The Productivity Commission weighs in on regulation of Australian airports

15 February 2019

This article was first published by AirCargo Magazine.

The Australian Productivity Commission (PC) website describes its main role as:

“Providing independent research and advice to government on economic, social and environmental issues affecting the welfare of Australians”

The PC undertakes these tasks both as requested by government or according to its annual work program. The PC has had a long history of being involved in reviews and reports on issues affecting the trade and transport industry among its other work. Some of those reviews and reports affecting industry have included:

  • a report on the collection models for GST on low value imported goods
  • the review of the impact of Australia’s Free Trade Agreements
  • the review of the efficiency of Anti-Dumping regulation
  • inquiries into whether safeguard measures should be imposed on imports of processed fruit and tomato products

The traditional process is for the inquiry or review to be announced, for submissions to be taken while the PC undertakes its work, then the issue of a draft report followed by further submissions and public hearings leading to a final report being delivered to government. There is no obligation on government to act on the recommendations of the PC which are generally based on economic concepts and detailed review, whereas government decisions will take into account wider considerations. By way of example, the PC recommended the introduction of an economic “bounded national interest” test which would allow for arguments that even where there was dumping causing injury that it should be allowed to continue without the imposition of dumping duties on the basis that it was in the national interest for that to happen, due to the presence of cheaper goods for manufacturing or consumption, where that benefit outweighs any damage to the local industry. Unfortunately, that recommendation was not accepted by government. Similarly, the PC has often recommended the removal of all customs duties at import as they distort the market and cost more to implement and administer than the amount they contribute to government revenues or economic well-being.

I have been involved in a number of PC inquiries including making written submissions and appearing before the PC during hearings to elaborate on submissions and to ask questions raised by the PC. It is an interesting jurisdiction with a combination of financial, economic, legal and public policy issues being considered.

On 6 February 2019, the PC released its draft report on the Economic Regulation of Airports which followed an earlier report of the same title in 2012. Obviously, the regulation of airports, along with other trade infrastructure such as ports, roads and railways is an important element in an efficient supply chain and optimal allocation of resources. There is a special level of interest in trade infrastructure as its costs are significant, meaning that ownership and operation only resides in a few parties which requires a careful approach to competition and regulation. As the PC points out in its draft report, economic regulation of airports includes the general provisions of competition and consumer law and airport-specific light-handed regulations that were introduced following the privatisation of airports in the late 1990s.

In the overview section of the draft report the PC summarises the issues around airports as follows.

“Australia’s airports are critical infrastructure and their performance depends on, among other things, high‑quality management and a regulatory regime that promotes efficient operations and timely investment, and facilitates commercial negotiation between airport operators and users of airport services.””

In this way, the comments also reflect the types of concerns around the operations of Australian ports and the stevedores operating at those ports which is firmly under attention by the ACCC and state governments.

The draft report was awaited with real interest. Nearly everyone who uses Australia’s airports and their services has a view on their operations and many of those views are not exactly complimentary. However, in general terms, the PC has formed the preliminary review that most of the regulation of the operations by the airports and the operations themselves were in order.

Some of the findings in the draft report were as follows:

  • Existing airport regulation benefits the community and remains fit for purpose.
  • Despite the preceding finding, airport operators should not remain complacent as further scrutiny on some aspects need further review and tailored reforms would be needed for specific areas of concern.
  • The four major airports have market power in services provided to airports and charges for international services in Brisbane and Sydney are high compared to overseas airport charges.
  • Airports could exercise their market power in landside access services to encourage people to use airport-owned car parks but there is insufficient evidence to determine if that is the case, more data on the issues is required.
  • While, on balance, commercial negotiations between airports and airlines give little cause for concern, some agreements contain clauses restraining the airlines access to regulatory remedies for the exercise of market power and clauses that restrict airports abilities to offer incentives to other airlines. Those clauses are anti-competitive and should be removed.
  • Car parking charges at airports are not caused by the exercise of market power by airports but reflect consumer demand.
  • The Sydney airport curfew restricts noise for locals but does reduce the airport efficiency. The PC is seeking other options that could meet noise objectives at a lower cost.
  • Government funding of airport infrastructure investment should be subject to rigorous published assessment. There is also scope to improve the financial management of airport assets at some regional airports.
  • The “last resort” arbitration proposed by a number of parties to resolve disputes was a “bad idea”, may not be an appropriate way to resolve disputes and could adversely impact on a range of airport users.
  • That airports should provide to the ACCC each year, more detailed information on use of the airport for passenger and other services.
  • Within 12 months the ACCC should provide advice on an updated set of quality service indicators in consultation with affected parties. Those updated indicators should then be legislated.

Some of these preliminary findings have caused surprise and attracted criticism. Graeme Samuel, the former head of the ACCC and now an advocate for the airlines expressed reservations suggesting that the PC may not have undertaken direct investigations on the issues  and had “ignored” evidence from a number of affected parties. However, at the same time, Infrastructure Australia supported the draft paper suggesting that the existing regime was working to support long-term investment and that disruptions would jeopardise the investment.

The PC has been at pains to point out that it is limited by the evidence of its own investigations and evidence which is provided to it. This places a premium on affected parties making their views known and providing additional evidence whether before proposed hearings in March or in writing.

The PC has requested written submissions by 25 March 2019, and once the final report is completed it will be submitted to the Australian Government in June 2019. Mind you, the political identity of that government and its response is far from certain. If nothing else, comments need to be made lest they not be included in the final assessment.