Category: Economy

  • John Taylor. Investing in Hedge Funds in Tax Havens: Legal? Ethical?

    If the aim of Labor’s attack on Prime Minister Malcolm Turnbull and his wife Lucy for using hedge funds domiciled in the Cayman Islands was to damage his credibility with the public, it appears to have missed the political mark.

    This article considers whether investing in hedge funds in tax havens is both legal and ethical.

    Advantages of offshore funds in tax havens

    Investing in US companies via a hedge fund enables Australian individuals and organisations to make investments over a much larger, more diverse, and more frequently changed portfolio than would be possible by directly investing in shares in US companies.

    If an Australian invests in a US-domiciled hedge fund then the Australian investor (under the Australia – US Double Tax Treaty) would be subject to 15% US withholding tax on dividends the fund received from US companies. This is because US domiciled hedge funds are usually established using structures such as partnerships that are transparent for US tax

    The Australian foreign income tax offset system will mean the Australian investor would pay Australian tax on those dividends equal to the excess of their average rate over 15%. The investment would also be subject to Australian capital gains tax on any capital gains the fund made on its US investments when they were sold. The Australia – US Double Tax Treaty will mean that normally no US capital gains tax will be payable..

    The position changes when an Australian investor uses a hedge fund domiciled in a tax haven such as the Cayman Islands.

    Let’s assume the fund invests in US shares. Normally the fund will be organised as a Cayman Islands company. The fund will structure its US share investments so that the investments are not regarded as the conduct of a US trade or business. Hence capital gains the fund makes on realising its US investments will not subject to capital gains tax in the US. This is because the capital gain will not be regarded as being “effectively connected” with a US trade or business.

    Any dividends received by the Cayman Islands hedge fund will be subject to US withholding tax at the US non-treaty rate of 30%. There is no double tax treaty between the US and the Cayman Islands.

    There will be no Cayman islands capital gains tax payable on a realisation of the investment, no Cayman Islands income tax will be payable on dividends received on the shares, and no Cayman Islands withholding tax will be payable on distributions by the fund to the Australian investor.

    Although no Cayman Islands withholding tax will be payable on a distribution by the fund to the Australian investor, a higher level of US withholding tax is payable on the dividend paid by the US company to the fund. So looking at the dividends in isolation there seems to be no advantage in investing via a Cayman Islands hedge fund.

    The real tax advantages Australian investors gain by investing via the Cayman Islands hedge fund rather than via a US domiciled hedge fund, are in terms of the ability to defer tax on capital gains the fund makes on underlying investments.

    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 will 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 for as long as the fund defers distributions 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.

    Is it legal?

    The legal question is the easiest to answer. Australia used to have rules (the Foreign Investment Fund or FIF rules) which sought to neutralise these and other deferral advantages. Those rules were repealed in 2010. In 2011 the Gillard Government proposed more targeted rules for foreign funds (the Foreign Accumulation Fund or FAF rules) but the Abbott Government in 2013 announced that it would not be proceeding with these and other related changes. So deferring Australian tax through the use of foreign hedge funds is currently not caught under Australian law.

    Is it ethical?

    How about the ethical question? This answer is harder. An investment via a Cayman Islands hedge fund results in more US tax and more Australian tax being payable on dividend distributions than investment via a US domiciled hedge fund organised.

    If we assume an ethical obligation to pay taxes both in the source and residence country, then deriving dividends indirectly via a Cayman Islands hedge fund meets that obligation.

    But the position is different in relation to capital gains the funds make on shares in US companies.

    Neither fund will be paying US tax on the capital gains but, in the case of investment via a US domiciled tax transparent fund, Australian tax will be payable on the capital gain as soon as it is realised, while Australian tax will only be payable on the capital gain derived by the Cayman Islands domiciled fund when that fund distributes it to the Australian investor.

    So back to the ethics of this. 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.

    That could raise another ethical question – is it unethical to use your own financial acumen, or that of others, to derive tax advantages unavailable to those without access to that financial acumen?

    It depends on whether we regard taxes as a payment for the benefits a taxpayer receives from society. If so then it is arguable that those with greater financial resources receive greater benefits from society. They benefit from having their greater resources protected by law and by domestic law enforcement. As they have more assets they benefit more by having them protected by the defence force. They derive greater benefit from infrastructure through which business can be conducted.

    If we regard taxes as a payment for the benefits received from society and if we accept that those with financial benefits receive greater benefits from society then to use your financial resources or financial acumen to pay less tax than is proportionate to the benefits you receive from society can be considered to be unethical. If everyone paid less tax than was proportionate to the benefits they received from society then society would eventually be unsustainable.

    Professor John Taylor is Head of School of Taxation and Business Law, Australian School of Business, UNSW. An earlier version of this article appeared in The Conversation on October 30, 2015.

  • Bob Kinnaird. The high price of Labor’s capitulation on ChAFTA

    Labor’s capitulation in supporting the treaty-status ChAFTA has profound ramifications that go far beyond the China deal.

    Labor’s support for ChAFTA has all but guaranteed the permanent surrender of Australian sovereignty over key parts of our migration program and laws, and the permanent loss of rights of Australian citizens and permanent residents to jobs in Australia.

    The Labor and Coalition leaderships both know this but have not told the Australian people or the Australian Parliament.

    Labor’s decision to pass the treaty-status ChAFTA unchanged effectively ensures the permanent removal of the Australian government and Parliament’s right:

    • To impose any limit on the number of visas granted in the entire standard 457 visa program for skilled workers or the shorter-term 400 visa.
    • To apply labour market testing (LMT) in the entire standard 457 visa program.
    • To apply LMT in the 400 visa program to a whole new foreign worker category in binding FTAs – ‘installers and servicers’ of machinery and equipment. These include for the first time in FTAs sub-trade or semi-skilled workers, and possibly even unskilled workers, as well as skilled workers.
    • To apply other regulatory measures in the 457 and 400 visa programs that remain unspecified and ambiguous, and which the Australian Parliament has not even inquired about. What is covered by Australia’s commitment not to apply ‘economic needs tests or other procedures of similar effect’ to foreign nationals in these visa programs is not even known.
    • To make laws giving preference in redundancy situations to Australian workers over standard 457 visa workers, and likewise over the ‘installers and servicers’ on 400 visas. The ‘national treatment’ provisions of FTAs prohibit such ‘discrimination’ in favour of Australian workers, but the Treaties Committee reports to Parliament on ChAFTA said nothing about this either.

    These binding international obligations in ChAFTA on the 457 and 400 visa programs will now flow on to other countries through the plethora of FTAs the Coalition government is aggressively pursuing. That flow-on has already started, as shown below.

    As well, Labor has guaranteed that all future FTA ‘packages’ with developing countries will allow semi-skilled and other ‘concessional’ 457 visa workers access to the Australian job market under the guise of ChAFTA-style ‘investment facilitation arrangements’ (IFAs).

    Labor approved the IFAs as part of the ChAFTA package with only cosmetic changes to the migration regulations for concessional 457s under these arrangements. These provide no additional ‘safeguards for Australian jobs’, despite Labor pretending they do.

    The MOU on IFAs is not part of the treaty-status FTA, but DFAT says it is nonetheless ‘a serious bilateral agreement’ between the governments of Australia and China. Changes to the MOU require China’s agreement. Labor and the Coalition have therefore succeeded in also reducing the previously unfettered right of the Australian government and Parliament to make laws and policies for concessional 457 visa workers on major projects.

    In October Trade Minister Robb admitted the Coalition is lining up more ChAFTA-style IFAs (India is almost certainly next), saying:

    ‘This has to apply not just to China… – in the case of that issue, these major projects over $150 million – that opportunity is there for every company in every country, so we have to look beyond China; we have to make sure that this doesn’t discriminate against China and that it’s not a one-off provision just for China’ (transcript, Robb media conference on 13 October 2015).

    As well as the loss of Australian sovereignty, all this means greatly increased legal rights for employers to use temporary foreign labour, and to use these workers as industrial relations weapons against Australian workers and unions.

    The ChAFTA flow-on

    The China FTA commits Australia not to apply LMT to all Chinese citizens in the standard 457 visa program – currently around 7 per cent of the total 457 program. That is a ‘point of no return’ moment.

    Until the China FTA, the Coalition had declared that only the nationals of Japan, Korea, Chile, Thailand and NZ had a blanket 457 LMT-exemption due to Australia’s international trade obligations in FTAs. These comprise only a small fraction of the 457 visa program (around 4%) with the largest of these (Korea and Japan) in FTAs concluded by the Abbott government.

    The China FTA will take that LMT-exempt share up to 11 per cent of the 457 visa program when it comes into force before end-2015.

    Once China goes, the rest will follow. By late 2016 nearly half of the entire 457 visa program will probably be exempt from LMT due to Australia’s binding international trade obligations as the China FTA LMT concessions flow through to other new FTAs. It could be more than half.

    Having capitulated on the China FTA, Labor is now unlikely to oppose extending the same blanket 457 LMT-exemption to all the other FTA countries that the Coalition is lining up in short order. Labor will need more resolve than shown so far to resist the claims of ‘discrimination’ that will be heard from every FTA country denied the same privileges as China.

    The most important of these is India, the largest country in the 457 program with 24 per cent of all visas. Concluding the India FTA by the end of 2015 is the Coalition’s next self-imposed deadline. Having waved through the China FTA, Labor will do the same for India. At that point, 35 per cent of the 457 visa program will then be LMT-exempt due to binding international trade obligations.

    In the Trans Pacific Partnership (TPP) announced in October, Australia has committed not to apply LMT in the standard 457 program to all nationals of five TPP countries – Brunei Darussalam, Canada, Malaysia, Vietnam, and Mexico – representing a further 5 per cent of the 457 program.

