In BuddeBlog, Paul Budde again outlines the major problems that the NBN faces. In this article he draws attention to reports that the government may be considering selling the NBN. He points out that it was remarkable that the NBN did not feature in Malcolm Turnbull’s Innovation Statement.
See link to BuddeBlog below.
To some of us it’s a time to pause, to reflect, to stand in awe. But to the vast majority of us it’s the silly season: a time of over-eating, drinking, buying, selling, worrying, partying, beaching, and pressured family gatherings.
And don’t the silly season preachers love it; out of hibernation they come to herald their version of the good news – news that is best delivered away from pulpits and outside of Sundays.
And what a persuasive, well-packaged homily it is: a seductive narrative that draws so many in:
“CHRISTMAS IS A TIME FOR GIVING.”
(Sub text) And boy, have we got the very things your loved ones need.
“SPOIL THOSE YOU LOVE THIS CHRISTMAS; SHOW THEM HOW MUCH YOU CARE.”
(Sub text) Buy, buy, buy, and when you think you’ve finished … c’mon, buy some more!
So the pressure to spend is on. We walk kilometres, zig-zagging in and out of stores; standing toe-to-toe with fellow shoppers competing for the best deals – and the quickest way out. All the while lamenting the pace of it all, oblivious to what we’ve become: manic consumers.
And how this millstone of consumerism weighs us down leaving us tired, hassled and empty: presents replacing presence; the secular bullying the sacred.
As for that birthday infant, the One whose name we daren’t mention lest we cause offense; well, he tends to remain tucked-away somewhere in the basement of our collective hearts: crying, smiling; longing to be cuddled and loved and fed … Happy Holidays, anyway.
Yet it is this nameless One, this silenced One, who gives voice to the longings of those of us who cannot compete in a world that says, keep-up, or else: the frail, the lonely, the infirm, the strange.
And as powerful and as noisy as the silly season preachers and Happy Holidays Grinch are, the Christmas child can still be heard whispering gently, persistently: “I-am-with-you: tiny, unassuming; lying at your feet.”
It is a whisper that alerts us to the beauty and majesty of our humanity; exhorting us to delight in those who cannot keep-up.
It is to them to whom Christmas belongs.
Peter Day is a Catholic Priest in Canberra.
In less than a week trade ministers from across the globe will come together at the 10th Ministerial Conference of the World Trade Organisation (WTO) in Nairobi, Kenya.
The meeting follows more than a decade of stalled global trade negotiations since the WTO’s Doha Round of talks in 2001.
Dominating the Nairobi discussion is the expectation that an impasse will continue over the scope and future of the multilateral Doha trade agenda, particularly given the influence of large newly-minted regional trade agreements.
Given the slow movement of the WTO talks since the Doha Round in 2001, many country members have forged ahead and conducted so-called “mega-regional” trade agreements amongst themselves, designed to be “WTO plus”.
These agreements – including the Trans-Pacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (TTIP) – commenced life as draft propositions between government negotiators, generating little public interest until they burst onto the world stage and into the public lexicon.
Like many countries in the Asia-Pacific region, Australia has also taken part in a growing number of mega-regional and bilateral trade agreements. These include more recently the TPP and free trade agreements with China, Korea, and Japan.
Each agreement promises to deliver substantial benefits to goods and services exports worth billions of dollars, and each has generated significant media interest and political debate.
However, in June, to little fanfare, Australia formally accepted a pending treaty that will be part of the Nairobi talks worth hundreds of billions of dollars annually to global trade, known as the WTO Trade Facilitation Agreement (TFA).
The TFA is a rescued component of the original Doha Round, concluded at the last WTO Ministerial in Bali in 2013. Once in force, it will benefit global trade through harmonisation of customs procedures, improved cooperation between customs and trade authorities, linkages on facilitation between the private sector and Customs, and a raft of capacity development programs for Least Developed Countries (LDCs).
The economic benefit to global trade arising from full implementation of the TFA is simply staggering.
Research undertaken by the OECD has found that in some African countries, estimated revenue losses from inefficient border procedures exceed 5% of GDP. Full implementation of the TFA would stem such losses, reducing trade costs by 16.5% in low income countries, by 14.6% in upper-middle income countries, and by 11.8% in OECD countries.
A World Bank study in March 2015 estimates that the global trade cost savings from full implementation of the TFA will conservatively amount to US$210 billion per year. To put this in perspective, that’s a gain of US$33.31 per year for each and every person residing in a WTO member country.
And yet despite its imminent extraordinary global impact, the TFA has earned barely a mention in the international discourse on trade, compared with the attention afforded to the mega-regional trade agreements such as the TPP and TTIP.
This suggests that the TFA has been dramatically undersold in the lead-up to Nairobi, with the influence of the mega-regionals serving to dominate and further split the discussion on achievements and direction.
Resulting speculation as to the relevance, scope and future of the WTO’s Doha trade agenda has gripped the Nairobi dialogue. In a recent speech, US Trade Representative Michael Froman called for “credible” results in Nairobi. This may indicate a normative expectation – is the scope of the TPP the new credible?
Across the Atlantic, the European Parliament has pushed for an ambitious but “realistic” result in Nairobi that takes into account the needs of LDCs. Is the TTIP, on which the EU is presently focused, the new global realistic?
However, in the same way as the mega-regional agreements grew from small contractual propositions into influential normative actors, so too has the TFA begun to take hold amongst members, suggesting that the WTO’s normative power is far from decrepit.
To date, 53 countries have already ratified the deal, with that figure growing every month. The TFA will enter into force once two-thirds of WTO members have completed the ratification process.
Each time a country ratifies the TFA, they are obliged by Article 13 of the Agreement to form or designate a National Committee on Trade Facilitation (NCTF). These committees have already been set up in many countries, and will facilitate implementation of the TFA between domestic Customs, industry, and other stakeholders.
The NCTF customs-to-stakeholder interaction on facilitation is arguably where the rubber hits the road for ratifying governments, and where the real delivery of benefits will occur. The World Customs Organisation will act as a key player in this space, and some of this work has already commenced.
The emergence of the Trade Facilitation Agreement onto the world stage should be a core focus of public discussion in the lead-up to the Nairobi Ministerial. It is without doubt a real and tangible success story for the WTO in recent years, limiting popular arguments that the WTO agenda is at risk of being blunted by mega-regional agreements.
The rapid ratification rate of the TFA also demonstrates members are voting with their feet, further underscoring the argument that although mega-regional agreements dominate present discourse, there are substantial areas of global trade regulation over which the WTO necessarily retains normative primacy.
Andrew Willcocks is PhD Candidate, ANU Centre for European Studies, ANU. This article was first published in The Conversation on 10 December 2015.
In his statement on innovation, Malcolm Turnbull said ‘the internet and the technology it enables means we are now part of the truly global market place. It means there are few barriers to entry for Australian businesses, no matter where they are located, right across Australia and they can sell their products and services to just about every corner of the globe.’
The internet is the bedrock for innovation today. But unfortunately, Malcolm Turnbull, as our former Minister for Commerce, damaged the internet. He introduced an internet censorship scheme at the instigation of the copyright cartel. He presided over a pervasive data retention scheme that has imposed a heavy burden on the whole communications sector.
But the biggest problem is the ‘claytons’ NBN.
In this blog on 10 September 2015, Rod Tucker, Laureate Emeritus Professor at the University of Melbourne, commented ‘The NBN; why it’s slow, expensive and obsolete’.
In The Conversation five days later Rod Tucker commented further ‘Under Turnbull the NBN budget has blown out as much as $A18 b. and on current projections is four years behind the original schedule.’
Paul Budde in his blog BuddeBlog on 29 September 2015 said ‘When the NBN was launched in 2009 one of the goals was to get the country into the top ten of the international ladder. Now in 2015 we have dropped to 42nd position.’
In this blog on 2 November 2015, Mark Gregory, a Senior Lecturer in the School of Electrical and Computer Engineering at RMIT University said ‘The decision by the Coalition government that was implemented by Turnbull in 2013 to adopt the obsolete FTTN technology for a significant percentage of the NBN will, in future years, be seen as economic madness. … The NBN is likely to be the most expensive lemon in Australian history. … ‘
For further elaboration of these comments, see ‘Malcolm Turnbull and the NBN mess’ in this blog on 3 November 2015.
And the criticism of Malcolm Turnbull’s stewardship of the NBN is gathering pace.
In the SMH on 11 December 2015, under the heading ‘Malcolm’s mess: how the Coalition’s NBN came unstuck’, Hannah Francis describes the mess that we now have with the NBN.
Malcolm Turnbull is right that the internet is the key technology that enables us to be part of the global market. But the high cost, slow and second-rate NBN which is now being rolled out is going to be a major handicap.
But there may be more to come. In the AFR on 4 December 2015, Andrew Clark said ‘the Turnbull government is in discussions with large telecommunications companies about selling large chunks of the government-owned NBN, including its huge hybrid fibre cable, copper and fixed line networks. A combination of the government’s dire fiscal position and criticism of the progress of NBN is fuelling the decision to engage in what would in effect be the biggest privatisation since the Howard government offloaded Telstra.’
Could this be an attempt to bury the NBN debacle before the final bills come in?
Godwin Gretch was an error of judgement without serious national consequences But the errors of judgement on the NBN have profound national consequences.
In all this sorry mess Jason Clare has gone missing in action.
Finally, we have a new international climate change agreement to guide action post-2020. The Paris conference delivered on its promise thanks to skilful diplomacy by the French, a general sense of good will among nations, dedicated national delegates working through the night more often than not seeking consensus language on difficult issues, along with numerous high-level backroom machinations.
The question now of course is just how good an agreement is it and by what criteria should it be judged? The philosopher Reinhold Niebuhr warned against allowing sentimentality, naive thinking or plain stupidity to cloud our judgment on prospects for enlightened public policy to be sustained in the face of powerful vested interests especially those underpinned by hard line ideologies. We should therefore keep Niebuhr’s advice in mind as we consider the Paris Agreement especially given the well-known influence of the fossil fuel industry on climate change matters and the reluctance of most governments to seriously address the issue.
The international climate change negotiations, now in their 22nd year, revolve around a complex and growing agenda. Negotiations in Paris hinged on finding “landing sites” where governments could converge on agreed text around key issues concerning (1) the level of ambition regarding the global mitigation goal, (2) differentiation between nations with respect to responsibilities and capacities, (3) providing the finance needed to support climate action in developing countries, and (4) the adequacy of the national mitigation pledges contained in the so-called Intended Nationally Determined Contributions (INDCs) along with mechanisms for their monitoring and compliance. As these issues are interdependent, the negotiations were complex and evaluation of the outcomes is not straightforward. Here I limit myself to commenting mainly on the level of ambition and INDC issues.
Article 2 sets the long term mitigation goal as “Holding the increase in the global average temperature to well below 2 °C above pre-industrial levels and to pursue efforts to limit the temperature increase to 1.5 °C above pre-industrial levels”. The international Community had already agreed to limit global warming to below 2 °C but recognizing the need to reach for 1.5 °C is a major advance as this would potentially avoid many significant impacts including inundation of the coastal zone and tipping points in Earth’s climate system.
Combining estimates from the IPCC 5th Assessment Report and the Global Carbon Project, the total global carbon budget for 2 °C (i.e., the amount of carbon dioxide than can be safely emitted from 2016 onwards) is only about 863 billion tonnes of carbon dioxide (CO2). A synthesis analysis undertaken by the U.N. climate change secretariat of mitigation commitments submitted by nations in INDCs estimates that global cumulative atmospheric CO2 emissions are expected to reach 748.2 billion tonnes in 2030. This is 87% of the post 2015 global carbon budget for 2 °C, leaving only 235 billion tonnes of CO2 or about a further 23 years of business-as-usual. The global carbon budget for 1.5 °C has yet to be rigorously estimated by the IPCC.
The inadequacy of the INDCs in light of the 1.5-2 °C goal is recognized in the “Decisions” part of the conference outcomes document and the Paris Agreement establishes the INDC as an ongoing instrument for ramping up mitigation action on an ongoing basis as prescribed in Article 4.3 “Each Party’s successive nationally determined contribution will represent a progression beyond the Party’s then current nationally determined contribution and reflect its highest possible ambition…”. Furthermore, Article 13 establishes a Transparency Framework to monitor and review on a 5-year cycle the adequacy of INDCs in light of a global stocktake of the aggregate mitigation efforts and compliance in terms of their implementation, among other things.
While the INDC and Transparency Framework provisions in the Agreement are commendable, providing a practical pathway for working towards the agreed global mitigation goal, and are applicable to all countries, major concerns remain. The compliance committee that is established under Article 15 to monitor and review the INDCs and their aggregate impact is something of a toothless tiger being “… expert-based and facilitative in nature and function in a manner that is transparent, non-adversarial and non-punitive…”. It would seem that “name and shame” will be the primary tool available for this committee to deploy should individual countries fail to meet their mitigation commitments and increase their ambition or if national commitments in aggregate continue to fall short of the emissions reductions needed to limit warming to the 1.5-2 °C goal.
If the year was 2006, the Paris Agreement would be rightly heralded as an extraordinary achievement and deserve without reservation a 5-star rating. However, as we enter our 22nd year of climate change negotiations under the U.N. Framework Convention, all the heavy lifting remains to be done by the next generation and too much is left to good will and the hope of technological innovation yet to come.
However, we should celebrate the fact that 195 countries have reached consensus and voluntarily given their consent to be bound by this Paris Agreement. When we look at the situation in Syria, it is far better to be addressing international problems through dialogue and cooperation than by dropping bombs. The Paris Agreement does establish processes and mechanisms that will enable significant mitigation and adaptation actions. It unambiguously signals that humanity and our economies have embarked on a fossil-free, low carbon future. For the first time, it is formally recognized in climate change law that conserving ecosystem carbon stocks including forests is central to achieving mitigation goals and that both biodiversity and human right must be protected when taking climate action.
Being an optimist, I am giving the Paris Agreement a 3-star rating. I do hope events show, in this case, Niebuhr to be wrong and that I have not allowed sentimental and naïve thinking, or worse, to cloud my judgement.
Brendan Mackey, Director, Griffith Climate Change Response Program, Griffith University
The Prime Minister and his government are welcoming us to the ideas boom. Showing a great sense of timing the innovation statement was made almost at the same time that Atlassian was listing on the NASDAQ. The Statement points to Atlassian as being valued at over US$3 billion. Today the company is valued at close to US$6 billion making billionaires out of its founders Mike Cannon-Brooks and Scott Farquhar and millionaires out of many of their co-workers.
Perhaps it is true that there has never been a more exciting time to be an innovator in Australia. But as the Atlassian example demonstrates, becoming an overnight sensation has taken them 14 years of effort.
With the long running resources boom having passed its peak and commodity prices tumbling, Australia needs to make a transition to a different kind of economy that will be driven by services and high value added manufacturing. Success in these areas is based on innovation.
Prior to the recent change in Prime Minister there was no great sense of confidence that the transition could be made without Australia going through a rough period with low or even perhaps negative economic growth. Part of the reset brought about by Malcolm Turnbull’s government has been to build confidence in Australia’s ability to compete and succeed in the emerging global economy whose features are being redrawn by waves of disruptive technological change, new businesses, new business models and new supply chains.
The innovation statement has been well received with the main quibbles being about its size compared to the opportunities and challenges ahead and the feeling that some are being left out – the statement is primarily perceived as being about start-ups and new business formation and heavily based on STEM skills which doesn’t leave much of a role for the humanities.
For the old hands there is a bit of sense of déjà vu. Haven’t we lived through a number of high profile innovation statements over the last 20 years but in some way the challenges remain the same. For example, the one put out by the Keating Government in December 1995 spoke about Australia adding value to the IP we create. Even more notable was the innovation statement of the Howard Government in January 2001 Backing Australia’s Ability which provided $2.9 billion over 5 years.
The question arises: what is different this time? Is there really something new going on or is this just another worthy effort that will be forgotten in 5 years?
The Innovation Statement
There is about $1.1 billion in initiatives over 4 years provided in the innovation statement. The initiatives are spread across 25 individual measures.
The National Innovation and Science Agenda focuses on four points:
As pointed out, the Agenda comes on top of the investment of around $9.7 billion in research and development in 2015-16.
