While inflation remains at levels below the Reserve Bank’s target band of 2-3% — thus preventing Australian workers’ stagnant wages from turning into real wage falls — some industries are increasing prices far more rapidly than CPI. And they all tend to have similar characteristics: they’re private oligopolies or monopolies in heavily regulated industries. In effect, the greatest sources of price rises for family budgets rely on government permission for those increases.
Take the latest accounts from toll road giant Transurban, which owns toll roads in Sydney, Melbourne, Brisbane and in the United States. Average daily traffic on Transurban Sydney’ roads — the Cross City Tunnel, Eastern Distributor, M2, M5, M7 and Lane Cove Tunnel — grew 2.9% in the first half of the financial year, but revenue from those toll roads increased 9.8% to $476 million.
Rather higher than inflation.
In Melbourne, average daily traffic fell 1% due to the CityLink Tulla-widening project, but revenue soared 14.2% to $388 million as it lifted tolls as part of the deal to pay for that project. Transurban’s proportionate earnings before interest, taxation, depreciation and amortisation (EBITDA) — which measure income relative to its ownership stakes in its toll road assets — rose 11.6% to $911 million. Group proportional EBITDA margins rose to 75.4% from 74.7% in the last six months of 2016. Transurban’s highest profit margins are in Melbourne, where they run at 88.5%, and Sydney, where margins run at 81.2%.
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Those margins are higher than the Commonwealth Bank, which had a gross margin of 62% in the six months to last December, or Rio Tinto, which had a margin of nearly 63% in its Pilbara iron ore mines for 2017, and ASX Ltd which has a gross margin around 77%. Its margins have been built on dud privatisation/infrastructure deals done with state governments (Labor and conservative alike), usually with inexperienced and rather clueless bureaucrats sitting across the table from the private sector’s sharpest lawyers to negotiate the original agreements, and toll road charges set by tribunals overseen by government.
The NSW government is very sensitive to Transurban’s surging tolls and its role in this rort: in an announcement last November, the government said drivers who pay an average $25 or more in tolls each week would be eligible for free registration. This is on top of the cashback offer for people using the M5 south-west motorway in Sydney.
Last week, energy giant AGL announced a near-doubling of interim profits thanks to the surge in power (and gas) prices, especially in wholesale markets. It, too, operates in an environment where it has substantial market power and governments play a significant role in vetting its pricing policies — and companies have successfully gamed that vetting process to deliver themselves huge increases in prices.
And then there’s the gouging of for-profit private health insurance companies, which are making massive profits while jacking up prices with government approval at rates far higher than inflation — in fact so much higher, the government actually boasted that the most recent price increase it approved was only twice the rate of inflation. Private health insurance is another industry with substantial market concentration and government regulation that has failed to rein in rising prices that hammer family budgets.
As the AMP’s chief economist Dr Shane Oliver noted last week:
Much has been made of record low wages growth and falling real living standards. But it’s interesting to note that while wages growth has fallen to a record low, price rises for most Australian businesses only averaged 1.1% last year (according to the ABS’s Market sector goods and services ex volatile items price index). If price rises for government influenced areas like health, education, utilities and tobacco were similar there would be far less angst about low wages growth!
It’s not clear if Oliver is correct in his conclusion — the lack of nominal wages growth, regardless of the inflation level, works to focus Australians’ attention on how employers are refusing to lift their pay. But he’s absolutely right that inflation is coming from industries where governments — notionally — play a big role in pricing. Problem is, market concentration means that pricing regulation is ineffectual.