In addition, research shows that in developed economies, borrowers with collateral obtain 9 times as much credit as those without it. They also benefit from repayment periods 11 times as long and up to 50% lower interest rates.
The insolvency system creates confidence in the credit system by ensuring that the rights derived from secured transactions laws are recognised and respected. Both systems provide tools for risk management—and in the event of an insolvency—confidence that a transparent process will be followed for asset distribution.
Now, to the public private model that underpins the operations of the PPSR in Australia.
This model was established by the Attorney-General’s Department in the reform to create a centralised personal property securities system in Australia. It facilitated this model through supporting technology that enabled the non-government sector to build interfaces with the PPSR in addition to making a government web user interface available.
Since the PPSR went live in January 2012, AFSA has continued to work with industry to nurture an environment in which private sector providers can deliver PPSR products and services. The incentive for providers being the ability to charge a margin to their clients on top of the standard cost recovered rate, in return for a tailored or value add service.
The capacity to build an interface has also benefited organisations that don’t necessarily want to on-sell access, such as high volume users of the PPSR who want to integrate the PPSR with their own business systems.
What all this has created is an operating model that provides both private and public access to the PPSR. At the time the PPSR went live, the case in support of the public sector maintaining an interface was very strong. Firstly, the private sector’s capacity to deliver the full suite of services at ‘go-live’ was unknown. Secondly, the significance of the reform that led to the creation of the PPSR meant that the public sector needed to maintain an interface to support the range of transitional issues that inevitably emerge with such a reform.
In 2016 I think it is fair to say, based on my regular and ongoing discussions with industry and peak user groups, that the PPSR operating environment is much more stable than it was in the first couple of years of its operation. Although there is likely to be a further round of reform to the Personal Property Securities Act that may impact on the way the PPSR operates in the future, any changes that flow from that will be designed to further reduce complexity and improve register usability. On this basis it is timely to critically evaluate AFSA’s role in continuing to directly provide transactional services that are also currently available via the private sector.
When considering issues such as this it is also useful to start with what the law requires.
Section 147 of the PPS Act is the relevant provision. Amongst other things it sets out key things I must do as Registrar of the PPSR. Specifically I must:
establish and maintain a register
ensure it is available at all times unless I have exercised a power under the Act or Regulations to refuse or suspend access
if I choose to suspend or refuse access I must issue a public notice within timeframes required under the Act or Regulations.
What the provision also says is that I may keep the register in any form that I consider appropriate. On this basis the Act provides me with discretion on how I provide and maintain access to the register. The caveat being that it should be operational—where that is directly in my control—other than when I have chosen to exercise relevant powers to suspend or refuse access to it.
In light of this, there is nothing that requires me as Registrar to provide a means of access that is directly under my control. For this reason it would be permissible for me to allow others to provide the only means of access, as long as I am able to ensure the required level of access to the register is maintained.
So with this in mind we can turn our minds to the question of whether AFSA should continue to participate in the PPSR transactional service market by maintaining its own web user interface. To answer that question we will look at how the market currently operates and consider the ancillary question of what the likely consequences would be if AFSA was to discontinue participating in the market.
At present almost 80% of all search and registration transactions are undertaken via a business to government interface, with the remainder occurring via the web user interface provided by AFSA. Currently there are around 200 organisations that have been whitelisted to build an interface with the PPSR, with a smaller proportion of those maintaining an active interface. From our perspective this is positive and we actively work to eliminate any unnecessary barriers to entry in order to support competition in the market. We work to do this while maintaining requisite standards in relation to the security and integrity of the system.
The fact that the majority of transactions occur via private providers suggests that there is scope for AFSA to discontinue its participation in the relevant market. After all, with only 20% of potential transactions being undertaken via AFSA’s web user interface, the risks—at face value—of withdrawal from direct service provision should be quite low. This was certainly my initial reaction – which is why I sought deeper analysis of the data, as I am acutely aware the devil is always in the detail.
What further analysis of the data revealed is that although the overall number of transactions performed via business to government interfaces is obviously much larger compared to those via AFSA’s web user interface, proportionally there is a larger number of individuals and businesses completing those transactions. This analysis confirmed what we knew anecdotally through discussions at our regular stakeholder forums, namely, that smaller volume users tend to use AFSA’s web user interface. One possible reason for this is that the initial focus by the private sector has been—quite understandably—on developing services for high volume users, as they provide the best means of getting a timely return on investment.