The measures that have received the most media attention are those relating to start-ups. These range from new tax breaks for early stage investors who will receive a 20% non-refundable tax offset based on the amount of their investment as well as a capital gains exemption, to reform of the insolvency laws, to the establishment of two funds designed to assist start ups: the new $200 million CSIRO Innovation Fund and the new Biomedical Translation Fund to co-invest $250 million with the private sector.
Less attention has been given to the additional commitments for building world-class research infrastructure. These measures are important and give greater long term funding certainty. Over the next decade $520 million will be provided to the Australian Synchrotron, $294 million to the Square Kilometre Array radio telescope project while the National Collaborative Research Infrastructure Strategy will receive $1.5 billion.
Other measures involving financial commitments are included but arguably of greater importance are the changes that have been introduced in the governance of innovation. One of the key concerns has been the tendency for instability in support arrangements for innovation and science and the lack of real priority accorded to these areas. An important goal should be to ensure that all arms of government are singing from the same hymn sheet and that the music is not changed mid stream.
A Cabinet Committee for innovation and science will be established chaired by the Prime Minister. A new independent statutory authority, Innovation and Science Australia, is also being established supported by a chief executive officer accountable through the Industry Minister to the Cabinet Committee. One of its first jobs will be to review the R&D Tax Incentive to improve its effectiveness and integrity.
Importantly, the innovation statement makes clear that the Government will be open to adapting and changing course if things don’t work.
The Ghosts of Innovation Statements Past
Australia has had quite a number of innovation statements over the last 20 years or so. Rather more, if we take into account the introduction of the 150% R&D Tax Concession in 1985,the Cooperative Research Centres program in 1991 and various attempts to kick start a venture capital sector.
There has been a longstanding recognition that while Australia performs reasonably well in terms of its support for public sector research in the universities and bodies like CSIRO, the return on such investment when measured in terms of the creation of technology intensive businesses based on Australian developed ideas has been less impressive.
The 1995 Keating Government statement on innovation provided about $400 million over four years for a range of measures designed to strengthen Australia’s innovation and science capability. Like the recent innovation statement, the measures supported both the commercialisation of ideas and the science base itself. About $64 million was earmarked for major investments in science facilities. At the time the Australian government was spending about $3.5 billion on support for R&D.
Perhaps as a case of history repeating itself, the then leader of the Opposition claimed the Keating innovation statement was full of ideas stolen from Coalition policy. Perhaps in innovation policy there is something to be said for being a rapid adopter. It has considerable historical precedent.
The next major innovation statement came in January 2001 in the form of Backing Australia’s Ability delivered by the then Prime Minister John Howard. In the statement the government committed $2.9 billion over 5 years to a range of innovation and science initiatives.
The initiative for the statement came from the Innovation Summit held in 2000 in response to urging by the Business Council of Australia who at the time were seeking the restoration of the 150% R&D Tax Concession. While they did not get the answer they were looking for, the government did introduce a wide ranging set of spending commitments in innovation and science. One of the more important, accounting for $736 million, was the doubling in ARC grants to match the earlier decision to double NH&MRC grants.
Reflecting the increasing awareness of the importance of new developments in communications and IT for future economic growth, the National ICT Authority was established.
Two further innovation statements much closer to us in time should be mentioned. Both in their own ways reflected the thought that eco-systems are increasingly important to success.
First, the Gillard Government ‘s “A Plan for Australian Industry and Jobs – Industry and Innovation Statement” of February 2013 which set aside $1 billion for the establishment, amongst other things, of a number of industry precincts.
Second, the Abbott Government’s Industry Innovation and Competitiveness Agenda of October 2014 which allocated about $200 million to a number of measures including the establishment of 5 growth centres which was its centre piece. The language around the statement was in terms of improving collaboration between industry and researchers and lifting commercialisation.
The Business Council of Australia played an important role in preparing the ground for the growth centres initiative.
What is different this time?
While a case can be made that over an extended period the basic objectives of lifting Australia’s innovation performance and building the science base have remained, and hence a lot of the surrounding political rhetoric sounds similar, the reality is that the circumstances facing Australia and the global economy in which it is placed have changed a lot requiring policy settings themselves to change.
What are some of these realities to which policy makers have had to respond?
By and large, Australia has not been a leader in the formulation of policies for innovation and science. Individual initiatives have achieved international recognition (eg the CRC program) but on the whole these have been notable exceptions. As the globalization process has progressed so has Australians awareness of what other countries are doing in these fields. Notable examples in recent times have been the set of innovation policies introduced by the UK Government which have strong echoes in Australia’s recent decisions. The Growth Centres owe a lot to the Catapult Program and the tax breaks for early stage investors to the Seed Enterprise Investment Scheme.
Governments in Israel and Singapore have placed a huge emphasis on creating an environment supportive of start-ups. Again, Australian policy has drawn on their experiences as knowledge of them increased.
The potential impact that a more successful approach to encouraging start-ups can bring has been brought home by some spectacular examples such as that with Atlassian which have received very wide media exposure. Start-ups are no longer seen as an interesting but relatively small phenomenon. Much of the growth in the market value of listed enterprises in China is associated with companies like Baidu, Alibaba and Tencent – all IT based companies of recent origin.
Successful policy generally requires that it is running with the grain of economic developments rather than against it. Australia is now starting to see enough examples of successful tech-based start-ups to break through the recognition gap both of entrepreneurial inclined young people and parts of the capital market. A serious effort will be made to support the needed cultural change in terms of the toleration of the risk of failure. While the direction of earlier innovation statements was broadly right, important parts of the underpinnings for success were lacking. The innovation statement has the powerful advantage of building on underlying momentum and giving things a strong additional push.
It is not perhaps something the media has picked up on, but the fact that the Turnbull innovation statement includes important supporting governance arrangements is different from previous experience and gives greater confidence in steadier and more predictable policy making. Turning support on and off is highly disruptive.
People are always important and on this occasion it is notable that key people such as the Chief Scientist, Alan Finkel, the CEO of CSIRO, Larry Marshall, and the Chair of Innovation and Science Australia, Bill Ferris, all have a strong background in new business creation and financing.
All things considered, a case can be made that this time it may well indeed be different.
What lies Ahead?
Innovation and science are now seen on both sides of the political divide as crucial to the successful transition of the Australian economy and to lifting productivity. Hopefully that will result in a workable, if not a high, degree of bipartisanship.
The innovation statement makes it clear that close attention will need to paid to the initiatives that have been taken to ensure that any shortcomings are addressed and that initiatives that are failing to meet their objectives are closed down. As in most areas of policy, a more evidence-based approach is needed.
While the focus of this statement is on start-ups (although it is recognized that some important things have been done to give greater certainly to longer term investments in the research infrastructure), at the end of the day start-ups are by no means the whole innovation story. Attention will need to be continued to be directed to improving the innovation performance of existing businesses. Non science elements such as design should perhaps be given greater attention as they are in successful innovation based economies.
The innovation statement is a valuable start and a strong expression of direction. This is not to be underestimated as we know that industry policy is about 90% psychology. But it should not be seen as the last word on innovation and science, especially at a time of very raid change. More will almost certainly have to be done if Australia is to be globally competitive.
In a difficult fiscal environment there will no doubt be times when parts of government are tempted to ensure innovation and science programs bear there share of the savings burden. This will be a real test of the new governance arrangements and will be a real indicator of whether things this time really are different.
David Charles is a Director of Insight Economics. He was formerly Secretary of the Department of Industry and Commerce from 1985 to 1990. He co-founded the Allen Consulting Group in Melbourne.
One useful outcome from the Council of Australian Governments (COAG) meeting on 11 December, was its acknowledgement of the “emerging budgetary pressures across all levels of government, particularly in the health sector.” This acknowledgement must be the critical starting point for any serious consideration of tax reform.
Quite naturally it was equally acknowledged that government expenditures must be efficient. However, the understandings reached at both the Treasurers’ meeting and at COAG, seemed to be that action on the revenue side of government budgets could also not be avoided.
Prior to these two meetings the principal direction for tax reform under consideration seemed to be to increase the GST revenue by some combination of increased tax rates and/or base broadening by removing some of the presently untaxed expenditures. Interestingly the meetings agreed to widen the scope of the options to include:
The implications of each of these three strategies for raising additional revenue will be examined below.
State Government Revenue Raising Capacity
Many State taxes are inefficient and ideally would be removed. The States do, however, have two major tax bases – land taxes and payroll taxes – from which revenue can be efficiently raised without much if any damage to economic activity and development. This is because:
With a good deal of justification, the Australian Treasurer, Scott Morrison, argued that the States need to improve their revenue raising efforts with both these taxes before the Australian Government would agree to augment the States’ revenue further. In particular, the States have competed with each other to exempt businesses from their payroll tax and to lower the rates. As a result this tax is now raising much less revenue relative to wages than it used to when it was passed over to the States by the McMahon Government more than 40 years ago. In addition, the coverage of the State land taxes is typically very low, with most properties exempt, so again the States could do more to help themselves before asking the Australian Government to increase its revenue raising effort.
The GST
As I argued in my posting on this blog (dated 10 December), “Ultimately the problem for the Australian government in relying heavily on the GST to raise extra revenue is that [under present arrangements] the proceeds only flow to the States”. So if the Australian Government wants to share the benefits of that extra GST revenue it necessarily would have to make offsetting cuts to the other main form of financial transfers to the States – namely the tied grants paid to the States by the Australian Government. Other things being equal, the bigger the increase in the GST revenue passed over to the States, the bigger the likely cuts by the Australian Government in its tied grants.
For the most part, however, these tied grants are closely related to the Australian Government’s own responsibilities and reflect its own priorities. Furthermore, the politics are not straight forward either, as there would be many interest groups who would be most concerned if the Commonwealth were to withdraw from funding their preferences.
Indeed, a relatively recent and interesting example, of these problems occurred when the Keating Government agreed with the States on a separation of road funding responsibilities. Instead of the previous shared responsibility for road funding, under this reform the States became solely responsible for all road funding other than designated National Highways, which were the sole responsibility of the Commonwealth. Immediately the States started lobbying to have more of their roads transferred to the Commonwealth as designated national highways. Then shortly after the Government changed in 1996, the National Party succeeded in abandoning this separation of responsibilities so that it could get back into its traditional business of doling out money to rural constituencies for their roads.
In addition, the States have a further concern about their reliance on funding from the GST. This is because the GST has not proved to be the “growth” tax that was expected when it was introduced. First the coverage of the GST is just under half of total consumption, and household expenditure on the other excluded consumption items, notably private spending on health, education and financial services, is growing faster. Second, over the last decade household savings rates have increased (albeit from a zero base), and consequently household consumption expenditures have grown more slowly than incomes; although with currently falling incomes this might be about to change.
Sharing Income Tax and GST Revenues
Given these difficulties with relying heavily on an increase in the GST to remedy government budgets, it is perhaps not surprising that another revenue raising option was proposed to assist in meeting all governments’ future fiscal challenges. This latest strategy would involve:
On the face of it, this proposal represents a neat pragmatic solution to some of the various political problems involved in relying mainly on an increase in the GST to resolve future budget problems. In particular, it is easy to see why it would appeal to the States as it would seem to provide a stronger growth in their future revenue, while from the Australian Government’s point of view it would most probably require less reduction in its tied grants.
On the other hand, this strategy would involve for the first time in more than seventy years, two levels of government sharing the major sources of revenue – the principal taxes on expenditure and income.
This revenue sharing would completely contradict the principles of responsible and accountable government. It would most probably result in a return to the annual wrangle between the Australian Government and the States over their respective revenue shares. Furthermore, whenever there was a perceived deficiency in State government services, the States would be able to claim that they had insufficient revenue and needed a bigger share of either the GST or the income tax. In other words, the States would be able to argue that they should not be held accountable for poor State government services. Instead the States could blame the Australian Government on the grounds that the Australian Government was preventing State governments from accessing sufficient revenue.
Most importantly, if fiscal policy is to retain its effectiveness for counter-cyclical purposes the Australian government must retain its flexibility to unilaterally set and change the income tax rates – reducing them to ward off recessions and increasing them in a boom. Furthermore, with interest rates testing new lows there is a risk that monetary policy may be less effective in future and that reliance on fiscal policy will therefore need to increase; indeed the evidence from a number of countries is that monetary easing since the GFC has mainly resulted in increasing asset prices, but has not produced the hoped for increase in real activity.
In this context it also should be remembered that experience suggests that tax variations are much more effective in moderating fluctuations in economic activity than variations in government expenditures. Essentially history shows that consumers respond more quickly to variations in income tax, and that there are especially long lags before decisions to invest in more infrastructure start to impact on the economy. In addition, it is easier to make temporary variations in tax rates which can subsequently be reversed, whereas many form of government expenditure are difficult to reverse after the economy recovers.
The use of the income tax to moderate fluctuations in economic activity means that the revenue from this source is more variable than other revenue sources. Furthermore, this is still true even if tax rates are not varied, although in that case the variations in income tax revenue would be less.
A key issue would be whether the State budgets could cope with this amount of volatility in one of their key revenue sources. A risk with any sharing of income tax revenue is that the States could spend up in the boom years and return cap in hand to the Australian Government seeking extra revenue in the lean years. Of course, any development along these lines would be the opposite of what would be required by a counter-cyclical fiscal policy.
Conclusion
In brief, the options for the Australian Government and the States to share tax bases, and especially the income tax, would represent a triumph of pragmatism over principle. Such a triumph of pragmatism is not unknown in Australian policy development – indeed some may consider it part of the Australian policy genius.
In the present instance this pragmatism may help resolve some difficult political problems, but in terms of effective federalism arrangements it would represent a major step backwards. Not only would there be no clear assignment of many expenditure responsibilities, but if governments also share their revenue bases the accountability for financing all State government services would also be muddied.
It would be particularly strange for a Liberal Government to adopt revenue sharing along these lines, as historically the Liberals have been more concerned about separation of roles and responsibilities of the different level of government than Labor. And any national government must be concerned about any weakening of its capacity to meet one of its greatest responsibilities – to ensure economic stability and growth.
Thus effective tax reform would still seem to be some way off. The end result will almost certainly represent a compromise involving a mix of options, including measures that were not on the COAG agenda, such as broadening the income tax base by reducing concessions.
When people remember Gough Whitlam, few would identify him as an economic rationalist. Economics was not his primary interest and, partly because of the perceived urgency of implementing “the programme” after 23 years in opposition, partly because of the incompetence of some of his Ministers, the budget blew out excessively on his watch. Yet in terms of microeconomic reform his record was, in many ways, better than that of previous and subsequent Coalition governments. Even including all the reforms by the Hawke/Keating governments in the 1980s and 1990s, Whitlam’s 25 per cent tariff cut in 1973 remains the single greatest stand alone initiative to open the Australian economy to international competition.
A lesson from the past
Whitlam’s economically rational approach also spilled over into defence procurement. This is an area, as experience demonstrates, that provides spectacular opportunities for squandering public money, not least in the naval shipbuilding industry.
By the early 1970s, the Royal Australian Navy (RAN) needed to replace some obsolescent warships of British origin, many of which had been built at high cost and over excessive lengths of time in Australia’s government-owned shipyards. Defence’s preference was to design and build locally an Australian light destroyer, the DDL project. When the Whitlam government came to power, design work on the DDL had been going on for some years under the Coalition and the Navy was an enthusiastic supporter of the project.
While there would have been significant political benefits in endorsing the project, clearly the risks of a local design and build would have been high. The complexities of integrating a new platform with overseas sensors and weapons, even the less complex systems available in the 1970s, would have led to substantial risks. Building ships locally to an original design would have inevitably resulted in higher unit costs, even in an efficient shipyard, than purchasing a ship from a longer production line overseas. On the basis of the local shipyards’ demonstrated past performance, bringing the project in on time and on budget was highly unlikely.
In 1973, soon after coming to office, the Whitlam government considered the proposed DDL project. While recognising the need for a new acquisition, it also considered that there was no unique mission for a surface warship in the RAN that would justify the costs and risks of designing and building a new Australian platform. The government therefore rejected the DDL and told Defence to go away and look at overseas platforms. Grumpily, Defence came up with two options. The Navy liked the handsome British Type 42 destroyer platform but not its sensors and weapons systems. It approved of the US Oliver Hazard Perry class (FFG) systems and missiles but not the platform, which had a single propeller shaft and resembled a container ship. Typically, Defence sought to mix and match. It wanted the British platform with the US missiles and radars and an American 5-inch gun.
