, you're saying the miners you represent, their mines won't go ahead if they had to build their own rail lines?

Megan Anwyl: No, not quite that emphatic. But it is the difference between, for some mines, whether they go ahead or not. And what I was also want to point out is that the alternative is trucking and there are a whole lot of reasons why trucking is not good for communities - social, environmental, financial, greenhouse these days, and a range of issues like that. So, I guess my argument is that it is good to have diversification of mining in the Pilbara... And I've got to tell you, I get up there quite a lot and that seems to be what the people that live there think, too. And surely they should count for something!

Peter Mares: Well Megan Anwyl, thank you very much for your time.

Megan Anwyl: Pleasure.

Peter Mares: And thank you to you, Alan Moran.

Alan Moran: Thanks very much.

Peter Mares: Alan Moran is Director of the Deregulation Unit at the free market think tank the Institute of Public Affairs, and Megan Anwyl is Chair of the North West Iron Ore Alliance, a coalition of four emerging iron ore companies. Companies that want access to the existing rail lines in the Pilbara that are owned by BHP and Rio.

To give us your thoughts on the sharing of private infrastructure, click the Have Your Say button at the top of this page. Or leave a message at our feedback line: 1300 936 222, for more or less the price of a local call.

Guests

Alan Moran
Director Deregulation Unit, Institute of Public Affairs

Megan Anwyl
Chair, Northwest Iron Ore Alliance

Further Information

North West Iron Ore Alliance

Institute of Public Affairs

Train driven through rights
by Alan Moran, Australian Financial Review

North West Iron Ore Alliance welcomes federal treasurer's declaration of Pilbara rail lines

Presenter

Peter Mares

Producer

James Panichi

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