    Australia has also made a standing offer to do the same for the three other TPP countries without a total 457 LMT exemption (the USA, Peru and Singapore) if they provide access to limited categories of ‘Australian business persons’ down the track – another 7 per cent of 457s.

    The ChAFTA concession not to apply LMT to ‘installers and servicers’ on 400 visas has also been extended to eight TPP countries – Brunei Darussalam , Chile, Japan, New Zealand, Peru, Canada, Malaysia and Mexico -and no doubt shortly India also.

    Waiting in the wings are other FTAs including the Regional Comprehensive Economic Partnership (RCEP), the Trade in Services Agreement (TISA) with 51 WTO members, Indonesia, the Gulf states and now the EU. The RCEP is perhaps the next most important for Australian temporary visa concessions. It includes the ten ASEAN member states and those countries which have existing FTAs with ASEAN – Australia, China, India, Japan, Republic of Korea and New Zealand. 

    Labor’s road to capitulation 

    Labor’s decision to support ChAFTA is a clear breach of commitments given by Opposition Leader Mr Shorten. In the Labor leadership contest in September 2013, Mr Shorten publicly committed to ‘opposing the removal of LMT in bilateral and multilateral trade agreements’ – as did Mr Albanese, the other candidate. (See ALP Leadership Questionnaire http://www.cfmeu.net.au/news/alp-leadership-questionnaire)

    Both candidates also committed to ‘opposing all attempts by the Coalition government to weaken sponsors’ legal obligations to undertake Labour Market Testing (LMT) so that 457 visa nominations may be approved only where a suitable Australian resident is not available to fill the position’.

    Labor failed to honour these commitments at the first test. When the Coalition brought the Korea Australia FTA (KAFTA) before Parliament in September 2014, Labor voted to support the FTA even though it removed Australia’s right to apply LMT to all Korean nationals (and permanent residents) in the standard 457 visa program.

    A few months later, Labor did the same with the Japan FTA which included identical provisions to KAFTA, removing Australia’s right to apply LMT to all Japanese nationals in the standard 457 visa program.

    Even after conceding on the first two North Asian FTAs, Labor still had good reasons to draw the line under Japan and Korea, and oppose the China FTA ‘labour mobility’ provisions.

    Labor’s own Treaties Committee Dissenting Report on ChAFTA warned ‘ there is a danger that Australia’s labour mobility commitments in CHAFTA will be used as the new baseline demand by all countries with which Australia is negotiating FTAs and all will expect Australia to offer additional concessions.’

    The 2007-13 Labor governments concluded several FTAs, with Chile, Malaysia, and ASEAN/NZ. But none of Labor’s FTAs removed Australia’s right to apply LMT in the 457 program to all nationals of the FTA parties. This was despite the fact that during this time, Labor did not withdraw the Howard government’s (non-binding) 2005 Doha Round offer in WTO GATS to remove LMT from the entire 457 program, but had actually re-affirmed it. 

    Conclusion

    The sorry truth is that both Labor and the Coalition are prepared to trade away Australian sovereign rights and the work rights of Australian citizens in binding FTAs in return for improved market access for Australian business and investment flows.

    The crude calculus dominant in the major parties and among unelected trade bureaucrats is that Australia has little to offer in trade negotiations with many countries, except greater and ‘guaranteed’ access to the Australian job market. This is because the (mostly unilateral) trade liberalisation already undertaken by Australia has left us with nothing much to offer that our FTA negotiating partners want!

    The major political parties won’t say this openly, especially when both maintain the fiction that Australia’s 457 and other temporary work visa programs are designed to meet ‘shortages’ of Australian workers.

    But DFAT admitted this to the tripartite Skilled Migration Consultative Panel in 2008:

    ‘Australia is now negotiating or planning to negotiate FTAs with a number of large developing countries….Given the degree of trade liberalisation already undertaken in Australia, and the limited ability of persons from some developing countries to take advantage of opportunities at the highly skilled end of the Australian market, temporary entry for semi-skilled and low skilled persons is one of the few areas (along with economic capacity building) where some of Australia’s developing county FTA partners have strong offensive interests. Naturally, Australia’s bargaining power in any trade negotiations with these countries will be significantly enhanced if it is able to respond favourably to their temporary entry interests.

    ’ From a trade policy perspective, therefore, it is in Australia’s national interest to ensure that its approach to temporary entry for work and business purposes is liberal, transparent, flexible and market-driven.’

    (Source: DFAT, Trade commitments and reform of the subclass 457 visa program, Discussion Paper to Skilled Migration Consultative Panel, September 2008).

    The Productivity Commission and others have shown that the alleged economic benefits of FTAs have been grossly overstated. The Commission recently noted that promotion of the benefits of FTAs and the TPP has been “characterised by a lack of transparent and robust analysis, a vacuum consequently filled at times by misleading claims”.

    The costs of FTAs – and indirectly, unilateral reform – have also been understated or ignored. The permanent loss of Australia’s sovereign right to make laws concerning temporary migration, with no public debate, is too high a price to pay for the dubious benefits of FTAs.

    Bob Kinnaird is Research Associate with The Australian Population Research Institute and was National Research Director CFMEU National Office 2009-14.

  • Ross Gittins. Launch of book by Menadue and Keating.

    Sydney, Thursday, November 5, 2015

     

    Paul Samuelson, the famous American economist, is said to have remarked that the stockmarket has predicted nine of the past five recessions. I thought of that this week and decided the Canberra press gallery could top it: the gallery has predicted nine of the past two early elections. They were at it again last weekend, reporting that, with the Coalition now riding high in the polls, serious thought was being given to calling an election – per force a double dissolution – early next year. It was an unconvincing proposition and, perhaps fearing that election speculation wouldn’t help restore business confidence, Malcolm Turnbull quickly scotched it, saying we could expect the election to be when it was supposed to be, in September or October next year.

    The sub-title of the book whose launch we’re here to celebrate is, Filling the Policy Vacuum. The media have an important part to play in filling that vacuum – and maybe in having helped to create it in the first place. At present, what’s filling the vacuum – that absence of serious and informed discussion about the many policy issues the government should be grappling with – is what’s called “race-calling” – who’s winning, who’s losing, who’s facing leadership rumblings from the backbench and who’s planning to call an early election.

    The gallery loves writing this stuff – it’s much easier and more interesting than discussing policy issues. And the gallery has discovered their editors back at head office love it. It’s reporting politics as though it was a form of sport – my team versus your team, who’s winning on the league table and worries about Plugger’s groin and whether he’ll pull up by Saturday. For most of our lives the newspapers have faced ever-increasing competition, not just from rival purveyors of news – radio, television and now the internet – but, more significantly, from the ever-multiplying ways for us to spend our leisure time rather than sitting down and reading the paper. Perhaps unsurprisingly, the media have reacted to this growing competition from rival forms of entertainment by making their political reporting more entertaining; by more race-calling and less earnest discussion of policy choices.

    I don’t happen to agree with this approach. For one thing, politics as a fifth code of football doesn’t have that many followers. Most of us in this room would be avid followers, but most people out of this room aren’t all that excited by it. It may well be that all the argy-bargy the media focus on actually turns voters off politics.

    Nor do I accept that policy discussion is inevitably on the dry side. Policy can be interesting, provided the journos know enough about the subject, have the confidence to sort the wheat from the chaff and highlight the parts of the policy choice that touch on people’s lives. The real problem is that good policy reporting and discussion requires harder work, not to mention greater specialisation.

    In Ken Henry’s introduction to this book’s collection of 48 short policy discussions by 31 contributors covering as many as 15 policy areas – with all those contributors being well-known and well-respected former bureaucrats or academics (none more so than the book’s two editors and most prolific contributors, John Menadue and Mike Keating) – Ken says he “can’t recall a poorer quality public debate, on almost any issue, than we have had in Australia in recent years”.

    There may have been a worse time in the past but, like Ken, I can’t remember it. In this talk I could try to come to grips with all the pertinent and challenging things those many authors have to offer on those many problems we face at present, but I’ll content myself with saying a little more about how this policy paucity came about and how the vacuum could and is being filled.

    I’ve already acknowledged the part the news media have played in creating the vacuum and filling it with dross. As Michelle Grattan wrote in a piece published on The Conversation website last Saturday (October 31), “if we are talking about improving and enhancing public policy and the debate around that, the media have a significant role to play. They provide prime routes by which information about policy is disseminated; they are also conduits for the ideas being thrown up from these other players”.

    It’s easy – and probably correct – to attribute part of the legacy media’s deterioration in performance to their preoccupation with finding a continuing place in the world of the internet, increasingly accessed by apps on mobile phones.

    But I want to make the point that, from a policy-debate perspective, digital disruption has brought pluses as well as minuses. People interest in finding thoughtful, well-informed, even expert policy discussion no longer have to rely on newspapers and magazines. They can find new sources of quality supply quite readily on the net. Chief among these is the aforementioned The Conversation. I think this is a wonderful development.

    One of the problems with the policy debate has long been the paucity of the contribution to that debate by academics. The universities profess to want to contribute to the debate, but the plain face is their reward system effectively discourages it, overwhelmingly favouring research. Many academics don’t follow the policy debate; they write for publication in journals that aren’t much interested in practical, “applied” matters like policy discussion and, fearing criticism from their peers, they spend months perfecting an article before letting it see the light of day.

    The genius of The Conversation is that it has reframed academic contribution to the policy debate as something the uni authorities smile on (because they fund the site) and as something that, because of the unavoidable time pressures, everyone accepts is quick and dirty, the very opposite to what a journal article is supposed to be. The proprietors of the site must have established for themselves a licence to extensively rewrite the turgid prose most academics have trained themselves to write.

    Of course, The Conversation is just the biggest and most notable new digital contribution to the debate. Various local academics run their own blogs – John Quiggin is the oldest example – or contribute to high quality group blogs, such as Club Troppo and Core Economics.