The Whitlam government faced Defence down again. It rejected the mix and match option as being excessively risky and an Australian build as not cost-effective. In 1974 it ordered the FFG ships with all their systems, to be built in the United States with no significant modifications. The Navy was not happy. The Perry design had been described huffily by Defence project staff as “a second rate escort that falls short of the DDL requirements on virtually every respect”.[1] But the government understood that the frigate would provide technological superiority in our region at low cost, with the Australian ships coming off a production run of over 50 vessels. The RAN did not require the world’s best frigate; it was unlikely to be confronting the Northern Red Banner Fleet in the Barents Sea.
In service, the FFGs have been successful. They were minimalist platforms that did the job, to the extent that subsequent governments decided to build two more ships locally (a decision that initially seemed disastrous until Transfield acquired the Williamstown shipyard from government and delivered them on time and on budget). They were also tough and durable. The Perry class USS Stark survived two hits from Exocet missiles, while the Type 42 HMS Sheffield, with significant aluminium in its platform, was destroyed by one. Critically, because they were not unique ships for which the RAN had parent navy responsibilities, through life support and maintenance, undertaken in Australia to US schedules, was cost effective.
More recent history
To clarify, through life support for the FFGs was cost-effective during their planned economic lives, but then Defence delayed the procurement process for their replacement, namely the air warfare destroyers (AWDs). Seriously bad decisions then raised their ugly head.
First, at a time when the US was retiring their Perry class FFGs, Australia decided on a unique major upgrade for its six ships, including improved sensors, modern systems, better anti-submarine weapons and vertically launched anti-air and anti-ship missiles. Awkwardly for those who believe we need to build ships locally in order to modify them, ADI (later Thales) in Sydney won this contract in competition with the Transfield shipyard in Williamstown that had very recently built the last two FFGs. The cost and timeline for the upgrade blew out substantially, with the modifications then being limited to four of the six ships. The other two FFGs were scrapped much earlier than intended. The cost ended up being $1.6 billion for four ships as against a budget of $1.266 billion for six, a blowout per ship of 90 per cent. Two ships short, they were also delivered two years late. In addition, there have been suggestions that the additional weight exceeds the ships’ design parameters, potentially creating stability problems.[2]
Secondly, following the successful local construction of the Anzac class frigates, the Howard government decided to procure the AWDs locally. Compared to the Anzac acquisition, the decision was a bad one for a number of reasons. First, there was no fixed price contract for the successful tenderer or any notion of specifying a similar cost to acquiring the ships offshore. Secondly and quite extraordinarily, while the Williamstown yard with its experienced workforce on the Anzac ships still in place was a tenderer, the contract was awarded to ASC in Adelaide that had never built a surface ship. The shipyard was dedicated to submarine maintenance and had no shipbuilding workforce. Thirdly, building three ships locally (as against ten Anzacs) was never going to be economic because of limited opportunities to exploit scale economies and learning curve benefits. Overall, if we had bought three larger and more capable Arleigh Burke ships off a 100 plus production run in the US, the RAN would already be deploying them and, rather than waiting for three smaller ships to be delivered three years late, the government would have banked significant budget savings.[3]
Lessons learnt
There are multiple lessons to be learned from these and other recent acquisition experiences. In particular:
Implications for the new submarine
On the basis of the above analysis, we need to consider the implications for Australia’s new submarine’s acquisition process. Currently, three broad proposals have recently been lodged by shipbuilders in France, Germany and Japan. These proposals are for a large conventional platform, unique to Australia, with a combat system and weapons systems sourced from the United States. The government intends to select one of these proposals in the near future to be taken forward in a detailed design.
In terms of the first implication above, the fundamental question is whether Australia needs to acquire a unique submarine platform to meet its requirement and discharge its mission. The only fairly detailed definition of the new submarine’s mission was contained in the 2009 Defence White Paper:
The Future Submarine will be capable of a range of tasks such as anti-ship and anti-submarine warfare; strategic strike; mine detection and mine-laying operations; intelligence collection; supporting special forces (including infiltration and exfiltration missions); and gathering battle space data in support of operations. [4](Page 70.)
Subsequently, the then Chief of Navy suggested that the main task of the new submarine was “sinking hostile ships and submarines” with “the South China Sea as the area of most interest”.[5] Overall, it seemed clear that one important role for the new submarine was power projection in waters far from home.
While this is an ambitious mission, particular for a middle power, it is by no means unique. All five of the permanent members of the UN Security Council would have a similar role for their submarines. Among western platforms, the power projection role in the South China Sea, although challenging, could be best discharged either by a Virginia class submarine from the US, an Astute from the UK or a Suffren boat from France. These are all nuclear submarines. While Australia would face some challenges in acquiring nuclear submarines, these are not insuperable. A nuclear submarine off these existing production lines may well be no more expensive than the unique conventional submarines under consideration and we would need fewer of them.
On the other hand, attempting to undertake this mission in a conventional submarine would be less effective and more dangerous. The submarine’s slow underwater speed and significant indiscretion rate would increase the risk of detection and destruction. The recent acquisition of nuclear attack submarines (SSNs) by China and India in our region suggest that any conventional boat operated by Australia would not enjoy technological superiority in the South China Sea. By the time the new Australian submarines are commissioned in ten or fifteen years time, both countries are likely to possess a fleet of SSNs, the more modern ones of which will be quieter and more efficient than the prototypes. This raises the awkward question of whether an Australian government would be willing to send young Australians into harm’s way in very expensive but technologically inadequate kit.
If the answer to this is “No” but the government remains unwilling to acquire nuclear submarines, then logic suggests that the mission needs to change. Specifically, the government could discard the power projection role and leave that task to a better-equipped ally. Forget discharging cruise missiles at a “major adversary” and scratch the idea of sinking ships in the South China Sea. This then leads to a sea denial role in the context of the defence of Australia, with additional intelligence gathering responsibilities. Would this require a unique platform? Again the answer is “No”. These tasks could be undertaken by existing conventional submarines available off the shelf from a number of shipbuilders, including all three of those in the design competition for Australia’s new submarine. One obvious candidate would be the existing Soryu class, which is larger than other available designs and, in its latest guise, takes advantage of advanced Japanese Lithium-ion technology.
If the government were to change the mission to sea denial and intelligence gathering, however, then it should first look at whether a submarine provides the most cost-effective means of fulfilling this role (see the third implication above). The capability of conventional submarines in the sea denial role is compromised by their slow speed, while to send a submarine to snoop off a neighbour’s shore is not necessarily the most cost-effective way of recording wireless transmissions overseas. By contrast, some of the RAAF’s fleet of modern aircraft, including the E-7A Wedgetail airborne early warning and control platform and, in the future, the P-8 Poseidon maritime patrol aircraft, have a potent capability in both sea denial and intelligence gathering.
Conclusions
In short, this analysis suggests three alternative ways forward for the new submarine:
None of these options requires a unique platform or merits an Australian build. Importantly, all three options offer significant savings compared to the current approach. Even if the SSN option were to be pursued (it would require difficult negotiations with the United States and assistance in maintaining the reactors), the overall cost would be significantly lower than buying 12 unique platforms with a mixture of systems, particularly if they were built in Australia.
All three options, however, would mean abandoning the current acquisition process. It is not too late to do that, but government would need to enter into an intensive process with some urgency to analyse the options in more detail. While strategic and technical military analysis is clearly required, it is of critical importance that these technical data should then be fed into an evaluation of risks, costs and potential pay-off for each option. It is not clear that such an approach, which would combine rigorous cost-benefit analysis with the investment appraisal disciplines of financial economics, is generally employed when Defence is assessing costly new acquisitions. Because Defence still has a single line budget appropriation (why?), its internal processes are often impenetrable to the keepers of the keys in Finance and Treasury.
Why I began this article by reference to Gough Whitlam and the proposed DDL acquisition was to suggest, in agreement with Laura Tingle, that the government has lost its corporate memory and its ability to learn lessons from previous approaches.[6] It seems remarkable, for example, that our defence acquisitions keep repeating the mistakes of the past, from mixing and matching systems inappropriately and accepting excessive risks, to allowing political judgements to override efficiency considerations and the proper regard for the public purse. In the new submarine acquisition, we seem even to have learned nothing from the Collins class procurement. In both cases the French, surely laughing up their elegant sleeves, have offered us a dumbed down version of an existing nuclear submarine, with the reactor replaced by an updated version of the same diesel-electric technology that powered Australia’s first submarine, AE1, on its epic voyage from the UK in 1913.
“We learn from history that we do not learn from history,” was Hegel’s gloomy prognosis. I prefer Santayana’s view, quoted by Laura Tingle, because it seems to offer a shred of hope: “Those who cannot remember the past are condemned to repeat it”.
Jon Stanford is a Director of Insight Economics. He had a significant career as an economist in the Australian Public Service, ultimately in the department of Prime Minister and Cabinet. He has worked extensively on economic and policy issues around defence procurement and naval shipbuilding.
[1] Jones, Peter (2001). “1972–1983: Towards Self-Reliance”, in Stevens, David. The Royal Australian Navy. The Australian Centenary History of Defence (vol III). South Melbourne, VIC: Oxford University Press, page 220.
[2] Defense Industry Daily (2014), http://www.defenseindustrydaily.com/australias-hazardous-frigate-upgrade-04586/
[3] In the early 2000s, the US offered to sell three second-hand Arleigh Burkes to Australia for a good price so as to avoid the risky upgrade to the FFGs. The RAN rejected this, just as previously it had, with more justification, rejected the offer of the four very large destroyers of the Kidd class.
[4] Australian Government (2009), Defending Australia in the Asia Pacific Century, Defence White Paper, Canberra, page 70.
[5] Peter Layton (2015), “Australia’s next submarine – will it be the Soryu”, Defence Today, Vol 11, No 4, page 8.
[6] Laura Tingle (2015), “Political Amnesia: How we forgot how to govern”, Quarterly Essay No. 60, Schwartz Media, Melbourne.
All informed opinion is that fiscal repair in Australia will require action on the revenue side as well as the expenditure side of the Budget. Accordingly at least some tax reform is essential and unavoidable.
In addition, reform of the taxation system and the future of federal- state relations are inevitably closely connected. First, possible changes to increase the GST revenue are central to many of the proposals to raise the necessary extra revenue and would represent a key element of tax reform more generally. Second, for very good reasons all the revenue from the GST is passed to the States, so changes to the GST not only require the agreement of the States, but these GST changes are likely to involve further changes in Federal-State relations.
Thus two meetings on Thursday and Friday of this week, the first of Treasurers and the second involving heads of Australian governments, loom as being particularly important for the future of federal-state relations and our economy. The focus will be on the options for improving all governments’ future fiscal positions, and while these meetings are unlikely to arrive at concrete decisions at this stage of the ‘reform’ process, they should set the direction for possible future reform.
In what follows I consider some of the issues that these meetings of Treasurers and Heads of Government will need to address.
What are the additional revenue options?
It is understood that at the request of the States, the Australian Treasury has been modelling various options to (i) increase the rate of the GST and/ or (ii) to broaden its coverage, and/or (iii) raise the Medicare Levy over time. As reported in the press, the maximum revenue raised could be as much as $45 billion annually or as little as $15 billion.
There is general agreement that the options to increase the revenue from the GST will only be adopted if adequate compensation is provided to the lower and middle income groups affected. This is, however, only one instance of the more general point that any assessment of these options for raising additional revenue cannot be divorced from what would be done with the very substantial revenue proceeds.
Who benefits from any additional revenue?
A critical problem in determining the purposes for which the additional revenue might be used is that under present laws all the extra revenue from changes to the GST would flow to the States, and the Commonwealth doesn’t benefit at all. Of course, the present assignment of the GST revenue to the States could be over-turned, but that would be a serious step backwards in federal-state relations. It would probably result in two levels of government sharing the same revenue source, and this would in turn most likely lead to a return to previous arguments over revenue shares, with the States being concerned that they were being short-changed by the Australian government. Essentially the accountability of which government was responsible for any poor performance would be further muddled by any shift in favour of revenue sharing.
Accordingly, if the States are to retain all the extra revenue from any increase in the GST, then other ways will have to be found for the Australian government to meet its own demands for extra revenue – particularly to:
A possible ‘reform’ package
In the series Fairness, Opportunity and Security I outlined a strategy that met these demands by the Australian government and the States to spend the extra revenue that could be expected from options to change the GST. The critical element was a large reduction in specific purpose payments to the States. In this way the States would have a net gain from their increase in GST revenue, but much of the increase in the GST revenue gain would be offset by the reduction in specific purpose payments from the Budget.
In principle, this reduction in specific purpose payments from the Australian Government to the states would reflect a rationalisation of the governments’ respective roles and responsibilities; the bigger the rationalisation, the bigger the reduction in the specific purpose payments. The States would no doubt welcome their increased autonomy, and it would be portrayed as a major reform of federal state relations, leading to less duplication and improved accountability. Nevertheless, another critical issue is how far the Australian government can withdraw from its present shared responsibilities with the States without jeopardising the achievement of objectives for which the Australian government is held accountable.
In particular, it will be difficult to make large reductions in these specific purpose payments without some withdrawal from school or hospital funding as in the current financial year schools and hospitals account for some $30 billion of the $50 billion total in tied grants from the Australian government to the States. However, can the Australian government afford to totally withdraw from schools policy when innovation, employment participation and the future growth of the economy are all influenced by the quality and quantity of education. Similarly, the Australian Government is directly responsible for funding the provision of medical services through Medicare, but if it were to withdraw from the funding of hospitals there would probably be less integration in the provision of health services when desirably there should be more. On the other hand, it would however be difficult to reduce the funding of specific purpose programs by a lot without reducing Australian government funding for education and health.
The Grattan Institute proposals
Earlier this week the Grattan Institute made an important contribution to this discussion when it released a new report proposing A GST Reform Package. This report provides a more solid base of quantitative information which allows us to get a better handle on the exact dimensions of the choice between tax reform and more devolution to the States on the one hand, and on the other hand, the retention of influence by the Australian Government that it might need to achieve its own objectives.
In brief the preferred option favoured by Grattan would increase the GST rate to 15 per cent, which is estimated to generate around an extra $27 billion in revenue. Grattan would then spend around 30 per cent of this extra revenue on welfare payments, and expects that this would leave most of the bottom 20 per cent of income earners better off. Second, Grattan would commit a further 30 per cent of additional revenue to income tax cuts which would allow the government to shave 2 to 2.5 per cent percentage points off the bottom two tax rates. Along with the higher welfare payments proposed, Grattan considers that tax cuts of this magnitude would fully offset the increase in GST for most low and middle income households – those earning up to $100,000 a year – while also providing some benefit for those further up the income distribution.
At first glance this seems like a very attractive package, noting that it could be further tinkered with, especially by adjusting the ways in which the extra GST revenue is raised. As previously foreshadowed, however, the problem is how does the Australian government get its hands on the funds necessary to increase the welfare payments and reduce the income tax as proposed, let alone meet its responsibilities for returning the Budget to surplus. Instead, the reality is that the States are expected to pocket all the extra $27 billion GST revenue which would be raised in this package.
Accordingly Grattan proposes that the Commonwealth reduce the amount of its tied grants to the States by $22 billion so that the States are only better off by around a net $5 billion. Whether that would be sufficient to buy the States support for this sort of package is a moot point, as $5 billion is well short of the $20 billion a year which has already been cut from their budgets for health and education. Furthermore, it would be almost impossible to cut $22 billion out of tied grants to the States without withdrawing from all tied grants other than for health and education, or alternatively making very deep cuts to the grants for health and/or education.
But leaving these two problems aside for the moment, a further issue is that the fiscal position of the Australian government is only improved by a net $22 billion under the Grattan proposals. Out of this $22 billion the Australian government would have to fund an increase in welfare payments ($8 billion) and cuts in tax rates ($8 billion) leaving only around $6 billion to improve its budget and meet any other commitments, including the more ambitious tax cuts which the government would no doubt prefer.
