Competition watchdog chairman Rod Sims says Australia will miss out on business investment or be forced to watch foreign raiders snap up assets if local firms do not lower expectations for investment returns to reflect lower interest rates.
And the Australian Competition and Consumer Commission boss has urged the corporate sector to help restore faith in the market economy by getting behind his push for new laws that prohibit unfair business practices.
Mr Sims said he hoped companies were “reducing cost of capital calculations and not sticking to some benchmark that is no longer justified”. Companies should not try to use mergers or acquisitions, which could harm competition in the economy, as an alternative to investment.
“Returns should be lower because interest rates are lower,” he told The Australian Financial Review.
“We don’t want to lose investment that we should otherwise get because of hurdle rates that are too high. And we don’t want overseas companies coming in and buying our assets because they’ve got more realistic hurdle rates for their cost of capital.
“So I hope that companies adjust their hurdle rates before they go chasing mergers.”
Hard wired into the culture
Mr Sims’ call for Australian companies to reassess their hurdles follows similar urgings from Reserve Bank of Australia governor Philip Lowe and Treasurer Josh Frydenberg, who are keen to stimulate business investment.
Hurdle rates are used by companies to judge whether an investment will generate sufficiently attractive returns. Dr Lowe has previously said a hurdle rate of return of between 13 per cent and 14 per cent had been hard wired into the corporate culture of some companies.
“At low-interest rates, many investments that didn’t make sense at higher interest rates should now make sense,” Dr Lowe said in late October.
“Low-interest rates give us the opportunity to lengthen our horizons and think about projects with really long-term pay-offs.”
But chief executives have dug their heels in, with many saying a longer-term view of interest rates remains necessary, and higher asset prices are an example of how risks have risen even as rates have fallen.
“As a result of lower long-term interest rates, our cost of capital has naturally lowered over recent years,” Medibank chief executive Craig Drummond told the Financial Review’s annual Chanticleer CEO poll last month. “Nevertheless, those lower interest rates have elevated asset prices, making inorganic investment more challenging.”
We are not trying to hold back the tide, we are trying to shape the tide.
— Rod Sims
AGL chief executive Brett Redman argued investment decisions were made with an eye to returns over decades.
“Typically, our hurdle rates are applied to business cases with a 20- to 30-year time span, so are set to be maintained through the economic cycle and haven’t been changed,” he said. “That said, good quality investments are rarely held back by a hurdle rate. It’s more a debate around the long-term risks of the project.”
Mr Sims, who cited the ACCC efforts on the Takata airbag recall and a new safety standard for quad bikes as amongst the agency’s biggest achievements of 2019, said the watchdog’s ongoing work around the use and potential abuse of data would be a focus in the year ahead.
As well as overseeing the rollout of the new Consumer Data Right, the ACCC will this year establish a new digital platforms branch to run investigations and legal action in this area.
“We do need boundaries and we don’t have them,” Mr Sims said while emphasising that the ACCC did recognise the positives that digital platforms brought.
“We are not trying to hold back the tide, we are trying to shape the tide. Data can be a force for good, and we want to make sure it is.”
The Morrison government did not support the ACCC’s recommendation for merger laws to be broadened and strengthened following its digital platforms inquiry, but Mr Sims said he’s encouraged that the government has an open mind on the matter.
“I think we’ve got a whole debate here around just how concentrated an economy do we want? How much do we want companies in a position where they can earn economic rents? Concentration has a cost and companies are buying potential competitors, companies are gaining power through getting hold of data, and I think it would be good for the law to recognise that, so the courts have that very clear signal.”
The ACCC’s view on current merger laws will be tested again this year when the Federal Court hands down its judgment on whether the merger of telecommunications giants TPG and Vodafone Hutchison Australia should proceed.
Mr Sims declined to comment directly on the progress of the case but said maintaining competition in the telco sector was critical for the broader economy.
But Mr Sims will also continue his push for a general prohibition on unfair commercial practices, which would be a lower bar than the current regime, which outlaws unconscionable conduct.
The controversial push for the new laws, which would require proof of a significant detriment to a consumer of small business from conduct outside of the offender’s normal business approach, is likely to be bitterly opposed by business groups.
But Mr Sims argued business should support the laws as a way of helping to restore public faith in Australia’s market economy and preventing the rise of populism.
“We want faith in the market economy. And I know we’re seeing a lot of concern about populism in terms of the United States and the UK. I don’t think people want to throw out a market economy, they just want it to work in ways that are fair to them,” he said.
“I’m not trying to stop companies making money. I am just trying to say, make sure if you’re making a lot of money that you’re also actually treating people fairly, be it small business or consumers.
“We’re here to protect competition. We’re here to protect consumers. But all that packages up as protecting faith in the market economy. Because, you know, it’s the best system we’re going to come up with.”
Price of privatisation
Mr Sims also repeated his previous warnings on the dangers inherent in the privatisation of infrastructure, as he gears up for another year of battle over the Port of Newcastle.
Users of the port, which was privatised in 2014 for $1.75 billion, have been hit with a series of price hikes in the last five years.
“We’ve really got to be very careful in Australia with privatising infrastructure with minimal regulation to raise a lot of money from the sale.
“We’re giving ourselves a very high-cost infrastructure. A lot of other countries, particularly in Asia, make good infrastructure a source of advantage. We’re running a risk of making it a disadvantage.”
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