    Which brings us to blogs by former bureaucrats, the chief among which must surely be our own John Menadue’s Pearls and Irritations. All the pieces in the book are, in fact, invited contributions to the special series John and Mike Keating organised earlier this year on Fairness, Opportunity and Security. The 48 articles are still accessible on John’s blog, but as an oldie who usually prints off internet articles to be read on paper rather than screen, I hope this project of turning them into a book will make them even more accessible and more widely read. They certainly deserve to be.

    In view of this policy vacuum needing to be filled, it’s really great to have John providing this new platform and encouraging former bureaucrats to use it. Never has their contribution been more needed. We independent media commentators do our best to evaluate the government’s performance, but there’s nothing like a former bureaucrat to be able to see through the smoke and mirrors and decipher the true position. I myself have been delighted to take full advantage of Mike’s superior understanding of budgeting and macro and micro-economic policy.

    I should add that the Grattan Institute – itself composed mainly of former academics and bureaucrats – has made a useful contribution to filling the policy gap, as have the many former bureaucrats now kept busy in non-retirement at the ANU’s Crawford School of Public Policy – some of whom have contributed to this volume.

    Since the extraordinary economic and political incompetence demonstrated by the Abbott government’s first budget, I’ve spent a lot of time thinking about who was responsible for its failure and the huge damage this did to the Abbott government’s policy performance in other areas. Was it the econocrats in Treasury and Finance, the people at the top of the spending departments, the government’s youthful private office advisers, the bum steer provided by the strangely constituted commission of audit (which was pretty much contracted out to the Business Council), or just the manifest personal deficiencies of Tony and Joe.

    I’ve come to the conclusion that poor advice from the econocrats and the department heads can’t be absolved from some share of the blame. But this can be traced back to the fault of the politicians – Rudd and Gillard as well as Howard and Abbott. The shiny-bums are an easy target for all politicians and, in the case of the Coalition, a very senior bureaucrat told me that they hold public servants in contempt. I believe that year-upon-year of ever-higher “efficiency dividends” has robbed the econocrats and the spending departments of much of their ability to provide their political masters with good policy advice.

    The new practice of new Coalition governments beginning their terms by arbitrarily sacking a number of department heads must surely be designed to encourage the others not to provide frank and fearless advice. The Liberals’ “revealed preference” seems to be that they don’t want policy advice from bureaucrats. We’ll make the policy, you just implement it.

    I know it’s easy to develop quite unrealistic expectations of what Malcolm Turnbull even wants to change, let alone will see his way clear to. But, even so, I’m sure he must be better than this. He’s too smart not to want good quality and frank advice from his bureaucrats, and I think he’ll want a high quality, intelligent public debate about policy options.

    In Michelle’s Conversation piece that I referred to earlier, she implied that one reason for the gallery’s less than inspiring performance on policy issues is the actions of governments of both colours and over many years in discouraging contact between bureaucrats and journalists. It wasn’t like that in the 1970s when she – and, a little later, I – first went to the gallery.

    Michelle suggests that the gallery’s coverage of policy issues could be much improved – to the advantage of the government of the day – if contact between the gallery and fairly senior bureaucrats was restored. As she stresses, this wouldn’t be about leaks, but about officials with expertise providing journos with the context and detail they have at their fingertips.

    If any politician is able to see the sense in such a proposal, it ought to be Malcolm.

    Ross Gittins, Economics Editor, The Sydney Morning Herald

  • Allan Patience. Now is the Time for All Good Men and Women to Come to the Aid of the Party

    Richard Di Natale has called on the Greens to get ready for government. Well and good. The direction in which he is prodding his party is a rare glimmer of hope in an otherwise bleak Australian political landscape.

    Whether in a coalition (likely with Labor), or in its own right (unlikely), what sort of public policy agenda would a Greens government pursue? It is time for it to come up with a broad and innovative policy agenda; otherwise a completely new political party will have to be created.

    The other major parties, Labor and Liberal, have become ossified under the thumb of ideologically blinkered, self-perpetuating elites, the consequence of what Robert Michels once called the “iron law of oligarchy.” The Nationals are mostly irrelevant to mainstream policy debates, but they too suffer from the same organisational malaise as the ALP and the Liberals.

    For over three decades now Labor and the Coalition parties have been in obsessive thrall to a neoliberal mindset, utterly insensitive to the havoc that neoliberalism has been wreaking on our economy. However, what they are clearly incapable of comprehending today is that the whole neoliberal (or “economic rationalist”) project is about to come crashing down.

    Some of the catastrophes that neoliberalism has unleashed on us in Australia include: stagnating economic growth rates; sharply increasing socio-economic inequalities that are undermining capitalism itself (though, as with most subtleties, this irony escapes most neoliberals); the running-down of vital public services and the devaluing of public goods (for example, hospitals, schools, public transport); the appalling expansion of what were once termed “repressive state apparatuses” (increased powers for police and border protection authorities, state-sanctioned human rights abuses on Manus Island and Nauru, draconian meta-data gathering laws, the use of legally prescribed secrecy by governments to hide what they are really up to); and a society in which a range of social pathologies (family violence, depression, narcissism, drugs, begging, violent crime) are becoming the sine qua non of everyday life.

    The licence that big private sector corporations have been granted by successive neoliberal regimes has not resulted in better services, cheaper credit, or widely shared prosperity across the community. As Milton once observed, licence is not the same thing as liberty. Markets are now being crowded out by start-up ingénues and fraudsters while being bullied by big local and overseas corporations intent on feathering their own profitability nests and with little interest in the needs or rights of their employees and consumers.

    For example, the billion dollar profits that the big four banks are presently announcing (even as they increase their lending rates) point to the abject failure of the principles of deregulation and privatisation – that neoliberals have boasted endlessly will free up a shackled market, to benefit everybody. In the case of the banks, the only beneficiaries have been their obscenely overpaid executives and a narrow grouping of major shareholders. And, remember, many of those shareholders are offshore corporations.

    Consider, too, the myriad private providers of electricity that have exploded on to the scene since the privatisation of energy generation. Neoliberals promised that privatising the delivery of electricity would bring vigorous competition into a previously lazy and cosseted industry, driving down the price of electricity in household budgets. But, as every household knows only too well, this simply isn’t happening. In fact there are now far too may competitors in the market devising all sorts of byzantine schemes to woo customers, while investing in costly advertising and hustling campaigns to cajole bemused and confused customers into signing up with one or other of them. The result has been a shocking escalation in the costs of a fundamental public good – affordable electricity. The privatisation of electricity has been one of the most spectacular of neoliberalism’s disasters.

    These are only two examples of many failures by neoliberalism to progress our economy and enhance people’s lives.

    So what sort of agenda should the Greens espouse?

    Their first priority must be to counter-attack in neoliberalism’s war on public goods and services. Reimposing regulatory constraints on a private sector that is out of control is an impossible task. That horse has well and truly bolted. However, neoliberals love to extol the virtue of competition in the economy. So why not give them some real competition?

    This is where Greens should enter the policy debates. They should can mount a political campaign explaining that there is no competing mechanism in the neoliberal quiver to challenge the social destructiveness and economic vandalising that neoliberalism’s privatising and deregulating have unleashed. They need to explain that the only achievement of neoliberal policies has been to oversee capital roaring up the system, not trickling down.

    This should be the prelude for advocating a policy of strategically targeted public competition into the so-called “free market.”

    The first item on the post-neoliberal policy agenda should be the setting up of a publicly owned bank, to provide genuine competition in the banking industry. Of course the neoliberal beneficiaries of the current banking order will scream like stuck pigs about the unfairness of a publicly owned competitor in their midst, insisting that only they be allowed to compete on that most sacred of neoliberal cows – the fabled level playing field.

    Anyway, why must a publicly owned bank be seen as unfairly tilting the economic arena? Its establishment would simply provide more competition to bring the banking field back to an even keel, while returning profits to the community either though cheaper, more consumer-respectful services, and/or profits being invested in public goods (for example, better schools, railways, medical services).

    Another strategic area in the contemporary economy is legal services. Thousands of Australians are locked out of the justice system because of prohibitive fees charged by the big law companies that as greedy as the banks. A publicly owned law firm providing cheap and friendly (dare one say compassionate) legal advice would help address the unjust over-representation of social minorities and the poor who are routinely and unjustly the majority victims of the pointy end of the country’s legal system. When did you last hear of a senior partner in a law firm, or a distinguished surgeon, or a bank CEO going to jail?

    Other strategic areas in the Australian economy in urgent need of tough public competition include the real estate industry (agents’ costs and fees are a significant factor in pushing up already escalating house prices), medical (including psychiatric) and dental clinics, a publicly owned pharmaceutical corporation (once a dream of the Whitlam government), childcare centres, a government airline, and a comprehensive news and entertainment media agency (an expanded and properly resourced ABC and SBS).

    A cautiously progressive introduction of public competition into strategic sectors of the economy would certainly contribute to improving the barrenness of our contemporary public policy environment. As each new public competition agency is settled in, further competition could be contemplated – for example a publicly owned supermarket chain.

    And once people realise that this kind of state intervention doesn’t cause the sky to fall in, then even the nationalisation of certain crucial industries could be considered – an obvious example is urban rail networks and road tollways.

    Indeed with the institutionalisation of a healthy culture of public competition in the post-neoliberal economy, further private competition could even be encouraged. But any new private enterprises will have to operate on a truly level playing field. Regulators will require them to demonstrate that their services are consumer-respectful and that the efficiencies they promise are genuine, not bogus as so many are right now.

    If the Greens are unable to mount a public policy program for the coming post-neoliberal era, then a new political party will be necessary. That will be the time for all good men and women to come to the aid of the party.

    Allan Patience is a political scientist at the Asia Institute in the University of Melbourne.

  • Michael Keating. The role of government in policy renewal.