Conclusion
What this Grattan package demonstrates most clearly is first, that as always, the devil is in the detail. Second, tax reform to put the nation’s finances on a more sustainable footing is necessary, but equally it is not easy. In particular, this specific package by the Grattan Institute raises the question of whether the relatively small gains are worth the pain?
Ultimately the problem for the Australian government in relying heavily on the GST to raise extra revenue is that the proceeds only flow to the States. So if the Australian Government wants to get more of that extra revenue it has to cut its tied grants harder, but for the most part these are closely related to its own responsibilities and reflect its own priorities.
Michael Keating AC was formerly Secretary, Department of Finance and Secretary, Prime Minister and Cabinet. He was the joint editor of the policy series ‘Fairness, Opportunity and Security’ which was posted on this blog and published as a book by ATF.
In my recent blog ‘Rent-seekers in the motor industry‘ I drew attention to the successful lobbying by the motor industry to retain the $12,000 excise duty on used-car imports into Australia and the restriction that imports must be limited to a single second-hand vehicle.
To defend its position, the Chief Executive of the Federal Chamber of Automotive Industries has said that there have been instances in New Zealand where used-car imports were linked to the Japanese mafia, the Yakuza, and instances where radioactive cars from the Fukushima nuclear disaster found their way to Russia.
This type of scare-mongering really exposes the weakness of the case which is designed to protect business interests rather than give consumers lower prices and more choice in second-hand vehicles. The case espoused by the motor industry has descended into farce,
There is a profound disconnect between Australia’s international climate diplomacy and its national climate and energy policies.
The diplomacy could be cast in positive terms, on the surface at least.
During the first week of the climate negotiations in Paris, Australia displayed a preparedness to be flexible and serve as a broker of compromises in the negotiations over the draft Paris Agreement.
Australia has also agreed to support the inclusion of a temperature goal to limit global warming to 1.5℃, which is a matter very dear to the hearts of Pacific Island nations for whom climate change is a fundamental existential threat.
Australia will serve as co-chair (with South Africa) of the Green Climate Fund in 2016, which will be channelling money to the most vulnerable countries in the Pacific and elsewhere to enhance their preparedness for the harmful impacts arising from a much warmer world.
In his address on the opening day of the conference, Prime Minister Malcolm Turnbull announced that Australia would ratify the second commitment period of the Kyoto Protocol (Kyoto II) and commit A$200 million a year in climate finance going forward to 2020.
And on the sidelines of the negotiations, environment minister Greg Hunt announced that Australia would provide A$1.2 million towards the Coral Triangle Initiative for Coral Reefs, Fisheries and Security.
He also unveiled the Blue Carbon research project to explore how the protection of marine and coastal habitats could reduce emissions by storing carbon while also protecting biodiversity and fisheries.
Yet appearances can be deceiving. The A$200 million in annual climate finance comes from the aid budget and is not new or additional. Nor does it represent an enhanced commitment relative to previous contributions.
And it is widely acknowledged that an enhanced commitment to climate finance by rich countries to assist poor countries to develop clean energy and adapt to climate change will be central to garnering the support of developing countries to a Paris agreement.
Australia had every reason to ratify Kyoto II, since it had one of the lowest emissions targets in the developed world for 2020 (5% below 2000 levels).
Australia has also been able to benefit from greenhouse gas accounting rules (including a carry over of surplus emissions allowances from the first commitment period) that will enable achievement of this target at the same time as greenhouse emissions outside the land sector are set to increase by around 11% by 2020.
Contrast this with Germany, the UK and Denmark, which announced that they will cancel their surplus emission allowances and not carry them over for Kyoto II.
Australia’s climate diplomacy is therefore like a doughnut: a few some promising initiatives around the edges but nothing in the middle.
The missing middle, of course, is robust domestic targets and policies for 2020 and the post-2020 period.
If Australia was really serious about aiming for a more ambitious temperature target to stand firm with its neighbours in the Pacific, then it would have domestic politics that were commensurate with this ambition.
As the strong contingent of civil society organisations from Australia at COP21 have been quick to point out, Australia’s domestic policy settings, including significant fossil fuel subsidies, actively encourage fossil fuel production and use.
These subsidies, along with the government’s Emissions Reduction Fund, cast the burden on the public to pay for the cost of carbon pollution, rather than the polluters.
The first week of the negotiations included a string of announcements of new initiatives on divestment from fossil fuels and efforts to promote the phase out of fossil fuel subsidies. This included a communiqué on fossil fuel subsidy reform, signed by eight non-G20 countries (including New Zealand and Norway) and supported by France and the United States.
Australia declined to give its support to the communiqué. Turnbull said Australia would have supported it if it had been restricted to “inefficient” fossil fuel subsidies.
Yet economists describe fossil fuel subsides as perverse because they harm the economy (by propping up inefficient industries) and the environment, and soak up scarce public money that could be better spent elsewhere.
To make matters worse, the government’s decision to approve the giant Carmichael coal mine in Queensland will completely cancel out any of the modest goodwill provided by Australia’s diplomacy.
Germanwatch’s Climate Change Performance Index for 2015 ranked Australia 60th out of the 61 countries surveyed – second last to Saudi Arabia. This is down from 57th last year.
No amount of flexible and constructive climate diplomacy, or negotiating support for Pacific Island nations, can hide the fact that Australia’s domestic policies are part of the problem, rather than part of the solution.
Robyn Eckersley is Professor of Political Science, School of Social and Political Sciences, University of Melbourne. Robyn Eckersley is attending COP21 in Paris as an accredited observer.
Since he became Prime Minister, Malcolm Turnbull has committed himself to Tony Abbott’s policies on climate change. He supports Direct Action. He supports the Abbott government’s carbon reduction targets. At the Paris Conference, the Turnbull government reaffirmed its commitment to the fuel rebate subsidy for miners. It plans to double coal exports.
In his blog on 7 December 2009, after he was dumped as Leader of the Liberal Party, Malcolm Turnbull said:
‘So, as a humble back-bencher I am sure he [Tony Abbott] won’t complain if I tell a few home truths about the farce that the Coalition’s policy, or lack of policy, on climate change has descended into.
To replace dirty coal-fired power stations with cleaner gas-fired ones, or renewables like wind, let alone nuclear power or even coal-fired power with carbon capture and storage is all going to cost money.
To get farmers to change the way they manage their land, or plant trees and vegetation all costs money. Somebody has to pay.
So any suggestion that you can dramatically cut emissions without cost is, to use a favourite term of Mr Abbott “bullshit”. Moreover he knows it.
It is not possible to criticise the new Coalition policy on climate change because it does not exist.
As we are being blunt, the fact is that Tony and the people who put him in his job, do not want to do anything about climate change. They do not believe in human-caused global warning.
As Tony observed on one occasion “Climate change is crap”, or if you consider his mentor, Senator Minchin, the world is not warming, it’s cooling, and the climate change issue is part of a vast left-wing conspiracy to deindustrialise the world.
The Liberal Party is currently led by people whose conviction on climate change is that it is “crap” and you don’t need to do anything about it. Any policy that is announced will simply be a con, an environmental fig leave to cover a determination to do nothing.
Tony himself has in just four or five months publicly advocated the blocking of the Emissions Trading System, the passing of the ETS, the amending of the ETS, and if the amendments were satisfactory, passing it, and now the blocking of it. …
We have given our opponents the irrefutable, undeniable evidence that we cannot be trusted. ‘
Malcolm Turnbull is now taking to the Paris Conference, a policy on climate change that a few years ago he described as ‘crap’ and ‘a fraud’!
The worst possible outcome from the current review of Private Health Insurance would be changes that resulted in the best-resourced Primary Care being only available to those who have such insurance.
Lauraine McDonald in ‘itwire’ has just reported that ‘An NBN cost scandal has erupted with a new document revealing that copper for the Turnbull government’s hybrid MTM broadband network is going to cost ten times as much as the original estimate.’
John Menadue
See link to full article below.
In May and June of this year, Michael Keating and I edited a policy series ‘Fairness, Opportunity and Security’. This policy series has now been published in book form.
We were and remain concerned about the policy vacuum in Australia. We are anxious that the debate on policy reform continue.
An important contribution to this debate has now been made by a report ‘Australia’s Comparative Advantage’. This report was sponsored by the Australian Academy of the Humanities, The Australian Academy of Science, the Academy of Social Sciences in Australia, and the Australian Academy of Technological Sciences and Engineering. The authors of the report were Professor Glenn Withers, Dr Nitin Gupta, Ms Lyndal Curtis and Ms Natalie Larkins. In releasing the report, Professor Glenn Withers said ‘Australia has achieved much over recent decades but there are substantial challenges ahead, including the risk of economic slow-down with the ending of the mining investment boom.’
The conclusions of this report were as follows:
When considering what the future may bring, this report has found that thinking that tomorrow will be more of the same as today is not good enough. All possibilities need to be contemplated. In choosing how we face that unknown, and in some cases, unknowable future, a broad approach is necessary to make sure that the foundations with which we will face the new challenges are enhanced for whatever may come.
Australian progress faces challenges of great importance, but these are challenges that this project finds can be met. In the view of this report, building comparative advantage will require a commitment to ongoing institutional reform and to investing in our future capabilities as a nation. The report outlines packages of policies that are illustrative of what is required.
Natural advantage sectors will still contribute mightily, but they can usefully be matched by the equally promising created advantage in the traditional areas of economic advantage and emerging advantage opportunities in advanced manufacturing and service industries.
The report also concludes that institutions and culture must be configured to support this process, including through Australia’s rather distinctive deployment of major public-private partnership systems, and that better leadership, management and the encouragement of innovation and entrepreneurship will be a key to
success. In all the above-mentioned illustrations the importance and centrality of knowledge/ ideas would be explicitly recognised in the associated structures and policies.
The project has found evidence that the Australian public is increasingly willing to commit to and support such ways forward. Explanation and leadership is needed for this vision to realise its potential, but the Australian community has the level of sophistication to understand what is needed to inform and support that process.
Building comparative advantage is not simply addressing a list of policies or proposals but ensuring the framework of a broad-based foundational approach to the Australia of the future is understood and at the heart of decision- making and debate. Australia does well at many things but that is no guarantee of future success. If we want the country to be the best it can be, we will have to build that future.
This report affirms that pursuing both institutional changes in political, legal, market and cultural arrangements alongside investment in skills, infrastructure and innovation would see long-lasting benefits to growth and living standards. These initiatives would develop the national capacity to realise comparative advantage and compete well in a changing global environment. They would also enhance our ability to do this equitably and sustainably.
The full text of this report can be accessed from the link below:
http://www.acola.org.au/index.php/projects/securing-australia-s-future/project-1
John Menadue.
We see it almost every day in the media; rent-seekers extracting benefits for themselves through political influence and lobbying at the expense of a broader community. It has very little to do with markets. It is about political favours for the powerful.
We have just learned that the Australian Motor Industry Federation and the Federal Chamber of Automotive Industries have successfully lobbied the Australian government to continue restrictions on the imports of second-hand vehicles.
The Turnbull government accepted many of the recommendations of the Harper Review into competition policy, but it decided to continue Australia’s archaic system where there is a $12,000 specific customs duty on second-hand vehicles. Retailers are further restricted because they can only import a single second-hand vehicles at a time.
The Productivity Commission recommended that Australia should progressively relax these ‘parallel import restrictions’ and scrap the $12,000 excise duty straight away. It pointed out that New Zealand abolished these sorts of restrictions on importation of second-hand cars 25 years ago.
A large number of quality used cars could be imported for example from Japan where the ‘Sharken’ system stipulates that when the registration of a new car expires after five years, it must be rigorously tested at that time and every three years thereafter. To support their car manufacturers, Japanese governments encourage Japanese consumers to buy new cars and sell their old cars. That is what Sharken is designed to do. As a result there are a large number of quality second-hand cars on the market in Japan. But it is very hard for Australian retailers and consumers to access this market.
Australia’s restrictions on used car imports might have been justified to some degree to support our motor vehicle production industry. But the closure of our car manufacturing industry in two years’ time makes a continued restriction on second-hand vehicles even more indefensible.
The rent-seekers tell us that these import restrictions are necessary for safety and emission control reasons. But our own safety controls do address these issues. Furthermore, the emissions standards in many overseas vehicle manufacturing countries are more rigorous that ours.
In short, the actions of the Australian Motor Industry Federation and the Federal Chamber of Automotive Industries in opposing liberalization of second-hand vehicle imports is a clear example of the power of rent-seekers to extract wealth from consumers. And they are getting away with it. As a result, consumers will have to continue to pay a lot more for used cars and with much less choice.
Cost is a central issue in the ongoing debate about the best approach to building Australia’s National Broadband Network (NBN).
In 2013, the Coalition argued that Labor’s original all-fibre to the premises (FTTP) network could cost as much as A$94 billion. In the 2016 NBN Corporate plan the figure was revised down to A$74 billion to A$84 billion, while NBN Co’s multi technology mix (MTM), incorporating fibre to the node (FTTN) and upgraded hybrid fibre coax (HFC) was less costly, with a price tag of A$46 billion to A$56 billion.
Since the Coalition announced these numbers, Labor has said that, if elected, it will not go back to an all-FTTP network, but instead pursue a half-way option, in which the HFC component of the MTM is retained but FTTN, the slowest and most limited technology, is phased out.
It’s worth looking more closely at cost difference between FTTP and FTTN to see if the claimed A$84 billion to A$56 billion maximum cost comparison stacks up, and see where Labor’s new half-way solution sits.
The NBN 2016 Corporate Plan states that the average capital cost (capex) to connect a home or business to the NBN using FTTP is A$3,700. But the real cost for a FTTP connection is probably less than this.
The A$3,700 figure quoted by nbn co is based on old construction techniques that have been superseded in other parts of the world. The costs of rolling-out FTTP in New Zealand, for example, have been dropping steadily in recent years and will soon be A$2,900 per premises. For some reason, NBN Co has yet to acknowledge the lessons learned in New Zealand.
Let’s give NBN Co the benefit of the doubt and assume that the A$3,700 cost per premises for FTTP is correct. In comparison, the 2016 Corporate Plan states that the average capital cost for a FTTN connection is A$1,600, or A$2,100 less than FTTP.
For an upgraded hybrid-fibre-coax (HFC) connection the capital cost is A$1,100, or A$2,600 less. However, in light of recent revelations in a leaked document from NBN Co published by Fairfax indicating that it may be necessary to overbuild Optus’ HFC network, the savings offered by HFC will not be as good.
Using these numbers, it is easy to compare the capital costs of different networks.
At the end of construction, the MTM network will provide FTTN to 4.5 million premises and HFC to 4 million premises. Labor’s new approach is to replace as many as possible of these 4.5 million FTTN connections by FTTP. The maximum additional capital cost to do this would be 4.5 million times A$2,100, or A$9.5 billion. This figure corresponds to A$790 per premises averaged across all 12 million premises in Australia.
An all-FTTP network could be achieved by also replacing the HFC connections were by FTTP, the total additional capital cost of this hypothetical all-FTTP network would be A$19.9 billion, or A$1,658 per premises averaged across all premises.
Of course, it is necessary to also consider operational expenditure (opex) – the cost of running the network – and revenues from the network. These factors all contribute to the peak funding figures in the 2016 Corporate Plan.
Peak funding is the maximum cash outlay required before cash flow becomes positive. Peak funding is a useful measure of cost because it is a direct measure of the cash outlay required. But it is not necessarily a good measure of the cost of the network infrastructure or a good measure of the net financial cost/benefit to the Australian taxpayer.
Operational expenditure is a major issue for the MTM network because of factors including the need for new software management systems, the additional costs of maintaining the degrading copper wires in the FTTN network, and the cost of the electricity required to power the FTTN nodes located in suburban streets. Importantly, an FTTP network would incur none of these costs.
In fact, the leaked nbn co document mentioned earlier shows that the operational costs of FTTN network are 67% more than for FTTP, and the operational costs of HFC are 25% more. Over the lifetime of the network, this difference could amount to billions of dollars, greatly reducing the overall difference in costs between FTTN and FTTP.
Another factor that reduces the cost difference between the Coalition’s network and Labor’s new alternative is that a Labor’s FTTP/HFC network would be capable of generating higher revenues through the delivery of premium services that would not be achievable with a slower-speed FTTN network.
