What has happened?
On 21 September 2023, the ACCC announced its opposition to Transurban Group’s acquisition of a majority interest in Horizon Roads. Horizon Roads operates the EastLink toll road in Melbourne.
The ACCC blocked the deal on the basis that it would “entrench” Transurban’s position as the only non-government operator of toll roads in Australia. The ACCC found this gave Transurban “incumbency advantages” when competing for future toll road concessions in Victoria through its access to high quality operational traffic modelling, data and in-house expertise. These meant it could undertake modelling more quickly and cost-effectively than others.
The deal was opposed by stakeholders, including the Victorian Government. While the ACCC found tender processes for future toll road concessions could be designed to be open to other parties, the incumbency advantaged held by Transurban would make any such competition less effective in the future.
Changing ACCC approach to complex transactions
The case is interesting because of what it says about the changing ACCC risks and attitude around complex transactions in concentrated markets.
Transurban previously had five deals cleared by the ACCC (in 2007, 2010, 2014, 2015, and 2018). The most recent involved Sydney toll road operator WestConnex. In that case, and despite raising similar concerns about the data and modelling advantages held by Transurban in the market for future concession processes, the ACCC cleared the deal after undertakings were given by Transurban to publish traffic data from its roads.
In light of the upcoming debate about substantial merger reforms, which would introduce sweeping changes to the regime, the Transurban / Horizon Roads decision highlights the toughening attitude and approach of the ACCC towards deals in concentrated markets.
Background: ACCC’s review of Transurban / Horizon acquisition
On 28 March 2023 the ACCC received an application from Transurban in respect of its proposed acquisition of a majority interest in Horizon Roads. Transurban is Australia’s largest toll road operator.
In Victoria, Transurban has interests in the CityLink and West Gate Tunnel toll roads. Horizon Roads operates the EastLink toll road in Melbourne.
Competition for toll roads in Australia
The ACCC’s assessment was primarily concerned with the quality of competition for future bidding processes in Victoria for toll road concessions.
Toll road concessions are agreements between a toll road company and the relevant state government under which the toll road company builds and operates a toll road and collects fees from drivers. These agreements typically follow from competitive bidding processes, but sometimes they result from unsolicited bids to the government.
An important part of being able to prepare and make competitive bids in these processes involves access to quality traffic data and traffic modelling capabilities. There is a significant degree of uncertainty and risk when forecasting traffic flows and the associated revenues for toll road concessions. Accordingly, the financial failure of most toll road projects is typically chalked up to overly optimistic or inaccurate forecasting .
Stakeholders therefore place a premium on the amount that the toll road project in question can be de-risked through the accuracy and credibility of the traffic modelling underpinning the proposal.
ACCC finding that Transurban has “incumbency advantages"
Other than EastLink, Transurban operates all of Australia’s other private toll roads, including CityLink in Melbourne and the West Gate Tunnel project (currently under construction) in Victoria.
The ACCC found that this scale provided Transurban with a significant amount of traffic data and in-house traffic modelling expertise. In its Statement of Issues, released in late June, the ACCC identified several “amber light” issues of concern, being:
the extent to which Transurban enjoyed incumbency advantages by virtue of it owning two toll road concessions in Melbourne which resulted in access to local traffic data and in-house traffic modelling capabilities;
the extent to which these incumbency advantages increased barriers to entry;
whether the transaction would materially increase these incumbency advantages (and thereby increase barriers to entry); and
whether the transaction would remove the opportunity for a non-Transurban entity to gain Horizon Roads’ local traffic data and modelling capabilities allowing it to bid competitively for future toll road concessions in Victoria.
The final decision appears to echo these concerns, with the ACCC stating that:
[t]he proposed acquisition would result in Transurban entrenching its position in Victoria, and prevent the entry of a rival operator which could compete closely for future toll road concessions in Victoria and that if Transurban doesn’t acquire Horizon Roads, it would likely be acquired by a potential long-term rival and could be used as a platform to develop the capabilities needed to compete more strongly for other toll road concessions.
Same, same... but different
This is not the first Transurban transaction that the ACCC has closely scrutinised. Transurban has had no fewer than six toll road deals considered by the ACCC since 2007 and all, prior to this deal, had been cleared.
In its most recent consideration of a toll road transaction, the 2018 assessment of the acquisition by Transurban of WestConnex in Sydney, the ACCC was satisfied that the incumbency issues could be mitigated by Transurban publishing its toll road traffic data. This published data could then enable competitive bidders to calibrate and validate their traffic models to the same level of confidence as Transurban.
The ACCC also found that:
the vast majority of traffic data that Transurban currently uses for traffic modelling is available publicly or is not exclusive to Transurban; and
rival bidders for WestConnex were able to build traffic models of comparable sophistication to Transurban using available expertise and technology.
The ACCC’s decision to oppose Transurban’s acquisition of Horizon Roads reflects a significant shift in position on this issue. The issues investigated in Transurban/WestConnex were virtually identical to the Horizon Roads acquisition, with the assessment focusing on incumbency advantages, access to data and superiority of traffic modelling capabilities. In the Public Competition Assessment of the WestConnex acquisition, several of the concerns, which the ACCC now appears to put material weight on, were ultimately not found to warrant taking steps to block the deal.
