Regulation of Below Rail Infrastructure Assets in Queensland: What can we learn from the Canadian experience?
Stephen Mclay s2840946
Supervised by Alex Robson and David Rynne
Introduction p 3
Defining the economic principles of natural monopoly infrastructure assets and the benefits/costs of privatisation p 3
The pros and cons of direct regulation p 5
Where commercial negotiation has been successful and the difference between commercial negotiation with government owned corporation monopolies and private monopolies p 7
Defining the economic principles of natural monopoly infrastructure assets and the benefits/costs of privatisation
Monopolies arise when there is only one seller in the market, many buyers, no close substitutes for the product and barriers to entry into the market. (McTarggart, Findlay, Parkin, 2010) Barriers to entry can be distinguished as barriers created by government and structural barriers to entry. Governments create barriers to entry by granting exclusive rights to produce to the incumbent and use their legal power of coercion to prevent the entry of other firms. For example, creating and maintaining a monopoly franchise - a form of privatising national assets. Monopoly franchises are often granted to public utilities that provide services like gas, electricity and the railway lines. (Church J, Ware R, 2000)
Governments grant monopoly franchises to private suppliers for a number of reasons, including:
1. Improved efficiency and productivity- Monopolistic producers adopt a profit maximising stance (in order to satisfy shareholders) and in doing so, minimise costs and optimize output, achieving ‘productive efficiency’. Through the operation of effective competition, demand and supply are more optimally matched so consumers, producers and society in general benefit from ‘allocative efficiency’. (UNDP Bosnia Herzegovnia)
2. Fiscal gains- In the case of privatisation of publicly owned entities, in the short term, governments receive revenue from the sale of state assets which can be used to pay off national debt. Governments also gain from the redistribution of rent, where the government uses legal restrictions to maintain entry barriers and set prices to provide a pool of profits to subsidize other services. (Church J, Ware R, 2000)
3. Lack of political interference- Governments are motivated by political pressures (i.e. the next election) more so than economic and business principles. For example, the state may employ a number of workers that is inefficient and be reluctant to reduce the workforce because of the negative publicity that comes with loss of jobs. The private sector is separated from this pressure, thereby negating that issue. (Pettinger. T, 2011)
However, these arguments do not apply purely to privatisation, but to the creation of effective competition, which is fundamentally limited in the case of natural monopoly. (UNDP Bosnia Herzegovnia)
A natural monopoly occurs when the technology or character of the industry are shaped so that a single producer can meet demand in a way that achieves the lowest cost and greatest social benefit.
The base assumption underlying these conditions is that entrance of other companies into the market would be a waste of the limited factors of production and would require excess levels of investment and the difference in marginal and average costs would lead to an aggressive rivalry between companies. In the worst case, this could mean a price war where...