This is well documented by high-profile companies such as Ovum, which predicts FTTP services will drive the highest global growth rates for broadband revenues over the next five years, based on premium speeds of 100 Mbps and higher.
In light of all these factors, why is NBN Co’s cost estimate for a hypothetical FTTP network so large? The NBN Corporate plan provides no detailed information on its financial modelling, but it states that an all-FTTP network would take until 2026 to 2028 to complete.
If the timeframe was indeed as long as this, the revenue stream would be delayed. This could indeed lead to unrealistically large numbers for the peak funding cost of FTTP.
So where does the 2026 to 2028 timeframe come from? My guess is that NBN Co has simply extrapolated from the present rollout rate for FTTP, which has not increased much since 2013. One piece of supporting information comes from a Senate Estimates meeting, where NBN Co confirmed that its A$74-84 billion number was not for a “continued” FTTP network but for a “restart” from the current plan.
NBN Co waited until September this year to hire additional staff, increasing the number of employees from 3,400 to 4,500 to speed up the rollout of FTTN. If it had hired these additional staff in 2013 and focused on the FTTP rollout, the network could well have been completed by around 2020 or 2021.
Rod Tucker is Laureate Emeritus Professor, University of Melbourne. This article was first posted in The Conversation on 1 December 2015.
Australia’s Treasurer Scott Morrison has signalled his reform priority:
“I’m interested in talking to people who have ideas how we can get spending under control. We have a spending problem, not a revenue problem.”
There is plenty of money to be saved in roads. They cost Australians over $30 billion annually, but what does Australia see from all this spending? When major projects are independently assessed at all – which is infrequently – they often expose themselves as commercial and economic duds. As Dr Michael Keating and I explained in an earlier collaboration, this approach doesn’t add to national productivity – it creates conditions where it can drain away[i].
It is too much to expect transport and infrastructure ministers to worry about this. They tend to see their brief as building things: shovels in the ground and memorial plaques bring their own reward. As Treasurer, Morrison is held to a higher standard: he is the one who must shoulder much criticism when national economic growth and productivity slumps. It is in his interest to implement structural spending improvements in the roads portfolio, where others will not.
Doing so would save billions annually and drive renewed productivity in the sector.
The Australian government recently accepted the Harper competition review recommendations for roads. The prescription was for cost-reflective pricing and an end to levying vast, lazy fuel taxes and high vehicle registration charges.
Before Morrison implements this prospective but very complex work, he can make two important changes immediately to create a more fiscally-responsible and productive sector.
Morrison is the one doing the spending, so he should demand transparent business cases from major commercial road proposals seeking Commonwealth funds, to provide confidence that these projects represent responsible outlays of taxpayer gold. Economic benefit-cost ratios (BCRs) in the region of 1.5:1, for example, represent a perfectly fair basis for government to proceed upon – but only if that ratio is deemed solid.
The only way to vouch for a BCR’s solidity is to subject all business case assumptions to objective scrutiny. To date, this has been almost impossible. A standard tactic of transport project proponents seeking taxpayer funding has been to ‘redact’ their business case – make it highly confidential – such that often governments, much less the public, cannot satisfactorily see and test the assumptions that shape the headline BCR. Proponents secure redactions by claiming their business case contains sensitive and valuable intellectual property. This claim is usually highly overstated if not completely unfounded, but governments desperate to announce icon projects tend to acquiesce.
It is next to impossible to determine from a redacted business case what assumptions were brought to bear in developing a final BCR for the project. Most important are the revenue assumptions, where Morrison stands to waste the most taxpayer cash and bleed out economic productivity. After all, even for projects that are supposedly privately financed, the track record is that the government guarantees the risks, and the taxpayer is left holding the debt if the project fails.
Let us look to track records: commercial Australian tollways have tended to overstate revenue, making BCRs appear better propositions than they become in practice. Below is an independent expert analysis of Australian toll roads: the top horizontal line (1.00) represents the traffic forecasts that the proponents presumably employed to arrive at their project BCRs. The coloured lines show the forlorn actual tollway traffic levels across time:[ii]
Morrison would be buying a big fight by recommending that full project business case assumptions be published. Lobbyists might declare it will put the major project investment pipeline at risk. But only dud projects would truly have cause for concern: if the project has some merit anyway, Morrison would in effect be clearing out expensive undergrowth to let the better-conceived projects thrive. The market would soon adapt for the better.
If sounder projects delivered a nominal ten percent efficiency gain across the roads budget, this would save over $3 billion annually and add very reliably to productivity yield from this infrastructure class.
Future savings need not stop at $3 billion. Sydney’s Westconnex had an initial $10 billion budget which grew to over $14 billion and is supposedly now nearer $17 billion[iii]. Westconnex stated a BCR of 1.8:1[iv], which has presumably now dropped to only a very marginal 1.1:1, assuming that nothing else has changed except for the blow-out in costs. Unfortunately, however the assumptions have never been made public and in addition the appetite for tolls upon tolls has recently come under serious question[v]. How would this project have fared if subject to full business case transparency?
2. Incentivise a market for better road proposals
Morrison can shape a genuine market for those projects which do indeed display very productive BCRs, but which to date struggle to attract much market or budgetary attention.
He could instigate a ‘priority funding’ category for projects which displayed higher economic benefit-cost ratios (say, 4:1 and above). Any project which could demonstrate robust assumptions at this hurdle rate should be afforded immediate access to limited taxpayer funding.
Such projects exist. There are fine minds in the engineering and traffic planning sectors capable of produce extremely innovative and practical solutions:
Elsewhere, thousands of modest rural, regional and suburban road projects can prove enormously productive in BCR terms. In 2011 the author identified a business case for Infrastructure Australia to improve several hundred yards of road at Chullora in Sydney which cut off a national trucking route from Australia’s largest rail freight terminal: the overlooked problem was costing millions in additional freight costs every year – fixing it required less than a one-off cost of half a million dollars [ix]. Many such projects could be bundled together to form large, inherently productive and even commercial portfolios.
Why don’t these projects win out for funding already? It’s because they are rarely advanced. Usually they aren’t the largest or most profitable to build – Managed Motorways projects are in the low hundreds of millions, not billions. So long as billions flow without molestation to dubious mega projects, there will be little market self-interest in outlaying the considerable time, cost and effort to identify and bundle small but high-yielding projects together.
Bestowing priority funding status for high BCR projects would change this dynamic overnight and produce maximum bang for minimum bucks.
Very few politicians appear willing to stand up to the major road project builders and their lobby cheerleaders to demand more productive solutions. Will this change? Prime Minister Turnbull has called for boldness and innovation. His Treasurer can facilitate this in roads with the stroke of a pen. If not, more and more of the $30 billion roads budget will be consumed by low-rent civil engineering free-for-alls.
Taking bold but sound steps in roads can save billions. It will increase national productivity, rather than piss it up against the wall.
Luke Fraser is founder and principal of Juturna, a public policy firm specialised in road and rail and infrastructure investment reform. With Dr Michael Keating AC he co-authored the infrastructure contribution to the recently-launched Fairness, Opportunity and Security essay collection (ATF press). He is also a former national trucking industry CEO who in 2012 was appointed to the COAG Road Reform Board. He was for a time a chief of staff in the Howard government.
Notes
[i] See https://publish.pearlsandirritations.com/blog/?p=3834 published in May and reproduced in the book Fairness, Opportunity and Security ATF Press (2015)
[ii] http://www.robbain.com/Toll%20Roads.pdf site accessed 20 November 2015
[iii] http://www.smh.com.au/nsw/westconnex-motorway-cost-blows-out-by-14-billion-20151119-gl3isl.html site accessed 20 November 2015
[iv] http://infrastructureaustralia.gov.au/projects/files/NSW-WestConnex.pdf site accessed 20 November 2015.
[v] http://www.smh.com.au/nsw/sydney-motorists-unwilling-to-pay-for-more-toll-roads-study-20151110-gkv5b3.html accessed 25 November 2015
[vi] http://infrastructureaustralia.gov.au/projects/files/Qld-Gateway-Motorway-Upgrade-North.pdf site accessed 20 November 2015
[vii] http://infrastructureaustralia.gov.au/projects/files/SA_Northern_Connector_Brief.pdf site accessed 21 November 2015
[viii]http://infrastructureaustralia.gov.au/projects/files/VIC_Brief_National_Managed_Motorways_Program_VicProjects_2012.pdf site accessed 19 November 2015
[ix] http://infrastructureaustralia.gov.au/policy-publications/publications/files/Competition_Reform_of_the_Road_Sector.pdf p. 19 site accessed 23 November 2015
“The greatest trick the devil ever pulled was convincing the world he didn’t exist.”
Twenty years ago Kevin Spacey uttered this famous line about his alter ego, Keyser Söz, in The Usual Suspects. Keyser Söz isn’t climate change, but he might as well be.
Since the film was released an inordinate amount of money has been spent to trick the world that human-induced climate change doesn’t exist.
Recent data from the CSIRO suggests the ‘trick’ is yet to be completely foiled in Australia. Although almost 80 percent of people believe climate change is occurring, every second person routinely changes their mind and there is considerable divergence on whether human activity is a causal factor.
Thankfully, someone who requires no more convincing is Mark Carney, the Canadian Governor of the Bank of England.
“There is a growing international consensus that climate change is unequivocal,” Carney said in September.
“Human drivers are judged extremely likely to have been the dominant cause of global warming since the mid-20th century.”
Carney, like his Chief Economist, Andy Haldane, is what I call an unusual suspect, someone who looks beyond the parapet and leads on an issue when we don’t expect them to.
Think doctors and nurses on children in detention and sporting heroes like David Pocock on marriage equality.
Although we might deem these interventions ‘unusual’ given their infrequency, they can be perfectly natural for the individual speaking out. Often they are based on experience or expertise.
This makes unusual suspects particularly insightful, and especially powerful.
Carney’s incursion into the climate change debate shouldn’t be taken lightly. He also heads up the global Financial Stability Board, established after the Global Financial Crisis.
It was no coincidence Carney gave his speech at Lloyd’s of London.
Insurers know full well the rising cost of weather-related events, aggravated by climate change, from around $10 billion per year in the 1980s to $50 billion today. These losses, Carney conceded, will “pale in significance” to those on the horizon when we consider “broader global impacts on property, migration and political stability, as well as food and water security”.
Carney and Haldane argue the physical, liability and transition risks posed by climate change threaten financial stability.
They are progressives amongst a hitherto conservative central banking set.
Haldane in particular has bemoaned “quarterly capitalism”, which sees public companies over-discounting future income streams by 5-10 percent per year.
He believes “shareholder short-termism may have had material costs for the economy, as well as for individual companies, by constraining investment”.
Haldane is not alone. Larry Fink, Chairman and CEO of BlackRock, wrote to S&P 500 CEOs in April, accusing them of prioritising actions to deliver immediate returns and “underinvesting in innovation, skilled workforces or essential capital expenditures necessary to sustain long-term growth”.
Where are Australia’s unusual suspects in business and finance?
One would find it difficult to locate seminal speeches on climate change and quarterly capitalism by our central bankers or the Business Council of Australia
Much has been made of our tepid growth outlook. Reserve Bank Governor Glenn Stevens challenged the National Reform Summit to ask: “how do we generate more growth? Not temporary, flash in-the-pan growth, but sustainable growth”.
The adjective — sustainable — is key. Focusing on growth at all costs risks missing the wood for the trees. To engineer sustainable growth, one requires a sustainable economy. And that is what Australia lacks most of all.
It is a shame, because sustainability is in Australia’s DNA.
In fact, in 2011, then Treasury Secretary Martin Parkinson told us “the theme of sustainability will need to shape the approach to policy development of this generation”.
Parkinson was and remains spot on: his focus was on how each generation could bequeath to the next a productive base for sustainable wellbeing at least as large as the stock of capital inherited.
How shortsighted it was for one of our best unusual suspects to be dumped by the Abbott government.
His likely reemergence as head of the Department of Prime Minister and Cabinet is timely.
At his alma mater, Princeton, in September, Parkinson echoed Carney by saying company boards and financial market regulators give scant attention to climate change risks. Equally absent was examination of the “knock-on effects to macroeconomic stability of falling demand for carbon-intensive exports”.
Accelerating Australia’s transition to a sustainable economy will require those in business, finance, government and civil society to embrace unusual suspects on climate change and sustainability as the new normal, not the exception. If anyone can do this knitting, it’s Parkinson. Welcome back.
Travers McLeod is Chief Executive of the Centre for Policy Development. This article was first published in the Huffington Post on 26 November 2015.
Despite promising to keep Medicare Locals, the Abbott government abolished the fledgling organisations after it took office.
Even when it had no clear policies or plans to replace them, the Abbott government seemed determined to undo many of the initiatives of the previous Labor government. This was certainly the case in relation to primary health care.
In 2008, the then Labor government established the National Health and Hospital Reform Commission(link is external) (NHHRC) to conduct a comprehensive review of Australia’s health system. The review provided the basis for the National Health Reform Agreement (NHRA) signed by the Australian government and the states and territories in August 2011. The reforms set out in the NHRA had three main objectives:
The establishment of 61 Medicare Locals across Australia was one of the key initiatives taken to address these objectives.These regional structures aimed to strengthen the primary care system (and thereby relieve pressure on hospitals and other acute providers) by integrating Commonwealth and state government health planning and service delivery and access.
Medicare Locals were non-profit companies selected after a competitive application process and funded largely by the Commonwealth with $1.8 billion for the period 2011–12 to 2015–16. While the Commonwealth funding deed specified program schedules and reporting requirements, Medicare Locals were provided with considerable scope to arrange their structure, operations and relationships to reflect their local health environment.
To provide this focus on primary care, Medicare Locals were required “to work with the full spectrum of general practice, allied health and community health care providers and improve access to care and drive integration between services.” They established collaboration with health care services and other community organisations in their region to develop strategies to meet the overall primary health care needs of their communities. Considerable effort was made to ensure that general practice had a central role in the work of Medicare Locals – with varying effectiveness.
Medicare Locals worked at a regional level with state and local government in the planning of primary health care services and in the linking of these services with Local Hospital Networks and aged care programs to deliver improved integration and effective transitions for patients across the entire health care system.
The Medicare Locals program was a contentious one, not just because it was a Labor government initiative, but many GPs saw it as a threat to their primacy in their local primary care market and saw the regional health planning activities of the Medicare Locals as an unnecessary additional layer of bureaucracy. This negative view was reinforced by the AMA, the doctors’ union, that lobbied the Coalition Opposition on the basis of the perceived threat to the GP small businesses. For this reason, the Coalition went to the 2013 election with a health policy that included brief mention of Medicare Locals as follows: “We will also review the Medicare Locals structure to ensure that funding is being spent as effectively as possible to support frontline services rather than administration.” However, the then Opposition Leader, Tony Abbott, made a promise that no Medicare Locals would be closed should the Coalition form government.
About a month after coming into office, the new Minister for Health, Peter Dutton, announced a review(link is external) of Medicare Locals to be conducted by Professor John Horvath. The review was aimed at “reducing waste and spending on administration and bureaucracy, so that greater investment can be made in services that directly benefit patients and support health professionals who deliver those services to patients.” Comments from selected “stakeholders” were invited.
Professor Horvath, previously Chief Medical Officer, was assisted in the review by two consulting firms: Ernst & Young provided advice on the current operations of Medicare Locals and future structure and governance options, and Deloitte Touche Tohmatsu (Deloitte), conducted an assessment of their financial performance and compliance to their Deed.
The conduct of the review attracted substantial criticism, particularly for its lack of transparency. A Senate committee subsequently reported(link is external) that it had not been able to obtain much definitive information about the process and methodology used to conduct the review.
More than 270 submissions were received, indicating a high level of interest in the review, but none was made available by the Department of Health or as supporting documents with the review as is the usual case. Horvath advised that he “personally conducted” interviews with key stakeholders but did not identify who they were. A small number of Medicare Locals were asked for input to the review but were restricted in the amount of information they could provide.
It is understood that the Deloitte audit involved what the Department of Health called “a basic review” of the 2012–13 operations of the Medicare Locals functioning at that time, with a more considered audit of six of the 61 Medicare Locals. As most Medicare Locals had only just begun operating (setting up structures, employing staff, developing IT systems, etc.), it is not surprising that their audited financial and other achievements were not substantial, and the auditors were not interested in the future plans of the Medicare Locals.