In particular, the ACCC found that while some rivals perceived Transurban’s traffic modelling expertise to be superior, it considered this could be matched by competitors because there was a large global pool of traffic modelling experts that competitors could use. Conversely, in its opposition of the Horizon Roads acquisition, the ACCC stated that “[w]hile there is a pool of traffic modelling experts in Australia and globally, Transurban has developed recognised expertise in preparing high quality traffic models in Australia that utilise detailed datasets, and can model options more quickly and cost-effectively than its rivals”.
Most significantly, while the ACCC found that the local traffic data Transurban had exclusive access to via its toll gantries (the structures over roads on which toll scanning devices are mounted) did confer a competitive advantage, the ACCC was satisfied that any competitive advantages would essentially be neutralised if Transurban published this data for competitors to use. As such, the ACCC accepted this undertaking from Transurban.
Key takeaways - A shift in the ACCC’s stance on concentrated markets
Transurban / Horizon Roads is the latest in a string of decisions by the ACCC that mark a discernible hardening in its attitude towards transactions in concentrated markets. This is not unique to Australia, with similar toughening attitudes from regulators overseas, including the US and Europe.
What can we take from the decision in light of the others over the last 18 months?
A precautionary principle - that errs on the side of blocking deals
Since 2021-22, we have seen less mergers cleared unconditionally by the ACCC.
In recent months, as well as Transurban / Horizon Roads, the following decisions have a number of common themes:
in December 2022, the ACCC refused to give merger authorisation to an infrastructure sharing arrangement between Telstra and TPG, which was upheld in June 2023 on review by the Competition Tribunal (Telstra and TPG );
in April 2023, the ACCC opposed Qantas’ proposed acquisition of Alliance Airways (Qantas/Alliance); and
in August, the ACCC refused merger authorisation to Suncorp for its proposed acquisition of ANZ (ANZ/Suncorp).
What can we make of this string of decisions?
In a recent speech delivered at the Law Council Annual Competition and Consumer Law Workshop, ACCC Chair, Gina Cass-Gottlieb, raised the prospect of introducing an ‘precautionary principle’ into Australian merger law - a concept drawn from environmental protection law. It is a principle that errs on the side of permitting a regulator to intervene to prevent conduct, even if the evidence is uncertain or incomplete, but where the risks are material and potentially irreversible.
We may already be seeing, in these recent cases, the ACCC erring more often on the side of taking steps to block deals, particularly in concentrated markets. It is telling that, in Transurban / Horizon Roads, this involved showing considerably more scepticism towards (and ultimately rejecting) many of the same arguments than had been accepted in Transurban / WestConnex in 2018.
Entrenchment of market power as a theory of harm in concentrated markets
A common theme in all of the recent cases above is an ACCC concern that a deal may entrench or enhance the position of a firm it argues has market power (Transurban, Telstra, Qantas and ANZ).
While this is not a new theme for the ACCC, it has taken on greater prominence following its Digital Platform Services Inquiry, where the issue of entrenchment was a central consideration. For example, in its March 2023 Digital Platforms Services Inquiry (DPSI) Interim Report , the ACCC noted that entrenching a position of market power “contributes to harms to consumers, such as reduced choice, higher prices, or inferior services compared to what would exist in a more competitive market”.
Alongside the DPSI, as part of its proposals for merger reform, the ACCC is calling for s 50 of the CCA to be amended to expressly include entrenchment or enhancement of market power as a factor to be considered when assessing the potential for a substantial lessening of competition.
Role of competitors or rival bidders as contradictors
Finally, a notable feature of the major deals blocked by the ACCC over the last 18 months has been the existence of one or more strong objectors that have participated in the process and been prepared to provide the ACCC with evidence of competition concerns (and potential counterfactuals).
In this case, the ACCC alluded to strong objections from stakeholders to Transurban / Horizon Roads , as well as opposition from the Victorian Government. The ACCC factored in rival bidders in its counterfactual, suggesting that “[a]n alternative toll road owner/operator with its own incumbency advantages is likely to increase competition for future toll road concessions in Victoria.”
Setting the scene for merger reform
The string of recent decisions, including Transurban/Horizon Roads, sets the scene for the upcoming merger reform process.
The ACCC has long called for significant reforms to Australia’s merger laws, with ACCC Chair Gina Cass-Gottlieb stating that they are no longer fit for purpose and calling for a recalibration of the current regime to make it easier to block more deals, more often.
At a high level (discussed in greater detail in our article, ‘The ACCC’s recommended merger reforms: a deep dive’), these changes include:
mandatory notification and suspension notification (requiring merging parties to suspend notify the ACCC if the transaction is above a certain threshold, and halting the transaction until the ACCC’s decision);
reversed burden of proof (requiring merging parties to proactively demonstrate that the transaction does not substantially lessen competition);
limits to merits review.
Of course, Transurban / Horizon Roads is just the latest in a series of high-profile decisions by the ACCC to oppose transactions that might suggest such radical changes are not required.