A further reason is that the market between private providers has not matured to the point that there is sufficiently strong competition between providers to influence price. Using search transactions as an example—a quick survey of publicly available offerings—excluding that offered by AFSA, demonstrates that the cost of a search can vary by up to $15 – $18. Further evidence of pricing insensitivity can be seen by the fact that a 15% drop in the base price set by AFSA under the cost recovery guidelines from 1 July 2015 has not appeared to influence publicly available pricing of transactions.
As small volume users of the PPSR are not necessarily going to have the required market power to negotiate a sufficiently competitive agreement directly with a private provider, it is inevitable that they will be dominant users of AFSA’s web user interfaces. For this reason I am concerned that any sudden exit by AFSA from the market poses the risk—given the current maturity of the market— that individuals and small businesses will lose the ability to access the PPSR at a reasonable price. This has the potential to create an inequity between small and large users; particularly given large volume users have greater capacity and incentive to build an interface directly with the PPSR if they are unable to negotiate suitable terms with a third party provider.
Although it could be argued that this situation is partly a product of AFSA continuing to remain in the market—this does not appear to be supported by current publicly available pricing. Nor has AFSA’s offering resulted in any growth in its market share over the last couple of years. This perhaps reflects what we see as our role in the market—to provide a generic functional product that leaves others room to develop value add products.
Taking all of this into account, we are of the view that there is no strong case to change the existing service delivery model at this point in time. Indeed our analysis of current market maturity suggests that any abrupt exit by AFSA will have implications for a large number of small volume users. The importance of taking such factors into account when making decisions about the type of operating model to adopt, is summarised well by Professor Kevin Davis in his recent analysis of the proposed ASIC register operating model. In that paper he emphasises the importance of striking the right balance between private and public involvement to prevent distortions in the market that may undermine the public good.
In addition to the economic arguments, I am also not satisfied that the market is sufficiently established to enable me to properly discharge my obligations as Registrar if access to the PPSR was only available via the private sector. Although I maintain control over when a third party provider can access the register, there is no means for me to ensure that the provider facilitates access to others. Therefore, having a capacity to assert some level of control over one or more of the third party providers would be a pre-requisite to any withdrawal by AFSA from the market. I have a number of reservations, which I will not expand on here, about the potential impact such an intervention in the market may have on competition due to the level of regulation it would require.
So if there is a case to maintain the current private / public service model—pricing is important. At present, AFSA prices PPSR transactional services on a cost recovered basis. The prices that are charged directly by AFSA or passed on through a third party provider do not contain any profit margin. Rather they cover the cost of operations, administration of the Act and depreciation of underlying technology; including an amount to cover depreciation of PPSR assets. From time to time private providers that deliver services to others have sought a lower price to that available directly via AFSA. The argument being that they are disadvantaged by the current pricing arrangement.
The difficulty for AFSA in dealing with such a request is that cost recovery guidelines do not allow AFSA to recover more revenue than cost of operations. What this means is that AFSA does not have the option of charging those that use its transactional services a price greater than the cost of operation. In recognition of this principle AFSA reduced the cost of all PPSR transactional services by 15% from 1 July 2015.
Third party providers can be seen to protect AFSA from incurring certain service related costs, as they manage clients that may otherwise have contact with AFSA. For this reason there is an argument that it should be possible to offer a lower price to third party providers in recognition of the fact that they do not benefit from some of the services provided by AFSA. The difficulty with such an argument is that maintaining the web user interface and any support associated with it, is marginal compared to the cost of maintaining the infrastructure and technology that supports high volume users. As a result, more granular analysis of operational costs is not likely to provide any justification for differential pricing.
On this basis the only option—under cost recovery guidelines—would be to pass on a cost to third party providers that is lower than the actual cost of operation. If adopted it would produce a situation—unless AFSA decided to run an operating loss—of having to set a much higher price for all other users. When this is considered alongside the significant volume of transactions undertaken via third party providers, the level of potential cross subsidisation required to cover the inevitable gap would be significant. Prima facie this outcome appears inequitable to existing users of AFSA’s web user interface, who as discussed earlier are pre-dominantly individuals and small businesses.
So in summary, there is currently no equitable means by which AFSA can deviate from its existing pricing model.
That brings me to the end of this discussion. I hope you have found the PPSR operating model to be a useful case regarding factors to be considered when thinking about operating models in a private public context.
 Professor Kevin Davis, September 2015, ‘Privatising Public Information’ Australian Centre for Financial Studies