The review was completed in March 2014 and was highly critical of the performance of the Medicare Locals. Itrecommended(link is external) that the recently established Medicare Local system (one third of the Medicare Locals were only established as from July 2012) be replaced with a system comprising a smaller number of regional organisations called Primary Health Organisations.
The Senate committee referred to above reported: “With limited information available publicly, and no detailed discussion of methodology in the Review report, it is difficult to understand the Review’s recommendations. Similarly, without the transparency that would have been achieved by the publication of the consultancy reports and the 270 submissions, the Review’s assertions that the Medicare Locals are ‘flawed’ cannot be tested.” The Senate Committee also stated that it could not reconcile the positive evidence it heard of the progress and achievements of Medicare Locals with the highly critical and negative findings of Horvath’s review of the work of the Medicare Locals.
Notwithstandinga clear public statement by Tony Abbott that no Medicare Locals would be closed should the Coalition form government, when his government brought down the 2014-15 Budget in May 2014 it was announced that all Medicare Locals would cease operation on 30 June 2015 and a new network of Primary Health Networks(link is external) (PHNs) would be established.
There have been substantial costs incurred in the closure of the 61newly established Medicare Locals, both financial and in terms of disruption or termination of valuable health services. In a relatively short time, boards had been established, staff had been recruited, premises and operating resources were acquired, relationships and collaborations established with local health organisations, and services and programs initiated. On the basis of government commitments, the Medicare Locals had entered into contracts, leases and employment obligations.
The costs of winding up the Medicare Locals have been estimated at between $112 million to $200 million. The Health Department admitted that closing Medicare Locals would cost $112 million but refused a Freedom of Information request for details of this estimate claiming it would not be in the public interest to release these figures because it could jeopardise “its good relationship with Medicare Locals.” However, many Medicare Locals showed no reluctance to publicly announce their wind up costs at the Senate Committee hearing. The Barwon Medicare Local estimated their costs at $2 million; the North Adelaide Medicare Local’s estimated costs were $2.2 million.
Skilled, and often very scarce, staff were lost as they became aware of the uncertainty of their future employment. These staff losses were felt most keenly in non-metropolitan areas where health workers are often difficult to find.
Perhaps more crucially, many highly needed health services that had been recently begun were terminated.Although in their early stage of operation, Medicare Locals had established or funded a range of vital services, made important advances in population health, identified and filled key gaps in services, and begun the critical task of integrating primary care with hospital services. This momentum was lost and many communities lost the gains made. Furthermore, key health staff were lost, a particularly important factor in rural and remote areas.
The Department of Health then announced that the new PHNs would be selected on the basis of a public tender process so that the new organisations could begin operations on 1 July 2015. This tender process was very poorly managed by the Department.
The notice of tender for the PHN Program was issued on 28 November 2014, almost a month after the previously advised scheduled release date. The tender period was very short and conducted over the Christmas–New Year period with tenders to be submitted by 28 January 2015.This was an absurdly short time for major organisational relationships to be established and business structures and financial decisions to be made, particularly as the minister encouraged new private sector interests to participate.
Although broad guidelines were provided to potential tenderers at the start of the process, major decisions and criteria such as the geographic boundaries of the proposed PHNs were drip fed to interested tenderers as the tenders were being prepared.
State government officials advised that there was very little consultation with the key state health agencies to recognise and capitalise on existing health planning and coordination bodies.
Information meetings for prospective tenderers were conducted in each state by Department of Health officials but the information provided was no more than that which already available on the Department’s website. The Department even refused to provide notes of the meetings or lists of attendees (which would have been of assistance to facilitate collaboration in the preparation of tenders).
Horvarth’s review criticised Medicare Locals for focussing too much on service delivery, not entirely coincidentally a concern of GPs and other providers. His report recommended that PHNs “should only provide services where there is demonstrable market failure, significant economies of scale or absence of services”. However, he did not define “market failure” and the Department clearly had difficulty in providing potential tenderers any reasonable clarity on this matter. This certainly made the preparation of submissions very difficult, especially for tenderers in rural and regional areas where Medicare Locals had provided services to meet significant gaps in services.
In summary, the tender process was very deficient. The Senate Committee noted the confusion surrounding the tender process and considered “flaws in the government’s PHN tender process raises doubts regarding any outcome of the tender process.”
It is not surprising that about this time a poll of more than 1100 doctors across Australia conducted by the AMA declared the Minister for Health, Peter Dutton MP, the worst Minister for Health for 35 years.
In April 2015 the Commonwealth government announced that 31 PHNs would be funded as from 1 July 2015. They would be required to establish Clinical Councils involving GPs, and Consumer Advisory Committees. Announcing the successful bidders, the Minister of Health, Sussan Ley, said the new PHNs would replace “Labor’s flawed Medicare Local system,” yet almost all PHNs selected (24 of the 28 PHNs) are either consortia of former Medicare Locals or have a Medicare Local as the lead applicant.
The new PHNs will be responsible for populations and geographic areas that are much larger than those of the Medicare Locals. (For example, one PHN will now be responsible for all of Western Australia except the Perth metropolitan area.) Medicare Locals had an average population of 355,000; PHNs will service an average population of 738,000. Six PHNs will service populations of more than one million. Many health experts doubt the effectiveness and efficiency of such very large organisations, citing the failure of the NSW government’s establishment of mega health services.
The substantial costs of establishing these new organisations are not known and it will be interesting to discover their operating costs when their first financial reports are made.
The concerns of the Senate Committee that the inadequate Horvarth review and the Department’s inept tender process could lead to a poor result appear to be justified. Now, several months after the PHNs were formally established, there has been little progress in developing any useful operations. Many in the health system are of the view that the whole exercise is a very expensive ideological move that, despite very substantial financial resources and lengthy disruption and dislocation, may not achieve the results that the fledgling Medicare Locals were beginning to realise.
John Thompson is an economist with experience in primary health. This article was first published in Australian Policy Online on 23 November 2015.
The sound of an incumbent lobbying has the grating element of petulant mewling. When the incumbent is a state owned enterprise that is evoking arguments about net neutrality, then it’s time to ask the “cui bono?” or “to whose profit?” question. After all, the term “network neutrality” can be best summed up as a line of argument use by large businesses in their lobbying.
In this case, it was the chair of the National Broadband Network Company, a business that likes to be known by its lower case initials nbn, that was flying the net neutrality kite. Ziggy Switkowski argued that it might be time to think about who should bear the cost of transporting streaming video from companies such as Netflix, Presto and Stan. Specifically, should the internet service provider (ISP) be able to charge Netflix and others for some of the carriage costs that it incurs? Ziggy also mentioned that access to nbn’s network might be more expensive to smaller ISPs.
This might be a reasonable question to ask. The speech was on 16 November and attracted comments from the electronic trade press on the day and was covered by Fairfax on 23 November. Of itself, this suggests that nbn wants the question asked. However, the issue has much less to do with net neutrality that it does with the Chair of nbn seeking to change the scope of the company’s business. nbn is constrained by the shareholder ministers’ wishes expressed in a Statement of Expectations and its regulatory constraints which are imposed by law and nbn’s own Special Access Undertaking, that it gave to the ACCC. These assume that retail providers connect to nbn’s network at one or more of the 121 points of interconnection to nbn’s network. In doing so, the retail provider pays a two part tariff reflecting both the connection bit rate and the volume. The volume component is the Connectivity Virtual Circuit (CVC). This is a pure pricing construct, as there is no underlying cost for the CVC.
The problem for Ziggy is that Australian internet users, in common with internet users all over the world, want to download more content. In doing so, they make the interconnection to nbn’s network look increasingly expensive at no additional cost to nbn. However, Ziggy’s argument on network neutrality harks back to an older era. For a start, each of the major providers of content pay for their own carriage across the Pacific. ISPs can interconnect with Netflix, Google (for YouTube) and Facebook in Sydney or Melbourne. Second, there are extensive content distribution networks to deliver the content closer to the points of interconnection and the use of these networks is paid for by the content providers. Netflix also offers ISPs the option of a no cost cache if they generate a great deal of traffic to a particular area. This Netflix Open Connect Appliance could logically sit at each of nbn’s points of interconnection (on the customer side of the CVC toll point) and Ziggy’s network neutrality issue would be resolved.
But nbn actually wants to change its operating environment by competing with existing infrastructure providers. The argument that the smallest ISPs cannot afford to connect at every interconnection point sounds like a problem. It is not. The large infrastructure providers offer carriage services to the ISPs on a wholesale basis. However, the effect of this is also to magnify the nbn’s odd CVC pricing arrangements. Instead of letting private sector competitors provide services, the state owned enterprise would rather provide the carriage itself. This has the convenient effect of masking the CVC problem and the inconvenient consequence of lessening competition among private sector actors.
The concept of competitive neutrality, with its origins in NSW state policy of the late eighties, its codification as a consequence of the Hilmer Review in 1993 and its role as the centrepiece of the proposals of the Harper Review last year, is a critical part of competition policy in Australia. If a state owned enterprise in another country argued that consumer demand was driving its actions in contradiction to the principles of competitive neutrality, Australian businesses would rightly complain. Using the the thin veil of network neutrality to try to justify breaching the principle when the solution to the problem is for nbn to change its pricing approach is not easily forgivable. Perhaps, like the album by David Bowie’s alter ego “Ziggy Stardust”, this line of argument should be released once and not be repeated.
Dr Rob Nicholls is Lecturer, School of Taxation and Business Law, UNSW Business School.
19 November 2015
Hon Sussan Ley M.P.,
Minister for Health,
Parliament House,
ACT 2600
Dear Minister
(I have signed this letter on my behalf and also on behalf of the people listed below. I will be posting this ‘open letter’ on my blog early next week.)
We are pleased to see that you are canvassing community and expert views on private health insurance.
In discussing the community survey, recently on the ABC Breakfast Program, you said “We support the public system for those who can’t afford private health”.
That is a long way from the idea of universal mutual support that has underpinned Medicare and public hospital arrangements. It assumes, incorrectly, that private health insurance, and the associated subsidised access to private hospitals, is something Australians see as desirable if only they could afford it.
As you know, about half of Australians do not hold private health insurance. Many are driven to hold it by the Medicare Levy Surcharge – a coercive instrument that has little to do with choice. You would also be aware that 200 000 taxpayers pay the surcharge, rather than holding private insurance, even though almost all of them would be financially better off taking the cheapest hospital cover.
For many, the main attraction of public hospitals is not that they are “free”, but rather that they offer a high standard of care. Most importantly the funding system for public hospitals, unlike the funding for private hospitals, does not carry an incentive for over-servicing. There is growing community awareness of the risks of over-diagnosis and of over-servicing.
Some others, particularly older wealthy people whose income is below the MLS threshold, do the sums and work out that their best bet is to draw on their savings to finance any needed private hospitalisation, secure in the knowledge that if they need acute care they are served by public hospitals. In doing this they miss out on the subsidies, the benefits of which are go to pay for high administrative costs and the cross-subsidies associated with adverse selection. Thanks in part to superannuation, households with people in the 65-74 age range, have on average $500 000 in financial assets.
It is ironic that, in spite of your Party’s commitment to self-reliance, those who pay for their own private hospitalisation, or who pay their own dental bills, receive no support, while those who hand over responsibility to insurance corporations receive a 30 per cent subsidy or a generous tax incentive in the form of exemption from the MLS.
Then there are those community-minded people who value the idea of sharing their health care expenses with other Australians. They are morally repulsed by the idea of being corralled into the “gated community” of private health insurance. Also some people, aware of the way “charity” systems inevitably degenerate, see it as important that people with means who hold political influence have a stake in using and maintaining a high standard public hospital system.
You, and your fellow health ministers in the states and territories, fund and operate an excellent public hospital system. We hope you take pride in a public service that serves all Australians so well, and do not let it degenerate into a charity system. A way to prevent such degeneration would be to remove private hospitals’ de facto dependence on private insurance, and to bring them into the same funding arrangements as public hospitals, thus allowing them to provide the same high-standard of integrated care as public hospitals, allowing for remuneration models other than individual fee-for-service, and abolishing any suggestion that Australia has two health care systems – one for the affluent and one for those who are less fortunate.
Yours sincerely,
John Menadue
Kerry Goulston, Emeritus Professor, Medicine, USyd
Ian McAuley, Adjunct Lecturer, Canberra University
Jennifer Doggett, Health Consultant,
Stephen Leeder, Emeritus Professor of Public Health and Community Medicine, USyd.
Karen Willis, Associate Dean, Learning & Teaching, Faculty of Health Sciences, ACU
Arthur Chesterfield-Evans, Medical Practitioner and anti-tobacco activist
Sebastian Rosenberg, Senior Lecturer, Brain and Mind Centre, USYD
Jill White, Professor of Nursing and Midwifery, USYD
John Dwyer, Emeritus Professor of Medicine, UNSW
Fiona Armstrong, Executive Director, Climate and Health Alliance
Tony McBride, President, Australian Health Care Reform Alliance
Tim Woodruff, Vice President, Doctors’ Reform Society
The Abbott government established a Royal Commission to harass trade unions and in the process to damage the ALP. But what we are hearing in this Royal Commission is really small beer by some union hacks. It is small scale compared with the massive tax avoidance by multinational companies in Australia that is being revealed.
Yet the government has refused to establish a Royal Commission to examine the activities of these multinationals who are depriving Australia of billions of dollars of tax revenue. A Royal Commission would be very useful to flush out this very serious national problem.
The government has also refused to establish a Royal Commission into large-scale financial advising scandals by the Commonwealth Bank and other financial institutions.
In the SMH on November 18, Michael West has drawn attention to the government’s attempts to prevent exposure of activities by high income earners. Michael West said
‘last week, when two amendments proposed by the Senate to the government’s multinational tax reform bill were unceremoniously dumped by the government the next day. … So determined was the government to help billionaires and multinationals conceal their tax affairs that it killed its own bill. The first amendment, forcing multinationals to file proper (General Purpose) financial statements was to have thrown some light on their inter-company loans and other dealings with offshore associates designed to rip millions out before tax could be paid. The second was the preposterous “kidnapping” amendment which would have ensured greater transparency by billionaires. Both thrown out; the whole bill nixed, presumably after some 11th hour desperate lobbying by powerful vested interests.’
John Menadue.
For Michael West’s full article see link below:
In today’s health care debates around the centrality of primary care, moving towards patient-centred medical homes, improving care coordination for people with chronic illnesses and whether private health insurance provides value for money, there is one element that is almost always missing – the role and the costs of specialist services.
In 2014 over 28 million specialist services were billed to Medicare and 21 million of these were for out-of-hospital services. Only 30% of these services were bulk billed, and the average out-of-pocket cost for the remaining 70% of services was $70.89. However gaps of several hundred dollars are not uncommon.
Specialist fees are the main driver of Medicare out-of-pocket costs and the main reason why people access the various Medicare safety nets (Extended Medicare Safety Net, the Original Medicare Safety Net and the Greatest Permissible Gap measure).
The Government has moved to make changes to the Medicare safety nets in the name of ‘simplification’ and the Health Insurance Amendment (Safety Net) Bill 2015 is currently before the Senate where it has been sent to the Community Affairs Committee for review.
Reforms to the Medicare safety nets are long overdue. There is considerable evidence that the current arrangements are inequitable, do not benefit those with the greatest need, and continue to be inflationary, despite legislative tweeks. This has led to increasing economic pressures on patients from their out-of-pocket costs with consequences for their health outcomes and quality of life. There are also pressures on hospital budgets from preventable admissions that can result when patients skip specialist appointments and fail to comply with treatment regimes because of cost.
As federal parliament considers the new safety net legislation, it is crucial to ensure that this does not have the unintended consequences that were inherent in the Extended Medicare Safety Net (EMSN). One such consequence was that the EMSN actually increased the ability of specialists to charge higher fees, particularly in areas such as obstetrics and assisted-reproductive technology services. In 2009 it was estimated that for every dollar the government spent on the safety net, only 57 cents went towards reducing patients’ costs and the remainder went towards increased doctor fees.