    In thanking Ross Gittins for launching ‘Freedom, Opportunity and Security’, Mike Keating explains the reasons why he and I decided to launch this series, first online and now in a book. Mike Keating’s book launch notes follow. I will also be posting Ross Gittins’ comments. John Menadue.

    Thank you Ross Gittins and thanks to you all for coming

    Why we embarked on this project

    • Concern about the poor quality of public debate on many public issues
    • The failure of political leadership to change that situation, or even be willing to try

    Instead we think there is a role for public conversation in developing and prosecuting a genuine reform agenda

    • History of past reforms is a long gestation period, with expert opinion often playing a key role in establishing the policy agenda
      • Eg tariff reform and de-regulation of financial markets
    • Too often calls for reform these days are little more than slogans – tax reform; industrial relations reform – but no content.

    Have been fortunate in attracting people who are experts in their field and who are able to support their arguments with evidence. This evidence and logic is I hope one of the strengths of this book.

    Timing of the book is also fortuitous, coinciding with advent of a new and different government

    • More open, less negative and more optimistic
    • Most importantly good ideas are not being ruled out without any consideration

    Labor needs to respond accordingly. 

    The book itself

    Not my job to summarise the book.

    • Ross has done that, and we would rather you buy it now if you want to know more – as I am sure you do

    Just a couple of observations

    • Despite apparently deep divides between our political parties, judging by the articles in this book there is considerable consensus about the policy prescriptions for moving forward
    • This consensus may just reflect the company that John and I keep
      • Don’t think so
    • Foreign policy is a good example, of how there is more consensus than I expected
      • Used to think there were more opinions in DFAT than there were senior staff members
      • But the five different authors here – all former senior member of DFAT – agree that
        • we need to focus more on the opportunities and less on the threats – should appeal to Turnbull –
        • we need to achieve a more independent balance in our foreign policy
    • Most importantly, all the authors see an important role for government in our future
      • Consistent with past Australian traditions, general presumption among all the authors that we should maintain government responsibilities, even if we think their effective achievement requires changes in the means used
      • Want better government, not less government
      • Contrast with the US

    Given that conclusion, one issue in particular seems to me to be most important and that is taxation and the Budget

    • Perhaps I am biased, but naturally I don’t think so. Taxation and the Budget encompass so many of the other issues.
    • Critical issue is that we will need to raise more tax to preserve let alone enhance our sort of society
      • Market economy is likely to deliver greater inequality unless government acts to counter-act a wider distribution of earnings
      • State Premiers all want more tax beyond the cuts that the Australian Government has imposed.
      • Considerable expert opinion, including in this book, that Budget repair will require action on the revenue side as well as on the expenditure side, but hard to raise additional revenue if expenditure is not efficient, effective and equitable.
      • Do we think we can raise the additional revenue needed without increasing the GST?
        • Removal of tax concessions may not raise as much as some seem to expect
        • ALP proposal to reduce super concession will not raise much
      • My article in this book suggests that such actions will not be sufficient, and raises the option of increasing the GST to obtain the extra revenue needed. Progressive and even realistic thinkers need to support this option if it is the best way to obtain a consensus in favour of higher taxation
        • Can protect the poor
        • Income tax scales need adjustment to offset fiscal drag

  • John Menadue. The new squatters are taking over more public land.

    On a wide front developers and other commercial interests are moving into our public parks, gardens and beaches. They are our new squatters and the community is feeling powerless in the face of this invasion.

    In earlier blogs I outlined the historic encroachment of private interests on our ‘public commons’ – the land and facilities we share as citizens.

    In Sydney, there are many glaring examples of how the new squatters are moving onto public land.

    Darling Harbour has been ‘developed’ to within an inch of its life. Instead of a spacious recreation area we now have a congested and ugly commercial ghetto.

    Without due process and with political influence writ large, the public commons at Barangaroo has been dramatically reduced in favour of commercial interests. The original plan was to keep about half of the site, including the whole 1.4 km waterfront, as inalienable public land. That has been junked in favour of James Packer’s six-star casino to bring in ‘high rollers’.

    The original architect of Barangaroo, Philip Thalis, said ‘the vibrant public space envisaged seven years ago has shrunk to become basically an enclave of privilege and exclusion’.

    But worse is in prospect. The Sydney Morning Herald has reported ‘the city’s newest park, Barangaroo Reserve has attracted 200,000 visitors since August. But kite flyers, soccer players, fishers and musicians will find it off limits from this weekend. Anyone wanting to hire exclusive use of Barangaroo foreshore, lawns, coves and walkways for public functions however are welcome-if they are prepared to pay.’ Slowly the takeover continues.

    Another Sydney example of squatter encroachment on public land is the Sydney Botanic Gardens. For many years part of the gardens have been alienated for four months each year for opera and cinema. Wealthy patrons and wealthy sponsors have been the main beneficiaries. But this isn’t enough for the new squatters. The Botanic Gardens and the Domain Trust have released a master plan for the parks to be developed with cafes, an $80 million hotel and year-round concerts. This is desecration of the hallowed grounds bequeathed by Governors Phillip and Macquarie.

    In congested Watsons Bay where I live, a developer from Darling Harbour has applied to develop wedding facilities and restaurants within the South Head National Park and spill his patrons onto a beautiful public beach.

    Step by step our public commons is being eroded. When governments refuse to adequately fund our parks and gardens it is likely that commercial interests will seize the opportunity for a land grab. The economy is put ahead of society.

    In the 18th and 19th Century, wealthy and privileged landowners in England passed Enclosure Acts forcing people off common land which they had used for centuries. About 20% of land in England was enclosed.

    We followed suit in Australia in the 19th Century with ‘squatters’, mainly from the upper echelons of colonial society, occupying large tracks of crown land to graze livestock. Over time, this occupation of the pastoral ‘commons’ and the dispossession of indigenous people was enshrined in law and enforced by the police.

    History tells us that we need to be very careful about those who want to take possession and erode our public ‘commons’. It happens slowly, almost imperceptibly, often without our knowledge or understanding of what is at stake.  And it is not just about getting shooters out of national parks or protecting waterfront land without public tender. Councils often carelessly allow commercial interests to encroach on public parks, botanic gardens and beaches.

    Some council do oppose many crass and vulgar developments, but too often they don’t have the resources to combat a phalanx of celebrity architects, lawyers and public relations lobbyists. Some councils are obviously concerned that if they reject such developments, it will lead to expensive legal appeals to the Land and Environment Court.

    We owe a great debt to foresighted citizens and governments in the past who established our public ‘commons’, national parks ,botanic gardens and beaches, for the enjoyment of all.

    If governments and their agencies are unwilling or unable to protect our natural and built environment, I would hope that our unions would take up again what the BLF pioneered 40 years ago in Kelly’s Bush in Hunters Hill, Sydney. We need an association of professional and community groups, including unions to develop a charter to safeguard our public commons.

    With the rapid increase in our urban populations, protecting and expanding our public commons is more important than ever. The new squatters must be turned back.

     

  • Steve Hatfield-Dodds. Australians can be sustainable without sacrificing lifestyle or economy.

    A sustainable Australia is possible – but we have to choose it. That’s the finding of a paperpublished today in Nature.

    The paper is the result of a larger project to deliver the first Australian National Outlook report, more than two years in the making, which CSIRO is also releasing today.

    As part of this analysis we looked at whether achieving sustainability will require a shift in our values, such as rejecting consumerism. We also looked at the contributions of choices made by individuals (such as consuming less water or energy) and of choices made collectively by society (such as policies to reduce greenhouse gas emissions).

    We found that collective policy choices are crucial, and that Australia could make great progress to sustainability without any changes in social values.

    Competing views

    Few topics generate more heat, and less light, than debates over economic growth and sustainability.

    At one end of the spectrum, “technological optimists” suggest that the marvellous invisible hand will take care of everything, with market-driven improvements in technology automatically protecting essential natural resources while also improving living standards.

    Unfortunately, there is no real evidence to back this, particularly in protecting unpriced natural resources such as ocean fisheries, or the services provided by a stable climate. Instead the evidence suggests we are already crossing important planetary boundaries.

    At the other end of the spectrum, people argue that achieving sustainability will require a rejection of economic growth, or a shift in values away from consumerism and towards a more ecologically attuned lifestyles. We refer to this group as advocating “communitarian limits”.

    A third “institutional reform” approach argues that policy reform can reconcile economic and ecological goals – and is attacked from one side as anti-business alarmism, and from the other as indulging in pro-growth greenwash.

    Income up, environmental pressures down

    My colleagues and I have spent much of the past two years developing a new framework to explore how Australia can decouple economic growth from multiple environmental pressures – including greenhouse emissions, water stress, and the loss of native habitat.

    We use nine linked models to assess interactions between energy, water and food (and links to ecosystem services) in the context of climate change.

    The National Outlook focuses on the intersection of water, energy and food. National Outlook Report, CSIRO

    The project provides projections for more than 20 scenarios, exploring different potential trends for consumption and working hours; energy and resource efficiency; agricultural productivity; new land-sector markets for energy feedstocks and ecosystem services; national and global abatement efforts, climate, and global economic growth.

    While our major focus is on Australia, at the national scale, we also model what might happen globally, and at more detailed state and local scales within Australia.

    We find economic growth and environmental impacts can be decoupled − in the right circumstances. National income per person increases by 12-15% per decade from now to 2050, while the value of economic activity almost triples.

    In stark contrast to income, which rises across all scenarios, environmental performance varies widely. Key environmental indicators such as greenhouse gas emissions, water stress, and native habitat and biodiversity are projected to more than double, stabilise, or fall across different scenarios to 2050.

    As shown in the chart below, we find that energy rises in all scenarios, but that greenhouse emissions can fall at the same time – with the right choices and technologies. Water use can also rise without increasing extractions from already stressed catchments. Food output (here indicated by protein) can increase, while native habitat is restored.

