Dangers of privatising key assets

There has been some discussion lately about granting a lease of the Darwin port to a company associated with the Chinese government. The central focus has been around the potential defence and intelligence issues associated with such a strategic asset. Media reports have suggested that even the US President raised the matter during a recent visit by our current Prime Minister.

There is no doubt in my mind that ports are a strategic asset and that we should be concerned about who operates them; but these concerns should be more about trade than defence implications.

The process of privatising the Melbourne, Fremantle and Darwin ports, together with the private control of Newcastle, Port Botany, Port Kembla and Brisbane give rise to potential misuse of market power by the operators of those facilities.

In the case of commercial operations, the logical concern is over price gouging through increased access fees and the like. This is a consideration in any private enterprise with a substantial captive market and few alternatives. Increased competition is one way of combating this problem as well as ensuring the watchful eye of the ACCC.

However, there is a greater risk if the port facility is controlled by a foreign state-owned operator or a company fronting for such sovereign players. In such circumstances, the state-owned enterprise often has interests well outside of the realm of commercial profitability or return on investment. A canny player with virtually unlimited funds can play a business plan that is simply unaffordable to non-sovereign wealth funds.

And this is a real risk for Australian business.

Whilst our regulatory bodies can keep an eye on price of access to port facilities, they cannot necessarily influence the productivity or processes at work within them. In short, this means that a strategic port asset controlled by a foreign government can introduce impediments to efficiency to impact Australian exports. This can occur in any number of ways including closing sections of the facility, reducing work numbers, limiting access and so forth. Many of these scenarios could be contrived purely for the purpose of impacting the export market.

The question many will ask is ‘why would any port operator want to do this?’ The obvious answer is for long term strategic or economic benefit with scant regard to the short term costs.

It may be that a particular port is the only realistic option for the export of a particular commodity. Restricting access to that port could place enormous financial pressure on the industry reliant on that access. This could in turn make the exporting company vulnerable to closure, bankruptcy or takeover. In such a situation, the well capitalised sovereign wealth fund linked to control of the port is in an excellent position to take advantage.

I am not saying that such events have transpired; merely that such a scenario is entirely plausible.

Already we have state owned players active in some of the ports I have mentioned above. Whilst there may be short term satisfaction with the existing results of those privatisations, we would be wise to be alert to the possible long term consequences of ceding control of some of our most important trade assets.