Preventing such problems will require an informed study of the impact of specialist fees and how specialists are likely to respond to efforts to limit reimbursements to patients of fees that are in excess of the Medicare Benefits Schedule (MBS). As it stands there is very little publicly available information in this area. Considerable work was done on a relative value study in the 1990s (regrettably with no outcomes) and the specialist medical colleges presumably have data from their members, but the Department of Health has shown no inclination to analyse their data or to make it available to academic centres for such work.
Medicare data for the June quarter 2015 show the following:
Over the past decade there have been some interesting changes in these figures that tell a story of policy and community pressures and influences.
Although the average bulk billing rate for specialist services delivered out of hospital has barely changed, the average out-of-pocket cost has more than doubled (from $32.66 to $70.89). For individual specialties there have been some dramatic changes. For example, the bulk billing rate for obstetrics, currently 51.5%, was only 21.8% in the June quarter of 2005. We can assume that the increase in bulk billing is due to the increases in Medicare reimbursements that were made as part of an effort to tackling the inappropriate use of the ESMN. But the bad news is that those obstetricians who don’t bulk bill have continued to increase their fees and the patient’s average contribution has risen from $51.75 in 2005 to $247.79 today. Moreover, my previous work on Medicare obstetric costs highlights that when loophole is closed, obstetricians look to shift their costs around between capped and uncapped and outpatient and inpatient billing items.
Specialists who work in radiotherapy and nuclear medicine have also changed their billing behaviours over the past decade. While bulk billing rates have increased impressively from 13.3% in 2005 to 68.5 % in June 2015, presumably in response to government agreements and legislation, average out-of-pocket costs for patients who are not bulk billed have more than doubled, from $16.33 to $38.74.
It’s important to think what the growing costs to see a specialist mean for patients such as older Australian with multiple chronic illnesses. A recent study shows 27% of older Australian reported having at least three chronic diseases, with high blood pressure, arthritis and cancer as the most prevalent diseases. Such patients may have a very competent bulk-billing GP coordinating their care, but in addition to the cost of specialist consultations there will be costs for diagnostic tests and monitoring, prescription medicines, over-the-counter medicines, and supplies for conditions such as diabetes, colostomies and incontinence.
National Seniors Australia found that older Australians with five or more chronic conditions spend $3528 per year on out-of-pocket health care costs. Small wonder then that approximately 10% of adults referred to a specialist delay or do not keep their appointment because of cost. This proportion rises to over 12% in the most socioeconomically disadvantaged fifth of the population. The current freeze on Medicare rebates to doctors will only aggravate the growth in gap fees. The gap between what Medicare pays and the AMA-recommended fee for MBS item 104 (initial referral to a specialist) is now $97.72; the new safety net will ignore $40 of this.
There are no Medicare incentives to encourage specialists to bulk bill. Because poorer Australians can’t afford to pay the gap fees to reach the safety net thresholds, less than 4% of EMSN benefits go to the most socioeconomically disadvantaged 20% of the population while over 50% of benefits go to the most advantaged 20% of Australians. This exemplifies the inverse care law – and poor public policy – as it is the poor who are most likely to suffer ill health, who have the lowest discretionary income, and who are most in need of protection from out-of-pocket costs.
The government’s “simplification” of safety net arrangements, eliminates the confusion of multiple Medicare safety nets and caps on reimbursement for selected items and ostensibly will make it easier for people to qualify for support if they have high out-of-pocket expenses. But this comes at a cost for patients – the new safety net actually provides patients with less financial protection against high out-of-pocket costs – and a saving for government.
It is estimated that new threshold levels will mean an additional 60,000 people will qualify each year for the Medicare safety net. The big question is whether the reforms will lead to a change in the type of people who qualify for safety net benefits and that is not easily answered. In testimony to the Senate Community Affairs Committee, Dr Kees Van Gool indicated that the answer depends on how many concession card families experience annual costs between $400 and $638 how many general families have out-of-pocket costs between $1,000 and $2,000 because these are the people who stand to benefit under the new arrangements. However he noted that concession card status is a poor proxy for household income. Capping the amount of out-of-pocket costs that contribute to the safety net threshold will have further implications for how many and what type of families qualify for the new benefits.
This reform may invoke a number of behavioural changes by both doctors and patients seeking to derive maximum benefits from the safety net. There are clearly greater incentives for patients to seek out doctors who charge less than 150% of the MBS fee and this, in turn, may invoke price competition amongst doctors. Doctors may act to redistribute their fees across an episode of are, as obstetricians have done, or increase the volume of services they offer. The Minister for Health has indicated that she wants to prevent the inappropriate provision of complicated medical services outside of hospitals, although it is not clear how the safety net legislation will address this.
In an era of budget restraint, what can be done to address the impact of rising specialists’ fees on the federal and individuals’ budgets in ways that do not undermine the business needs of the medical profession? In a paper written earlier this year, Jennifer Doggett and I proposed greater transparency around specialists’ outpatient fees and the out-of-pocket costs to the patient. This approach was also put forward by Dr van Gool in his testimony to the Senate Community Affairs Committee.
Anecdotal evidence indicates a wide range of fees charged, with some specialists charging dramatically more than the Australian Medical Association recommended fee (which is itself higher than the MBS reimbursement). However there is no evidence that specialists charging the highest fees deliver the best outcomes and patients and referring GPs might make different choices about specialist care if they knew the costs involved. At the very least the major outliers should be named and shamed. It is also important that consumers are provided with comprehensive information about their health care choices and are made aware of options, such as public outpatient clinics, where they can receive specialist services at no (or lower) cost.
There has been some support for this approach from the medical profession, perhaps driven to action by the fact that a few greedy colleagues are making life difficult for those doctors who bulk bill or have only a small gap fee. In July 2014, the Royal Australasian College of Surgeons spoke out against excessive fees, saying that the College “is highly concerned at the amount of reported out-of-pocket costs being incurred by patients in the health-care sector“ and further stating that the College “believes that extortionate fees, where they are manifestly excessive and bear little if any relationship to utilisation of skills, time or resources, are exploitative and unethical. As such, they are in breach of the College’s Code of Conduct and will be dealt with by the College”.
An information sheet on the College website strongly supports full disclosure and transparency of fees as early as possible in the patient-doctor relationship, advocates that patients understand all available treatment options, and encourages concerned patients to seek second opinions on recommended treatments and the fees to be charged.
Just recently, the Urological Society of Australia and New Zealand has been prompted by a study showing that out-of-pocket costs for prostate cancer can be in excess of $30,000 (this includes not just specialists fees but private hospital services, medicines and other costs) to talk to its members about the perils of extortionist fees and of not telling men about public health options for treatment.
Most importantly, the issue of out-of-pocket costs for patients and the impact these have on health outcomes and costs elsewhere in the health care system and the federal budget needs to be addressed across a range of issues currently under consideration – not just Medicare safety nets, but the Medicare Benefits Schedule review, the mental health and primary care reforms, and welfare supports. Many people will predictably always have trouble meeting their health care costs, and the solutions will not always lie within the purview of the Health portfolio.
There are branches within the Department of Health that deal with the medical profession, the pharmaceutical industry, and private health insurers; it’s time for a branch with specific responsibilities for consumers’ and patients’ needs. It’s an important part of the effective, efficient and equitable delivery of health care services.
Dr Lesley Russell is an Adjunct Associate Professor at the Menzies Centre for Health Policy, University of Sydney.
I must confess I was surprised to learn that Malcolm Turnbull uses a hedge fund domiciled in the Cayman Islands. The story has come and gone without much examination.
Conflicts of interest
In the SMH of 24/25 October 2015, the veteran journalist Alan Ramsey highlighted what Malcolm Turnbull told the parliament about his hedge fund in the Cayman Islands. Malcolm Turnbull had said
“In order to avoid conflicts of interest [in Australia] almost all of my and my wife’s investments – and they’re all disclosed – are in overseas managed funds, which means that I and Lucy have no say in which individual companies those funds invest it.”
Alan Ramsey went on to comment
“Nothing Turnbull said in his defence … tells us why it is not possible for any minister, state or federal, any premier, or any prime minister, to make personal or family investments in Australian projects, companies or developments of any kind for fear of breaching conflict of interest issues. Yet surely, you’d think, this would not be beyond the wit of lawyers and financial advisers, even parliamentarians to overcome.”
Deferring tax
In this blog on 12 November “Vexed issues of ethics”, Professor John Taylor, Head of School of Taxation in Business Law in the Australian School of Business at UNSW, examines the legal and ethical questions of investing in hedge funds in tax havens. He says
“In the case of an investment via a tax transparent US hedge fund, the capital gain will be subject to Australian tax as soon as the investments are sold. But in the case of the investment via the Cayman Islands hedge fund, the capital gain would only be taxed in Australia when the fund makes a distribution. The time value on the money will mean the real cost of the tax the investor pays on the capital gain falls as long as the fund defers distribution to the investor. Over time in real terms, less Australian tax will be paid. Admittedly the investor will not have benefited from receiving the distribution in that time and will not have control of the time of distribution. But an investor can use the appreciation in value of the investment as security against other financial transactions. … So deferring Australian tax through the use of foreign hedge funds is currently not caught under Australian law. …
“If everyone did this, there would be seriously adverse revenue consequences for Australia. But of course, not everyone can. Investing in Cayman Islands hedge funds is largely the preserve of the financially astute or those with the resources to seek advice from the financially astute.”
There is still a great deal unexplained about this Cayman Islands episode. Just imagine the media blitz that we would have seen if Kevin Rudd, Julia Gillard or Bill Shorten used a hedge fund domiciled in the Cayman Islands.
Leading up to this month’s major climate change conference in Paris, there has been a welcome increase worldwide in the commitment to address climate change generally and, in particular, to restrict global warming to two degrees Celsius. Although they are still insufficient to meet the two degree target, the initial national commitments to be taken to the conference are, perhaps, more ambitious than might have been expected a couple of years ago.
One of the side effects of this increased ambition has been a growing focus on the role of coal in increasing carbon emissions. In particular, there has been a developing sentiment in favour of banning investment in new and expanded coalmines in Australia. The “keep it in the ground” campaign started mainly as a green activist movement, although supported by respected media outlets such as The Guardian. Yet the campaign appeared to be more ideological and emotional than one that would attract the support of rational policy analysts. More recently, however, the campaign has been endorsed in an open letter to world leaders by 60 eminent Australians, including two highly regarded economists, Bernie Fraser, a former Secretary of the Treasury and Governor of the Reserve Bank, and Professor John Quiggin of the University of Queensland.
In this article, I address the following issues:
IEA’s World Energy Outlook, 2015[1]
In its latest projection of global energy use, the IEA has reduced its previous estimates of the role that coal is likely to play in future electricity generation.[2] Its main scenario is based on an assumption that the world will take action along the lines of the national commitments for the Paris summit. It has been suggested that this would put the world on a pathway to stabilising the global temperature increase at around 2.7 degrees Celsius. While this outcome would fail to meet the two-degree target by a significant margin, this outcome remains perhaps the most reasonable assumption at this stage.
In analysing pathways to meeting emissions targets, it needs to be appreciated at the outset that we are not dealing with a slow growing market. The IEA estimates that global demand for electricity will increase by 70 per cent between 2013 and 2040.
The IEA’s main scenario takes account of the Paris commitments to counter climate change. While negotiations at the summit may produce a slightly more ambitious result in terms of pledges, on the other side of the coin it is likely that over time some countries will fall short of meeting their commitments. On that basis, it seems likely that this scenario is based on assumptions that are realistic and may be closest to the eventual outcome.
Under this scenario, fossil fuels would still supply over half of the world’s electricity in 2040, with the main fuel type shares being:
While coal’s global share of the power generation market would fall substantially under this scenario from 41 per cent in 2013, its use in absolute terms would increase by nearly 25 per cent in a much larger market. ‘Conventional’ fuels capable of providing continuous power (coal, gas, nuclear and hydro) would account for over 80 per cent of supply. Under this scenario, the two technologies much favoured by some green groups, wind and solar PV, together would account for less than ten per cent of global power supply in 2040.
The IEA also produced a more optimistic scenario of fuel shares in electricity generation in 2040 should the world follow a pathway consistent with achieving the two-degree target. This would result in the following fuel shares in power generation in 2040:
Depending on which scenario you believe, therefore, coal is still likely to play a considerab;e role in power generation in 2040. Much of the coal combustion is projected to occur in Asia, particularly in India. Of course, much depends on technological changes and their relative costs, which are extremely difficult to predict. If there were a breakthrough in the commercial applicability of carbon capture and storage (CCS), for example, coal could claim a much greater share of future carbon budgets. The same argument applies to renewables, where the development of practical long-term storage solutions is perhaps potentially greater than a CCS breakthrough. Also, the potential of small modular nuclear reactors appears promising, with considerable development work occurring in both the US and China.
An important conclusion from the IEA’s analysis is that even under the optimistic outcome of the nations of the world agreeing to take actions to limit global warming to two degrees, coal could still play a significant role in power generation in 2040. If the outcome falls short of this, as seems likely, coal’s future role will be commensurately greater.
Would banning new coal mines provide an efficient policy approach?
The proposal to ban investment in new and expanded coalmines signifies that substantial public costs, or negative externalities, are associated with the use of coal. There is little doubt that the combustion of coal to produce electricity has made the greatest contribution to increasing carbon concentrations in the atmosphere. Therefore, the most prominent miscreant in bringing about climate change is clear and, except for a few deniers and “sceptics”, overwhelmingly accepted by policy makers globally. Unless the resulting emissions can be captured and stored, there is a substantial negative externality associated with the combustion of coal.
In light of this clear conclusion, the question addressed in this section is how the issue should be addressed in policy terms so as to bring about the most efficient outcome. One widely canvassed approach in recent times is to ban investment in new coalmines and in expansions of existing mines.
Fundamentally, this is a resource allocation issue and is, therefore, more a question for economists than scientists or engineers. Most economists would agree that the most efficient way to deal with negative externalities is to impose a tax on the externality and then allow the market to determine the optimal allocation of resources. For example, if coal-fired power generation threatens the environment in terms of climate change, the most efficient way to deal with this is to tax the resulting emissions of carbon dioxide. Applied over all forms of power generation by means of a carbon tax or an equivalent emissions trading system (ETS), this application of a cost on carbon would help to ensure that carbon emissions from power generation were reduced by means of a strong market signal to investors in the electricity generation market. A carbon tax or ETS would provide a disincentive to invest in coal and other fossil fuel power generation plant and an incentive to invest in low or zero emissions technologies.
Banning new coalmines would reflect an arbitrary approach to reducing emissions. On what basis should various fuels be permitted or banned? Why is coal to be singled out but other fuels with significant emissions such as oil and gas are not? There is also a problem in that many of the interest groups that want to prohibit coal mining would also like to ban other fuels as well. Not only are some environmentalists ideologically opposed to all fossil fuels, including gas, but they also object to competitive zero emissions power generation technologies such as nuclear power and hydro-electricity. Banning coalmines may well be the thin end of the wedge. Some groups would also like to ban uranium mining and the construction of new dams. Then, of course, on the right of the political spectrum, there are groups who are vigorously opposed to wind farms on the grounds of their visual pollution. Once the size of the physical footprint of solar thermal generation is understood and the massive land resource required, some groups would probably be opposed to that technology as well. What would we then be left with?
Restricting the supply of coal by banning new mines would be contradictory to the more efficient approach to climate change of taxing carbon emissions and thereby allowing the market to determine what technologies are adopted to generate electricity. It would give a clear advantage to existing mines, which may be near the end of their economic lives and are often less efficient than new mines. It would also benefit other fossil fuels with a significant carbon footprint, such as oil and gas. The strong market signal arising from the ban would also inhibit, perhaps totally, any incentive to work on more greenhouse friendly ways to utilise the earth’s vast reserves of coal through technologies such as CCS.
Were it to be widely adopted, such a policy would also eventually raise the price of coal in developing countries, such as India, where a large proportion of the nation’s population is struggling to emerge from poverty and where currently there are very many households that have no electricity supply. In my view, it ill behoves people in countries like Australia, where their high standards of living have been built, in part, on the foundation of a secure, relatively cheap, coal-based electricity supply, to attempt to force people striving to emerge from poverty in other countries to renounce coal and pay much more for an interrupted electricity supply via renewables. For this reason, among others, nations need to think long and hard before denying natural resources to other countries that may not be so fortunate in terms of their resource endowments.