    Hatfield-Dodds et al (2015)

    Many of the 20 scenarios explored would represent substantial progress towards sustainable prosperity.

    Indeed, we find that Australia could begin to repair past damage: restoring significant areas of native habitat and achieving negative emissions (net sequestration) of greenhouse gasses.

    Growth of what?

    We use the normal definition of economic growth as measured by increase in Gross Domestic Product (GDP) – the value of goods and services produced in an economy – consistent with the national accounts framework.

    Some authors use a different definition, most notably Herman Daly a leading advocate for a steady state economy. Daly defines growth as an increase in physical economic scale, such as resource extraction, and goes on to argue that indefinite (material) economic growth is not possible.

    While this may be true, for his definition, it can be confusing for people that do not realise he is not referring to GDP growth. Indeed, Daly recently acknowledged that economic (GDP) growth is possible with finite resources and steady material throughput.

    These definitions matter: we project growth (GDP – measured in real dollars, adjusted for inflation) increases by more than 160% in scenarios where domestic material extractions and throughput (measured in tonnes) decreases by around 40%.

    Choosing a sustainable future

    But here is the real crunch: we find these substantial steps toward sustainability could build on policy approaches that are already in place in Australia or other countries. This implies Australia could make enormous progress towards a more sustainable future without a major change in what we value.

    We can be confident that a values shift is not required to achieve these outcomes – at least before 2050 – because none of the scenarios we modelled assume change in values or a new social or environmental ethic.

    Instead, we show that people will make choices to change their behaviour to make the best of particular policy settings. These choices shape production and consumption.

    For instance, we consider increasing Australia’s climate effort in line with other countries would be consistent with Australian public opinion and assessments of Australia’s national interest in limiting the rise in average global temperature to 2°C. So we do not interpret this as implying a change in values.

    But we find collective choices are crucial. For example, individual choices about whether to drive or catch a train to work are strongly shaped by prior collective choices about transport infrastructure. Collective choices are often, but not always implemented through changes in government policy, legislation, and programs.

    We find collective choices explain around 50-90% of differences in environmental performance and resource use across the scenarios we model. Consistent with the institutional reform approach, we find top-down collective choices are particularly important in shaping “public good” outcomes – accounting for at least 83% of the difference between scenarios for greenhouse gas emissions.

    Bottom-up individual choices play a greater role when private and public benefits are aligned. For instance individual choices account for up to half of the difference between scenarios for energy use (33–47%) and non-agricultural water consumption (16–53%).

    While individual choices are important, we find decisions we make as a society are likely to shape Australia’s future sustainability more than the decisions we make as businesses and households.

    Sustainable prosperity is possible, but not predestined. Australia is free to choose.

    Steve Hatfield-Dodds is Chief Scientist, Integration science and public policy, CSIRO. This article was first published in The Conversation on 5 November 2015.

  • John Menadue. The unfairness and waste in health. Private Health Insurance is the real culprit.

    Medibank Pte has been in dispute with the Calvary Hospital Group and now with UnitingCare over performance in their hospitals.

    At last our largest private health insurance company, MBP has come to understand that the private providers, hospitals and doctors, are really in control. These private providers determine the quality of care and its cost. The PHI companies like MBP are really powerless to control both the quality and cost of healthcare. They need to lift their game .But they are in a bind.

    The problem that the MBP faces is precisely the same problem as the US healthcare system faces. In the US hundreds of competing private health insurers do not have the power to control quality and price setting by providers. If a private insurance company is too tough the provider will take the business to a competitor. The worldwide lesson is that only a single insurer can have a real effect on costs and promote quality.

    The CEO of MBP has got into trouble by confronting the powerful providers, in this case Calvary and UnitingCare. He has resigned!  In his exit comments, the CEO of MBP, George Savvides said he was seeking to ‘reposition MBP from being a payer of bills, to a player in the health system’. He could not be more precise and correct. The private health insurance companies meekly accept the prices set by providers, both hospitals and doctors. I read Savvides’ comments to mean that the providers rebuffed him in his attempts to improve the quality and contain the cost of care. And his board did not support him. The providers have won again.

    Apparently Savvides was insisting on two things. The first was that MBP would refuse to pay when any of a list of 165 ‘highly preventable adverse events’ occurred, including preventable falls in hospital and presumably hospital-caused infections. Secondly he proposed that MBP would refuse to pay hospitals for unplanned patient readmissions that occur within 28 days of a procedure, compared with seven days previously.

    Good luck to PHI companies like MBP who refuse to be passive payers of bills and want to have a say in the cost and quality of care by private providers particularly in private hospitals.

    ‘Adverse events’ are a major cost in all health systems – mistakes, injury, infections and even death. Many are avoidable and many are not. Avoidable adverse events probably cost well over $ 5b p.a. in the Australian health sector. Good clinicians are caught up in a bad system. See link to my previous post ‘The personal, public and social costs of mistakes in health’.

    Other PHI companies like BUPA must similarly be concerned about the difficulty in controlling provider costs. That is the reason why PHI premiums rise significantly each year. Since John Howard introduced the rebate on PHI in 1999 the cost of PHI premiums has increased 150%.Overall prices have increased by less than 50%.Not surprisingly a reader panel in the Sydney Morning Herald has found that 64% of people don’t believe that PHI provides value for money. The Minister for Health describes many PHI policies as ‘junk’

    But PHI companies like MBP and Bupa contribute to high costs. Through GAP insurance that they provide they have underwritten an enormous increase in specialist fees in private hospitals. These specialists receive remuneration three to four times what is paid in public hospitals. And not to be out done on specialist fees the major private hospital; Ramsay Healthcare for example paid its CEO $31 m in 2014. No wonder MBP wants to get hospital costs down!

    In addition to the inability of PHI companies to put pressure on health costs, there is the problem of waste in the delivery of health care – excessive pathology and radiology tests, over-treatment and over-prescribing. In the recent Four Corners program we were told about a tsunami of over-diagnosis and treatment. We heard about

    • Care that is ineffective and sometimes unsafe;
    • That perhaps a half of MRIs, are unnecessary;
    • At least half arthroscopies are unnecessary;
    • At least 20% of knee replacements may be inappropriate;
    • The majority of MRI’s and CT’s for back pain are a complete waste;
    • The scientific evidence for spinal fusion is just not there;
    • As much as a third of money for stenting is potentially being wasted;
    • And up to 43% of invasive coronary angiograms are unnecessary.

    This waste is common across the health sector, both public and private, but I suggest that the problems are greater in the private sector and private hospitals in particular.

    The Four Corners program highlighted the particular problems in private hospitals.

    • ‘Stents are more likely to be given in the private sector than in the public’
    • ‘Most spinal fusion is done in private hospitals’
    • Angiograms are performed ‘more frequently in the private system’
    • ‘In the last ten years we have forked out nearly $486 m. for knee MRIs in the private sector alone.’
    • ‘It does seem that over-treatment is in the private sector’.

    Four Corners did not examine Work Cover and the cost of injuries in the workplace, particularly back injury when it is treated in private hospitals.

    Many clinicians and others in the Four Corners program pointed out that there is a great deal of data in all these areas but unfortunately it is invariably in silos and not readily accessible to the public so that we can effectively address the problems of ineffective, wasteful and sometimes harmful medical procedures. There are large variations in medical procedures between public and private hospitals and regions. We have a long way to go in rigorous evidence based care. Accreditation in itself does not tell us much about the quality of care.

    There are particular reasons why we should be concerned about what is happening in some private hospitals.

    • Fee for service in private hospitals and in the private sector generally provides a perverse incentive. Clinicians are rewarded for volume of work rather than the quality of care and patient outcomes. In the public sector, clinicians are more likely to be remunerated on a salaried or sessional basis without the financial incentives for over treatment.
    • In the public hospitals peer review is much more widely practiced with mistakes, adverse events and poor performance more readily corrected.
    • Dealing with less complicated cases, many private hospitals do not have the breadth and depth of experience and the skills that are found in public hospitals and particularly teaching hospitals. Some of the larger private hospitals are well run with peer review and strict accreditation. Some have training registrars and medical students. However the quality of care is patchy, particularly in smaller private hospitals.
    • I am also advised that private hospitals are much more likely to import minimally qualified nurses on temporary visas. This inevitably leads to more adverse events.
    • Private hospitals work much more on a cottage industry basis with visiting medical practitioners coming and going between the hospital and their private rooms. With hundreds of visiting specialists it is very difficult to develop professional collaboration and peer review and professional esprit des corps when they are coming and going on a part time basis.

    Australia is spending $10 b. to subsidise private health insurance. In 2014/15 this was made up as follows

    • $6.3 b for direct outlays as in Budget Paper 1
    • $1.5b tax free income rebate.
    • $1.0b benefit for exemption from Medicare levy surcharge.

    The total is $8.8 b for 2014/15. This year it would be higher and before we look at the inflation effects of PHI

    Most of the direct outlay of over $6b benefits higher income people accessing high cost private hospitals in the name of choice .In the process they jump the hospital queue.

    MBP’s attempt to address some of these problems in negotiations with Calvary Hospitals and UnitingCare is the first public sign that I have seen of PHI companies recognizing their serious problems. The ‘canary in the mine’ is warning us about the quality and cost of private hospital care that is   generously subsidised by the Australian taxpayer.

    PHI’s are financial intermediaries. They do not deliver healthcare. They are proving unable to effectively manage quality and contain costs in private hospitals. George Savvides has found out the hard way. But the government doesn’t care and diverts attention with nonsense about the unsustainability of our health system. Abolishing the $10b subsidy for PHI would greatly improve the quality of health care, reduce costs and make our health care system much more sustainable.

