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The national rail regulator has warned against the $8 billion merger of Australia's two biggest freight companies, saying they have already abused a near-monopoly to lift the cost of carrying goods across the country.
The Australian Rail Track Corporation, which owns and regulates the 6000km rail network stretching from Brisbane to Perth, accuses the dominant rail freight carrier, Pacific National, of boosting its own profits by not passing on savings to customers.
And to prevent any further reduction of competition in the $54 billion freight market, it insists that Pacific National parent Toll Holdings must be forced to sell the Melbourne port - the biggest container terminal in the country - if it successfully buys fellow Pacific National owner Patrick Corp.
Pacific National, owned equally by Toll and Patrick, controls 75 per cent of Australia's rail market and more than 80 per cent of traffic on the east-west rail link through Brisbane, Sydney, Melbourne and Perth.
The $2.8billion company is at the centre of a fierce dispute between its owners as Patrick attempts to fight off a hostile takeover bid from Toll.
A merged Toll and Patrick, worth more than $8billion, would dominate the national freight market. Smaller operators are concerned about the power of the merged business but the ARTC submission is the first indication of entrenched regulatory suspicion of the deal.
At a time when the commonwealth-owned ARTC is investing billions to improve the standard of tracks to lure freight transport off the nation's roads, the regulator believes Pacific National's near-monopoly and "commercial motivations" are reducing use of the rail network.
In a damning submission on the merger to the Australian Competition and Consumer Commission, the ARTC says Pacific National's attitude since its creation in 2002 appears to have "resulted from a decline in contestability of the rail market". It says Pacific National's prices on the east-west link have risen despite an eight-year investment program by ARTC that has cut the cost ofaccess to the rail tracks by 23per cent.
While not calling on the ACCC to block the bid, the submission says: "ARTC considers that the acquisition of Patrick by Toll will increase Toll's ability and desire to use its control of Pacific National, and its market power, to constrain competition." The ARTC has called on Toll to sell the Melbourne port, worth about $1.4 billion, in an attempt to ensure that competition in the freight industry is not undermined by a successful bid for Patrick.
Toll should also be required to sell Melbourne's vital Dynon rail terminal, trains and access to strategic rail track around Australia and be subjected to a range of regulated "third-party access" orders.
The ACCC is conducting a formal review of the competition implications of Toll's plan to buy Patrick. It is widely believed that the ACCC will block the merger because of the power it will deliver to Toll in the freight business.
But orders to divest Patrick's key Melbourne assets would also have the potential to kill Toll's bid.
Together, the Melbourne assets are the jewels in Patrick's business because they are central to its national coverage of the container business.
In November, ACCC chairman Graeme Samuel accused Patrick of being engaged in a "cosy duopoly" on the waterfront with rival P&O.
Mr Samuel said the benefits of the hard-won, union-busting waterfront reforms in the late 1990s, led by Patrick chief executive Chris Corrigan, had stalled as Patrick and P&O dominated the industry. He said stevedoring profit margins in Australia remained "well above" international rates, with Patrick and P&O not investing enough to increase port capacity.
But Mr Corrigan angrily denied the claims, saying he had never argued for a duopoly, "cosy or otherwise", and was investing hundreds of millions of dollars in new port facilities.
The rail regulator's caution about a Toll-Patrick merger appears to be inspired by what it describes as Pacific National's "incomprehensible behaviour" on the east-west rail link.
ARTC says Pacific National's conduct since its formation has put an end to the growth in rail's share of the east-west freight market and threatens to undermine investment on the east-west and north-south service.
"ARTC estimates that market share on the east-west corridor has stabilised at around 81per cent since 2002, following consistent growth of 3 per cent in market share over the previous seven years," the submission says. "While ARTC accepts that there may be other reasons for deteriorating performance on these corridors over recent times, ARTC considers a primary cause to be the reduction in rail competition in 2002, and how this seems to have manifested in Pacific National's commercial motivations."
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