Would banning new coal mines provide an effective policy approach?
Abstracting from efficiency considerations, if the Australian government prohibited the development of new coal mines, would this be an effective approach to reducing the global use of coal for power generation?
It is difficult to see how this could be an effective policy in the absence of an agreement between all of the major coal-producing countries to restrict supply. Such an agreement would be very unlikely. There are abundant resources of coal worldwide and, hence, many alternative sources of supply to Australian mines. As may be seen from the tables below, many of the countries with abundant coal reserves are less wealthy than Australia and are most unlikely to agree to prohibit investment in their coal industries.
While the Australian coal industry is a very efficient producer, it does not dominate the global market and could not be said to possess any significant market power. Data produced by the US Energy Information Administration, for example, suggest that while Australia’s coal endowments are extensive, they amount to less than nine per cent of global reserves.[3] In 2013, Australia ranked fifth in overall coal production (metallurgical and thermal coal), accounting for less than six per cent of the global total.[4]
Exhibit 1: Major Thermal Coal Producing Countries (2013)
| Country | Production (Mt) |
| China | 3,034 |
| USA | 756 |
| India | 526 |
| Indonesia | 486 |
| South Africa | 255 |
| AUSTRALIA | 239 |
| Russia | 201 |
| Kazakhstan | 103 |
| Colombia | 81 |
| Poland | 65 |
Source: World Coal Association, ‘Coal Statistics’, < http://www.worldcoal.org/resources/coal-statistics/>
In terms of the world’s largest producers of thermal (steaming) coal used for power generation, however, Australia is not ranked in the top five (Exhibit 1). In 2013, China’s production of thermal coal was over 12 times as great as Australia’s. The production of thermal coal in the USA and India was also far higher than in Australia, while Indonesia’s thermal coal production was over twice as great. Importantly, India now has a policy objective of being self-sufficient in coal by the early 2020s. This will require massive new investment in coal production.
Until recently, Australia was ranked first in terms of coal exports. Of Australia’s total coal exports of 336 Mt in 2013, 182 Mt were thermal coal. But in recent years, Indonesia has recorded a very rapid growth in exports (overwhelmingly in thermal coal) and has overtaken Australia. Coal exports from Indonesia more than doubled between 2008 and 2013, compared with a 33 per cent increase from Australia (Exhibit 2).
Exhibit 2: Major Coal Exporting Countries by Volume
| Country | Exports, 2013(Mt) | Exports, 2008(Mt) | Growth
2008-13(%) |
| Indonesia | 426 | 203 | 110 |
| AUSTRALIA | 336 | 252 | 33 |
| Russia | 141 | 101 | 40 |
| USA | 107 | 74 | 45 |
| Colombia | 74 | 74 | 0 |
| South Africa | 72 | 62 | 16 |
Source: World Coal Association, ‘Coal Statistics’, < http://www.worldcoal.org/resources/coal-statistics/>
Both Indonesia and Mongolia have the capacity to increase their exports substantially. Russia, South Africa and Kazakhstan are also potential rivals. In none of these countries, as far as I am aware, is there any significant questioning of the legitimacy or acceptability of the coal industry or any support for prohibiting new investment in the industry. Indeed, investment in these industries is generally keenly sought. Also, these countries generally have less rigorous approvals processes for new projects, less of an emphasis on environmental protection and lower labour costs than Australia.
In terms of effectiveness, therefore, the question is what environmental benefit would accrue from banning new coal mines in Australia and what would be the costs? It is difficult to see any possible benefits in terms of reducing global emissions, because, as the Prime Minister has pointed out, the investment in new coalmines displaced from Australia would merely take place in other countries. As demonstrated above, Australia lacks any monopoly or even oligopoly power in this market. If Australia took a position based on ideology and emotion, it would be very unlikely to have any impact on the demand for coal globally, but at the same time would provide an opportunity for other countries to step in and capture some of the market previously supplied by Australia. It would be a classic case of carbon leakage, where, in return for no tangible benefit, Australian investment and jobs migrated to other countries. People who depended for their livelihoods on the coal industry would be sacrificed without any offsetting tangible benefit in terms of climate change.
Conclusions
It appears that the governments of the world are likely to step up to the plate and commit to taking substantial action to counter climate change at the Paris summit commencing at the end of November 2015. This is most welcome. Under most plausible scenarios of emissions reductions, however, the forecasts by the IEA suggest that the combustion of coal will continue to generate a significant proportion of the world’s electricity supply until at least 2040.
Proposals to ban investment in new coalmines or expansions, either unilaterally or globally, would be neither an efficient or effective approach to addressing climate change.
First, it would not be an efficient approach because it would be arbitrary and selective and would fly in the face of the more efficient policy of taxing the negative externalities produced by burning coal and other fossil fuels more generally. It would, therefore, provide disproportionately favourable treatment to other fossil fuels such as oil and natural gas. In addition, it would provide a boost to other low emissions base load technologies such as nuclear and hydro, which may also be in the black books of some of the groups that want to ban coal.
Secondly, it would not be an effective approach. Australia has less than 10 per cent of the world’s coal reserves and is not in the top five countries that export thermal coal. Other countries would be happy to step in to fill the gap in coal exports left by Australia. This would be a classic case of carbon leakage. Investment and jobs would be exported from Australia with no tangible benefit in terms of climate change.
There are equity issues here as well, both in terms of people in other countries currently living in poverty who seek access to the cheapest electricity and also those Australians whose livelihoods depend on the coal industry. The people who advocate banning new coal mines would generally not suffer any tangible adverse consequences if their proposal were adopted.
Finally, in the absence of commercial clean technologies such as CCS, those who believe that substantial action needs to be taken to counter climate change will accept and even welcome the longer-term decline of the coal industry. Global action to counter climate change suggests that coal is a declining asset that, in the medium to long term, may well become stranded. Yet the dismal scientist in us also recognises that Australia’s endowments of coal represent a significant asset on our national balance sheet. The industry has given rise to well remunerated employment opportunities as well as very substantial royalty income to the benefit of the Australian community as a whole. In a declining market for coal, therefore, rather than banning new investment in the industry, the rational approach for Australia would be to seek to ensure that as much as possible of the declining future demand for coal is supplied from Australian mines. This is not inconsistent with a policy stance that encompasses strong action to address climate change and achieve the two degree target.
Jon Stanford is a Director of Insight Economics and previously worked in a senior role in the Department of the Prime Minister and Cabinet. He has acted as an expert witness in a number of court cases involving proposals to develop new coal mines.
[1] In reporting this summary of the recent IEA report, I am much indebted to Keith Orchison’s analysis in his This is Power blog and his articles in the Business Spectator.
[2] International Energy Agency, World Energy Outlook 2015, http://www.iea.org/publications/freepublications/publication/WEB_WorldEnergyOutlook2015ExecutiveSummaryEnglishFinal.pdf
[3] US Energy Information Administration, ‘International Energy Statistics’, <http://www.eia.gov/cfapps/ipdbproject/IEDIndex3.cfm?tid=1&pid=7&aid=6>
[4] World Coal Association, http://www.worldcoal.org/resources/coal-statistics/
If we look at the tax reforms of the past we can observe a few clear problems that are accumulating from design compromises.
So here we are again. Once again we confront the problems of a compromised tax system and seek to achieve reforms that will at least for a further time set us on a more robust and effective path. We confront another change leadership task which would set us on a substantially new course, rather than one that takes us along an old and well-worn path. Can we do it?
In 2013 I set out my thoughts on change leadership for public policy in a chapter of the CEDA study called Setting Public Policy. For this I compared what I thought were the key ingredients with those of John Kotter in his work on organisational change.
Let me revisit the 5 main steps towards leading public policy change which I then suggested based on a part of Kotter’s model, and make some observations on where we stand today with the tax reform debate.
It is within that framework that the main political economy issues affecting tax reform can be seen to arise.
Change Leadership tasks
Into 2016
2016 is nearly upon us. It could well be a momentous year. The many processes that have been launched could come to a head. Some sort of coherent framework hopefully can be articulated in which it all comes together.
Part of that will be a renewed understanding of the fiscal strategy, and the probably very poor economic underpinnings of that. I suspect that it won’t change much but hopefully the implications of what is there can be better explained to people – including for example implications of forward estimates that are based on a large restoration of tax share of GDP.
All the signs are that this could be a year of global cyclical weakness. That is certainly a widespread market and IMF view. There won’t be much room for policy error, and there may be a need for considerable short term agility.
This puts a premium in my view on ensuring that the key institutions in Australia are fully focused on their jobs and are sustained to deliver them. There has been inadequate attention to this in recent years, and that has been part of the problem holding back reform capability.
2016 will also bring an electoral mandate for the next three years at the Commonwealth level. I am not certain about the actual significance of mandates in Australian politics, but hopefully there will be a basis for reform at least as strong as that sought by the Hawke Governments in the 1980s and the Howard Government in 1998.
Greg Smith was a member of the Henry Future Tax Review Panel. He has also been head of the Treasury Tax Policy and Financial Institutions Division and of Treasury Budget and Revenue Groups. He was substantially involved with John Howard in the implementation of the GST. The above are extracts from a speech he delivered to The Melbourne Institute last week.
Jon Stanford’s article ‘Australia’s new submarine: what is its mission?’ is spot on.
The trouble with Defence planning and White Papers is that they all start off with what in my early days in the Navy was called a “Staff Requirement”. This thing, this equipment or ship is what we “require”. The first chapter of a Defence White Paper should be “How much money have we got”!
The bureaucratic Canberra attitude to money is that it just “comes”. A very competent technical Admiral once said to me in my days as Deputy Chief “Ian, are you saying we can’t do this just because of money?”
The 2009 White Paper is off in dreamland. Structuring Australia’s forces with the objective of the South China Sea as one of our possible areas of major Australia alone defence interest is just nonsense. For example:
Planners who suggest the ADF is unilaterally going to attack a nuclear-armed adversary in Asia are away with the fairies.
There are some simple facts.
Turning to intelligence gathering, I also agree entirely. If you want to listen to any type of radio transmission, put the receiver into a ship (war or merchant), shore station, embassy or satellite. The worst place is in a submarine. If you want a clear picture of something, don’t enlist a blind man and put him in a dark room.
The intelligence-gathering feature of submarines appeals to The Hunt for Red October fans. It has a lovely emotional tang about it. So what is the “Australian contribution to the Five Power intelligence club” if an Australian conventional powered submarine sitting off Shanghai/Vladivostok (which will have been detected by the Chinese/Russians) can tell the US that an SSK (conventional submarine) has left harbour? The Americans will know that because they saw it on satellite. Or perhaps our submarine will be operating in the Eastern approaches to Singapore Strait – the South China Sea choke point – where submerged submarines can be seen from the air and sonar ranges are extreme.
Ian Richards AO was formerly Deputy Chief, Naval Staff when he retired as Rear Admiral in 1984.
One of the first substantive announcements of Treasurer Scott Morrison concerned the privatisation of schools, hospitals and community services that are provided by State governments. He enthusiastically endorsed this 2012 Commission of Audit recommendation: ‘Given the size of the human services sector (which is set to increase further as Australia’s population ages), even small improvements will have profound impacts on people’s standard of living and quality of life.’ Morrison pointed to the greater efficiency and effectiveness that a competitive regime can deliver. There is no doubt that market mediated competition can drive performance. The private sector provides daily evidence of this.
But the notion that these approaches can be readily transferred to public services like schools and hospitals and social services cries out for deconstruction. For a start schools, hospitals and social agencies serve many purposes that cannot be easily captured in a unified price measure. How are these more subtle and variegated outcomes, which can vary hugely between individuals and between places, to be incorporated in a contract design? No easy challenge in itself. For reasons the Harper review acknowledges, it is fanciful to imagine that consumer choice can be generally instituted. In it absence, who are the omniscient, all-knowing central agents who will define the precise outcomes that contracted services should deliver? Even assuming this is possible, in practice accountability systems that recognise these wider concerns increase the likelihood of micro-management. And then the alleged benefits of privatised or contract-based settings rapidly evaporate. Innovation or continuous improvement is stillborn. Transaction costs escalate.
Is there an alternative to these dysfunctions? One approach might be to build on private sector practices that directly lead on to service or process innovation. Think of the Toyota just-in-time production system. Toyota deliberately jettisoned end-of-line capacities to repair or correct faults. It deliberately limited back up component reserves in case of supply chain hiccups. Production was stopped by every fault or flaw. But each of these stoppages became a key source of data in Toyota’s never ending quest for improved efficiency. This covered both the immediate production process as well as the wider system in which it nested. Unlike the aggregated information or ‘strong’ signal that is embodied in price data, this approach focused on the ‘weak’ signals that were critical to continuous improvement.
Prices embody the outcomes of a multitude of these weak signals. Note Toyota’s rise to become the major global car company. This was an immediate consequence of the visible hand of management practice – only distantly that of the invisible hand of market forces.
Or note the consistent stellar performance of the Finnish education system. Not one single school is privatised. Instead there is a deliberate focus on identifying obstacles to student performance at an individual level and from an early age. The system deploys more special education teachers than any comparable country. These work with mainline teachers and parents to identify under-performing or troubled children. They focus on these early ‘weak’ signals and initiate immediate remedial action. Approximately one third of the pupils in Finnish schools receive extra support in special education classes.
So markets and contracting by all means. But if they are to work the invisible hand of the market need to be supplemented by the visible hand of ‘weak’ signals. These are the building blocks of continuous improvement. Of course the challenge to identify pertinent weak signals varies widely. The relevant indicators are not the same in routine or highly specialised surgery or in Accident and Emergency or routine hospital care.
Translated to a contracting system, how can this be achieved? In principle the answer is simple. Contractors need to report not just on the outcomes that they believe they can achieve but also the means that they propose to use to achieve them. Then they need to be held to account for both outcomes and means. A central authority then needs to manage accountability and learning about these means. Its role is to learn and then to share this information amongst providers.
The core ethos of such a system is learning about means as well as outcomes. Its unit of exchange is the means used by different providers who are working towards broadly similar ends. But these exchanges will typically not involve anything that could be described as ‘best practice’. Most service settings are too contextualised to allow codified or standardised service designs to be developed. Service decisions need to take into account the circumstances and needs of an individual person or a specific place. In a technical sense decisions are ‘transaction intensive’ – prioritising the needs of individuals or places and mostly blending the technical skills and the empathic judgements of practitioners. Thus a teacher must respond to the circumstances of her students, a doctor to the needs of her patients. In both instances, the hardest cases can provide the richest source of systemic learning.
Indeed where services can be codified and standardised price mediated exchange will be a sufficient driver of performance. Where the latter is not possible, price mediated exchange will not by itself drive performance. Unless contracts or other systemic arrangements also disseminate learning about means, rhetorical promises of efficiency and continuous improvement will be misleading, indeed chimerical.
In a justly celebrated book, The Visible Hand, the distinguished Harvard economic historian, Alfred Chandler, showed the extent to which business efficiency in the United States was the product of superior management not in the first instance price mediated exchange. In seeking efficiency and continuous improvement in the much more complex world of hospitals, schools and community services this visible hand is even more critical.
Over the past thirty years, the discipline of economics has been a fertile source of models and frameworks for the redesign of government and of public services. But as more complex, transaction intensive services (‘wicked’ problems) have come increasingly to be the focus of attention, the limitations of price mediated exchanges need to be acknowledged. This is not the royal road to innovation and continuous improvement. Pace the Harper Review, the design of a functional innovation system is a more complex and more demanding challenge.
Ian Marsh is a visiting professor at the University of Technology Sydney’s management school.
Paul Budde comments in his BuddeBlog on 6 November 2015
‘If you abandon national FttH (fibre to the home) you also undermine the infrastructure required by the new economy. … The MTM [multi technology mix] leads to the Balkanisation of infrastructure in Australia and will favour companies such as Telstra and TPG. … The NBN Co will remain bleak from a financial position. … All of this becomes an even sadder story day by day, as at the same time it becomes clear that the trumped up costs of an FttH-based NBN were wrong. … The second rate roll out is going to cost roughly the same as the original FttH rollout.’
See link to full article below.
http://www.businessspectator.com.au/article/2015/11/6/technology/nbn-business-model-rails-0