    But the lobbying power of PHI companies and private hospitals like Ramsay Healthcare frightens almost all politicians and particularly Commonwealth health ministers from both sides of politics.

    Taxpayer subsidised PHI will destroy our world class health system in the same way that PHI has caused disaster in the US.

  • John Menadue. Malcolm Turnbull and the NBN mess

    As Minister for Communications Malcolm Turnbull had two major responsibilities. They were the public broadcasters, ABC and SBS, and the NBN.

    As I pointed out in an earlier post, the ABC needs rebuilding after the harsh budget cuts and termination of the Australian Network contract while Malcolm Turnbull was the minister.

    The plight of the NBN is much more serious. Consider comments by people who have followed this issue very closely.

    In this blog on 10 September 2015, headed ‘The NBN; why it’s slow, expensive and obsolete’, Rod Tucker, Laureate Emeritus Professor at the University of Melbourne said

    ‘The Coalition sold the public a product that was supposed to be fast, one third the cost and arrive sooner than what Labor was offering us. Instead the Coalition’s NBN will be so slow it will be obsolete by the time it’s in place, it will cost about the same as Labor’s fibre to the premises NBN and it won’t arrive on our doorstep much sooner. By my reckoning we didn’t get a good deal’

    In The Conversation on 15 September 2015, Rod Tucker commented further:

    ‘Under Turnbull, the NBN budget has blown out as much as $A18 billion and on current projections is four years behind the original schedule. Worse still, additional funding to help cover the cost blow-out will need to be obtained from outside sources. This could be difficult given that the fibre-to-the-node (FTTN) technology to be rolled out will soon be obsolete and will not be attractive to an investor looking for a reasonable long-term return on investment. This problem is just one of many that the incoming Communications Minister is going to have to solve. … Broadband customers Atlanta, for example, now have the choice of between 1 Gbps connections with Google or 2 Gbps symmetrical (upstream and downstream) services with Comcast. The NBN’s FTTN service will be 20 to 40 times slowed than Comcast. … These are just some of the things that need to be done to help get the NBN back on track. Let’s hope that Turnbull picks a successor who is up to the task. It’s not too late to fix the NBN but time is running out.’ 

    Renai LeMay in delimiter.com.au on 14 November 2015 pulled no punches

    ‘I was present at Turnbull’s very first press conference after Abbott appointed him as the new Shadow Communications Minister five years ago in 2010. And today, I was in parliament house in Canberra as Turnbull announced his challenge. I have borne witness to every step Turnbull has made along the way in the portfolio over the last five years. So let me be the first to say it. And I’ll say it loud and clear. Malcolm Turnbull has been an absolutely terrible Communications Minister. … The strength of the [ALP] policy was always that it would have laid the foundation for the next century of world-class telecommunications infrastructure in this country, fuelling the development of a massive digital economy and better health, education, business and social outcomes. Along the way it would also have completely broken Telstra’s stranglehold on market competition. Turnbull’s appalling multi-technology mix approach to the NBN, will in sharp contrast, set Australia significantly back. The policy will result in massive cash windfalls to the likes of Telstra and Optus, allowing Australia’s two major telcos to offload their outdated copper and HFC cable infrastructure at a premium cost to the taxpayer. Meanwhile, that same taxpayer will face a legacy of decades of technical failures stemming from Turnbull’s insistence that copper cables and 25 Mbps speeds are good enough for Australia’s broadband needs.’ 

    On 29 September 2015, Paul Budde in BuddeBlog said

    ‘As we predicted when the government changed its plans for the NBN, this would take, not the six months indicated by the minister, but at least two-three years. So in all we have lost at least another two years. During that time the OPEX costs of the company continued, as well as significant extra costs in political reviews, consultancy reports, new designs, pilots and so on – all of these costs eating into a limited budget that, in the case of government funds, will start to run out in 18 months time. On top of that NBN Co also faces a skill shortage, so it has plenty of headaches ahead. … 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 the 42nd position. … With the rest of the world now clearly moving towards FTTH Australia is set to linger on the bottom of the international ladder for many years to come, … if we want to be competitive in our Asian and globalised market we will need to lift our digital profile among our trading partners, and the NBN is key in that. We shouldn’t stop at the already out of date multi-mix technologies. These should be extended as soon as possible to a fully blown FTTH network in line with what other developed nations are building.’ 

    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 malaise that the telecommunications industry finds itself in has been exacerbated by the efforts of the Prime Minister Malcolm Turnbull who, as the Minister for Communications, spent two years doing very little whilst telling everyone that he was on the cusp of finding solutions for a variety of problems besetting the industry. … 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. … In what is likely to be the greatest con in Australian history, the government promised that the NBN would be completed at the end of 2016 and it would be built for $29.5 b. The latest projections from NBN Co indicate the NBN should be completed in 2020 or possibly later and the cost for Turnbull’s MTM approach will now be at least $56 b. … [The NBN] is likely to be the most expensive lemon in Australian history that was to be built with an impossible deadline as was widely pointed out by industry and academia at the time.’ 

    Can the new Minister for Communications, Mitch Fifield, get us back on track? It is going to be very hard. A major problem will be to unscramble the fibre-to-the-node contracts that have been let.

    Malcolm Turnbull has left us with an awful mess. It would almost seem that the NBN was set up to fail.

     

  • Mark Gregory. The new PM and the NBN. ‘An expensive lemon’

    The National Broadband Network (NBN) is now delayed by between five and ten years and will cost significantly more over a 20 year lifetime due to the government’s decision to shift from a Fibre to the Premises (FTTP) fixed access network to the Multi-Technology Mix (MTM) approach that includes Fibre to the Node (FTTN) and Hybrid Fibre Coax (HFC).

    The malaise that the telecommunications industry finds itself in has been exacerbated by the efforts of the Prime Minister Malcolm Turnbull who, as the Minister for Communications, spent two years doing very little whilst telling everyone that he was on the cusp of finding solutions for a variety of problems besetting the industry.

    In his time as Communications Minister Turnbull was responsible or involved with a remarkably small number of bills before Parliament, no doubt because the Senate would not support a large majority of the Coalition’s unsubstantiated justifications and rationale for legislative and regulatory change to the NBN and the broader telecommunications market.

    In a nation that appears to have an endless supply of state and federal funding for roads and hand-outs to multi-nationals that pay little or no tax, 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 to be economic madness.

    Any belief that Turnbull would, on becoming Prime Minister, take action to remedy the mistakes made with the NBN rollout over the past five years has now been shown to be nothing more than a pipe dream.

    Turnbull has clearly demonstrated that he is quite prepared to adopt the age old ploy of commissioning an endless number of reviews and audits that have been carefully stage managed to provide the answers that support his position on a range of topics. And he is quite prepared to direct government departments to take actions that appear to defy international standards and definitions if this is necessary to support his position.

    So it is unsurprising that Turnbull squelched a range of protests by prominent Australian engineering experts and Academics by resorting to name calling and failing to respond to the valid points raised.

    In what is likely to be the “greatest con in Australian history” the government promised that the NBN would be completed by the end of 2016 and it would be built for $29.5 billion. The latest projections from NBN Co indicate the NBN should be completed sometime in 2020 or possibly later and the cost for Turnbull’s MTM approach will now be at least $56 billion.

    In the lead-up to the last election the former Prime Minister Tony Abbott stated “we will deliver a new business plan for the NBN so that we can deliver faster broadband sooner and at less cost. I want our NBN rolled out within three years and Malcolm Turnbull is the right person to make this happen.”

    Turnbull was well aware that the NBN would not be completed by the end of 2016, yet he was prepared to be an active participant in what is likely to be the most expensive lemon in Australian history that was to be built with an impossible deadline as was widely pointed out by industry and academia at the time.

    There can be no doubt that Australia needs the NBN if there is to be active participation in the global digital economy, but to be more specific, Australia needs national telecommunications infrastructure that is based on an all-fiber access network in areas where a fixed access network is appropriate to ensure that the nation can compete and become a global digital economy leader.

    It is unremarkable that the success of New Zealand’s version of the NBN has not been addressed by Turnbull, the adoption of NG-PON2 FTTP in many markets around the world and it is likely that he will continue to harp on about the aging and underperforming FTTN networks operated by BT and Deutsche Telekom.

    Recently the total number of fibre broadband subscribers passed the total number of copper broadband subscribers and what this means is that as Australia rolls out the copper based FTTN or G.Fast we will fall further behind our competitors in related measures of broadband access capability.

    The recent launch of NBN Co’s Sky Muster satellite that will provide a much needed broadband access improvement to regional and remote Australia is likely to have been cancelled by Turnbull in late 2013 if it was not for the iron clad contracts put in place by the former government. Turnbull’s failure to comprehend the need for the two Ka band satellites led to his ridiculous remark in 2012 that the satellites were a “Rolls-Royce” solution that were not needed.

    Unfortunately, as Prime Minister Turnbull is in a position to turn his attention to removing monopoly infrastructure regulation from the Australian Competition and Consumer Commission (ACCC) in what can only be considered to be an effort to placate Telstra and if this decision goes ahead the telecommunications industry is set to enter a period not unlike the dark-ages.

    Turnbull’s recent support of Telstra by writing to the ACCC and arguing that the ACCC should not reduce fixed-line charges by 9.4 per cent clearly demonstrates what the priorities of the Turnbull government are and these certainly do not appear to include working for improved customer focused outcomes and lower costs, so it is likely that Turnbull will renew efforts to marginalize the ACCC.

    Telstra has had major financial boons from the two agreements with NBN Co and the associated multi-billion dollar sweeteners thrown Telstra’s way by the current and former government, but there is no doubt that if Turnbull has an opportunity to sell off the NBN then it is likely that the lions share will fall into Telstra’s hands due to the nearly $100 billion that it will be paid or save over time under the current agreement with NBN Co.

    A review of the Universal Service Obligation (USO) was announced by the former Parliamentary Secretary to the Communications Minister Paul Fletcher and it was apparent that he was taking a positive leadership role within the Coalition government for this important keystone of the nation’s social equality oriented telecommunications policy. Why Turnbull’s attention was not focused on the USO in his time as the Communications Minister is a mystery, but could provide some guidance as to his priorities.

    Turnbull appears to be in denial of his failure as a Communications Minister, and simply brushed aside demands for reasoned and justified telecommunications market reforms. Having made a mess of the NBN and brushed off the wide-spread criticism, we should not hold out hope that Turnbull will change direction.

    And now that the Coalition government believes that Turnbull’s popularity will make the next election nothing but a formality the telecommunications portfolio is likely to remain in the background as the Coalition government seeks to broaden and increase the goods and services tax to 15 per cent. Another Turnbull gem?.

    Mark Gregory is a Senior Lecturer in the School of Electrical and Computer Engineering at RMIT University.  His blog is here.

  • Michael Keating. The Turnbull Government’s Response to the Financial System Inquiry

    The Government has adopted 43 of the 44 recommendations of the Financial System Inquiry (FSI). These recommendations had received wide support, and as I said in an earlier blog (21 January), ‘they should be relatively easy for the Government to adopt’. Indeed, the surprise would have been if the Government had not been supportive (whoever was Prime Minister and Treasurer).

    Overall the net result should:

    • Strengthen the resilience of the financial system
    • Lift the value of the superannuation system and retirement incomes
    • Modestly promote some more competition
    • Lead to some improvement in customer treatment
    • Enhance regulator independence and accountability

    In this posting I will concentrate on the first two points, which have received most public comment and which are the most significant.

    Resilience of the Financial System

    Our financial system weathered the GFC exceptionally well, but nonetheless the Government has accepted the FSI view that “Australia’s financial sector regulatory framework needs to be stronger than those of other comparable countries”. In particular, Australia’s banks provide close to 90 per cent of the domestic credit to businesses and households. Furthermore, compared to other countries, Australia’s banks are especially dependent on off-shore financing, while their lending portfolios are heavily concentrated on home lending, with mortgages accounting for 60 to 70 per cent of their domestic lending.

    The main change to improve the resilience of the financial system has been the requirement for the banks to hold increased capital. In addition, risk weights, leverage, loss absorbency and regulators’ crisis powers will be addressed by the regulators and the Government. These changes should reduce the possible future need to call on the government guarantee and consequently for taxpayer funded bailouts. They should also reduce the advantages that the four major banks have over their competitors, thus increasing competition with better outcomes for consumers. Certainly, the present level of competition is insufficient to hold down charges (see more below), and one wonders if these changes will make enough difference.

    In fact, the banks anticipated the Government’s support for these changes to their capital ratios and moved to improve them before the government announcement. What is of concern, however, is that the increased cost of the extra capital has been passed on, or even more than passed on in the case of Westpac, through higher interest rates to borrowers. Furthermore, the return on shareholders’ funds for the four major banks in Australia is already just about the highest among all comparable countries. Thus the major banks could easily have absorbed the higher costs of their greater security instead of passing them on to their customers. Indeed, that would seem to be only fair as their shareholders are now facing less risk, and normally the return on capital should reflect the amount of risk.

    Clearly the oligopolistic competition among the four major banks is not working in the customer’s favour. Calls by the Government, media and of course the banks themselves, that these interest rates are competitively set and should be left to the market fail to recognise that the evidence clearly proves that the present oligopolistic form of competition is falling far short of the text book ideal of pure competition.

    Now some financial pundits are suggesting that the Reserve Bank will need to lower its interest rate just to offset the unjustified increase in mortgage rates. But this really would be a case of the tail wagging the dog, if monetary policy is going to be set in response to unwarranted decisions by the commercial banks. Indeed, in these circumstances one wonders if stronger regulatory powers might not produce a better result, if this is how our banks are going to behave if left to themselves.

    Superannuation and Retirement Incomes

    The objective of the superannuation system

    Since the introduction of compulsory superannuation back in 1992, superannuation has become one of the success stories of Australian policy. Superannuation funds now account for as much as $2 trillion of savings, and even though the compulsory system is still only half way to maturity, the retirement incomes of middle income households have already improved significantly. Overseas assessments rate the Australian retirement incomes system as being the second or third best in the world. Nevertheless, improvements in our retirement income system have been recommended by the FSI, and these can and should be made.

    Most importantly, the Government has accepted the FSI recommendation that the starting point for reform is to establish clearly the objective of the compulsory superannuation system and enshrine it in the superannuation law. This will act as a guide regarding superannuation’s purpose against which policy proposals can be assessed. This should in turn improve the policy debate and avoid some of the past policy mistakes.

    At this stage, however, the Government has still left open what that objective for superannuation might be. The FSI recommended that the objective of superannuation should be to provide “income in retirement to supplement or substitute the age pension”, and there is an emerging consensus that superannuation should be directed to providing a retirement income and not other benefits, including bequests. Nevertheless, there will be a lot of further debate about:

    • what constitutes an adequate retirement income
    • the implications for the amount of compulsory saving and how superannuation balances might be used in retirement; and
    • the extent to which superannuation should be matched by reductions in access to the age pension.

    Perhaps the most worrying issue yet to be settled in regard to the purpose of superannuation is the extent to which superannuation should act to reduce the call on the Age Pension. Unfortunately both sides of politics in their response to the FSI recommendations have expressed their desire that as many retirees as possible should live off their superannuation and not rely on the Age Pension or even a part Age Pension. In principle limiting access to the Age Pension in this way may seem like a good idea, but practically its advocates merely demonstrate their ignorance of how the pension and superannuation systems actually interact. Furthermore, it was never the expectation of the then government, as can be seen from the second reading speech when compulsory superannuation was introduced, that it would lead to a significant reduction in the number of people drawing an age pension. Instead, it was expected – correctly – that compulsory superannuation would lead to more part-pensions and less full pensions, but not much reduction in the total number of pensioners.

    The reality is that the present age pension for a couple cuts out at around average weekly earnings, and more than 80 per cent of the workforce earn less than this amount. So if this majority of retirees receive a superannuation weekly payment that is a bit less than their previous income, they must inevitably have access to a part pension in their retirement. The only alternative way to prevent most retirees having access to a part age pension would be to:

    • reduce the age pension,
    • increase the rate at which the age (and other) pensions are reduced as private income increases above the already high rate of 50 per cent, or
    • substantially increase the rate of compulsory contributions to superannuation.

    It is doubtful whether any of these ways of reducing access to the Age Pension are actually desirable or politically practical. So in setting the objective of the superannuation system we should focus on achieving an adequate retirement income, and forget about the consequences for expenditure on the Age Pension.

    Reforms affecting post-retirement incomes

    The other really important recommendation by the FSI, which the Government has also endorsed, is the proposal to introduce new income stream products that can better protect retirees from longevity and the other risks. At present retirees draw down on their superannuation balances after retirement, either as a lump sum, or as regular payments from their individual superannuation account. This means that the retiree has to calculate how long they will live and adjust their draw-down rate accordingly if they want to maintain their standard of living. In addition, they must handle the inflation and investment risks that will affect the value of their superannuation balance.

    The evidence strongly suggests that retirees are mostly risk averse and try to ensure that their money doesn’t run out while they are still alive. As a result, they typically leave a sometimes substantial balance in their fund when they die, but this comes at a cost of an unnecessarily low living standard through their retirement, and also a lack of security.

    In future the default option for a retiree will be a comprehensive retirement income product (CIPR), selected by their fund’s trustees. Individual retirees will still be able to opt out if their circumstances and preferences are different. But for those who agree to participate, the longevity and other risks will effectively be pooled, and this should encourage the financial system to develop new products that will provide much more secure retirement income streams to retirees. In addition, the Government has agreed to “continue to work to remove impediments to retirement income product development”.

    While these are important and welcome reforms to the post-retirement arrangements for superannuation, there remains some doubt whether the pooling of the post-retirement risks will work sufficiently on a voluntary basis. Time will tell, but it may be if voluntary pooling doesn’t work sufficiently well, then some form of mandatory pooling will be proposed. The difficulty with compulsion, however, is that the circumstances of different retirees can vary significantly as can their circumstances through their retirement. Thus it will be difficult to design a limited number of common post retirement products that suit everyone, but that is what mandatory pooling would impose.

    Other superannuation reforms

    The other major reforms of superannuation that the FSI proposed and the Government has (enthusiastically) endorsed relate to the governance and regulation of the system. The key changes are:

    • all funds must in future have a majority of independent directors
    • competitive allocation of new default fund members to MySuper products, that have emerged as key savings instruments during the accumulation stage, and the same would presumably apply for the allocation of retirees to funds offering the proposed CIPRs
    • amendment of the choice of fund arrangements by removing the deemed choice in certain industrial agreements and determinations.

    Clearly these changes are intended to reduce union influence over superannuation, notwithstanding that the present arrangements seem to be working well. On the other hand, it is hard to disagree, in principle at least, with more choice and competition. My personal view is that if the industry funds, where unions presently supply up to half the Board members, are truly as competitive as claimed, then I doubt that the changes will make all that much difference.

    The big prize for the retail, non-union, funds is a bigger share of the default market. If they are to win this bigger share, however, they should have to drive their costs and charges down. In that case the broader competition should benefit members, and that would be good. Indeed, a reduction of 30 basis points in charges, could on average accumulate over 40 years into an extra $40,000 that will significantly increase each retiree’s income.

    The key FSI recommendation that was not accepted by the Government was the FSI proposal to stop superannuation funds from borrowing directly. This is despite the risks that such borrowing presents to the resilience of the financial system, with much of that borrowing being invested in possibly over-inflated property. According to the Government the presently available data are not sufficient to justify significant policy intervention, but it will monitor the situation further.

    This decision effectively means that the Government has chosen to ignore the expert advice from the FSI, which clearly did consider that the data were sufficient when they made their recommendation. However, any prohibition on self-managed superannuation funds borrowing to increase their investments would have been unpopular with the relatively well-off owners of these funds. One cannot help wondering therefore whether that may be the real reason why the Government has failed to act on what is a potentially significant risk to financial stability.

    Finally, action to reduce the inequities and costs involved in the superannuation tax concessions was not part of the FSI mandate, but it did advise the Government that action should be taken. It is to the credit of the Turnbull Government that it has now decided that this issue should be considered as part of its Tax Review. On the other hand, a review of the superannuation tax concessions should never have been prevented by the Abbott Government; indeed even the former Treasurer, Joe Hockey, in his valedictory speech to the Parliament called for these tax concessions to be reviewed. 

    Conclusion

    All in all the new Turnbull Government has got off to a good start with its first major set of reforms covering the financial system. The net result should be better performance by what is now one of Australia’s biggest industries that greatly influences our overall economic performance. This reform package, however, was not a real test of the Government’s economic credentials. Frankly almost all the decisions involved were not controversial, and the few exceptions affecting superannuation governance and competition were strongly supported by the Government’s own constituency.

    The real test for this Government will come later when it reveals its intentions regarding Budget repair, tax reform, and the future of federalism. Innovation policy will also be important but less controversial, while workplace reform will most probably involve more legislation to curb the power of unions, but no-one has yet shown that such attempts in the past have ever made much if any difference to productivity.

    Michael Keating is the Chairman of the newly formed Committee for Sustainable Retirement Incomes which is an independent, non-partisan committee that has been established to act as a catalyst for public debate about retirement incomes through the development of evidence and policy advocacy.

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    [1] Michael Keating is the Chairman of the newly formed Committee for Sustainable Retirement Incomes which is an independent, non-partisan committee that has been established to act as a catalyst for public debate about retirement incomes through the development of evidence and policy advocacy.

  • Chris Bonnor. Educational opportunity in Australia.

     

     Educational opportunity in Australia – who succeeds and who misses out? This critical question about our schools is the title of a new report commissioned by the Mitchell Institute. It is a thorough, timely and outstanding contribution to our understanding of disadvantage in schooling. The report, produced by Victoria University’s Centre for International Research on Education Systems, compiles data from a variety of sources to answer the ‘who succeeds and who misses out’ question. And they do this by investigating four stages of education: beginning school, Year 7, senior school and at age 24.

    The report draws together existing information – something which adds to its value and significance. Cutting a long story very short, it concludes that only six out of every ten students succeed across the four identified stages. School works well for these students. As for the others, the report helps us know who they are and why they are falling behind. No surprise here: they are overwhelmingly the socio-educationally disadvantaged. The good news is that, with the right interventions, these young people can recover and succeed at the next milestone – as long as the school is properly funded to make the required difference. Yet another timely plug for the full Gonski.

    Notwithstanding the quality of this report I have an enduring hope that this is surely as far as we need to go in analysing the problem. It follows over a decade of research with the same message: if we want to lift student achievement we need to lift the disadvantaged. Stephen Lamb, the team leader for this report, told us that years ago. His submission with Richard Teese to the Gonski review, along with the NOUS report for Gonski, reinforced the message. More recent reports, including by Lyndsay Connors and Jim McMorrow, show that our framework of schools is dysfunctional. Bernie Shepherd and I have found that Gonski’s findings have been strongly supported by data since Gonski reported.

    A few matters arising out of the Mitchell Institute report are worth a mention. If six out of ten students are well served by our schools, then what strategies are needed for the other four? In a partial answer the report devotes attention to the problem of student disengagement, something which lies at the heart of underachievement.

    But there seem to be at least two underlying assumptions. The first is that the extent of student disengagement is something that the available data, including on attendance, retention and completion captures. Margaret Vickers is one who has challenged this in the past – and teachers are well aware of students who stay the course, but also stay below the radar and jump through the hoops without really achieving their best. For all the talk about lifelong learning, the school experience of many young people ensures that their learning life ends when they finally walk out the door. This contributes to the scale of the problem identified by the Mitchell report for young people at age 24 years.

    The second assumption seems to be that students are disengaged from schools. Many successful interventions proceed on information that suggests that it is the other way around: that the way we do school itself is disengaging and needs a rethink. The experience of Big Picture schools, to cite one example, is that students from a range of backgrounds (and for a range of reasons) have switched off mainstream schooling. Injecting a shopping list of ‘reforms’, including doing conventional school harder and longer – even with better teachers – isn’t the answer. Investigations into disengagement suggest that we should be having serious conversations with the young people and rethinking how we can tailor their learning.

    And we need to do this thoroughly and soon, with organisations such as the Mitchell Institute taking a leading role. We need to investigate authentic interventions which are making a difference, switching kids back onto learning and achievement for the long term, right now – and support the people who are doing it while planning how to scale up such success. If we don’t – and if we only just restate the problem – then we vacate the solutions field for all those intent on recycling solutions that just don’t work. The Mitchell Institute report has appeared in the same week that the media reported on Simon Birmingham’s apparent flirtation with school vouchers. Are we going to have to endure the useless reform fetishes of yet another federal education minister?

    To conclude: full marks to the Mitchell Institute and the authors of Educational opportunity in Australia. What a terrific start. Just don’t stop now!

    Chris Bonnor is a Fellow of the centre for Policy Development and a Director of Big Picture Education Australia

     

  • Marie Coleman. The FTB cuts have been softened, but they’re still a con

    The Turnbull Government might be trying to scale back the size of its planned Family Tax Benefit cuts, but the fact is they still hit the poor hardest and ask them to foot the budget repair bill, writes Marie Coleman.

    After a year of the Senate blocking its radical changes to parental benefits, the Government has tried another tack this week.

    On Tuesday the Turnbull Government introduced revised welfare legislation to Parliament that scales back some of the tougher Family Tax Benefit cuts first flagged in the 2014 budget.

    Under the new plan, the Family Tax Benefit (FTB) Part B payments to families would end when their youngest child turned 13 (rather than the original plan of six), and there will be a boost for those receiving FTB Part A payments.

    But the proposal still includes a number of cuts to payments that are expected to save the Government $4.8 billion over the forward estimates and leave thousands of families worse off.

    The welfare changes have always been tied (hypothecated) to overall budget savings and to funding new approaches to expand child care, and despite this new approach it is still something we need to reject.

    It still relies on punishing low income and sole parent families. It asks the poor to fund the need to bring outlays under control. And it doesn’t approach the expenditures outside the Social Security portfolio where the major inequitable expenditures exist.

    More than 130,000 single parents stand to lose family benefits under the Turnbull Government’s new family payments plan.

    Department of Social Services officials this week told a Senate committee that 136,000 single parents would see a reduction in FTB part B once their youngest child turned 13. Furthermore, single parents of teenagers would have their payments reduced from more than $3,000 a year to $1,000 and grandparent carers would also have their payments cut when their grandchild reached 13.

    According to the Australian Bureau of Statistics, in June 2012, there were 961,000 one-parent families, making up 15 per cent of all families. About two-thirds of these one-parent families (67 per cent) had dependants living with them.

    There were 780,000 single-mother families in June 2012, making up the vast majority of one-parent families (81 per cent).

    Single-parent families come into being for many reasons – death of a partner, divorce, separation, and births to unwed mothers. Many women leaving domestic violence become the heads of single-parent families.

    Not all these families live in poverty. But those reliant on our tightly targeted Australian social security system are indeed close to the poverty line. Australia has fewer children living in poverty than many comparable economies because of our system of providing benefits to all families to assist with the costs of child rearing, although there are some worrying trends.

    Many, but not all, single-parent families are reliant on financial support from the taxpayer to some degree. Some, not all, receive Sole Parent Payments. Many receive further support through the system of Family Tax Benefits (FTB).

    FTB has two key elements.

    First, the FTBB is available to all families, both two-parent and single-parent. Second, the FTBA is means tested, and available to the very poorest of families – some two-parent, some single-parent.

    The Senate estimates session heard 3,900 grandparents who are carers would be affected by the measure and that a further 76,000 couple families would lose their FTBB completely when their youngest child turned 13.

    The Government argues that the new approach will mean that parents will be encouraged to enter the workforce, and that the proposed new child care arrangements will mean that those who do will in fact be better off.

    This assumes that there is work for these adults – notwithstanding continuing strong trends in unemployment in many regions. It also assumes that the as yet announced child care details will indeed lead to beneficial outcomes. But child care policy experts Professor Deborah Brennan and Dr Elizabeth Adamson found that the draft proposal will “reduce access and increase complexity“. Many organisations commenting on the Regulation Impact Statement supported the Brennan-Adamson findings.

    Then there are the regional and national employment data from the Australian Bureau of Statistics.

    Unemployment and underemployment remain an issue. There are strong regional issues. Where are the retraining programs? Social Services Minister Christian Porter has no real answers. He suggests grandparents need to get a job. Really?

    Get real. Where are the jobs for these grandparent and sole parents and low income families?

    Senators need to look at the facts in their own areas – can sole parents or grandparents find work? This is a disgraceful con.

    Marie Coleman is the chair of the National Foundation for Australian Women Social Policy Committee. This article was first published in The Drum on 23 October 2015.

  • Robert Brown Two concerns about the government’s response to the financial system inquiry.

    It’s been a big week for the Australian financial services industry. Firstly, there was the unusual decision by the big banks to raise mortgage interest rates in an economic environment which would normally result in no change or even a drop in rates, claiming with some justification that new capital adequacy requirements ‘forced’ them to do it. Secondly, there was the government’s generally positive response to the recommendations of Financial System Inquiry chaired by former CEO of the Commonwealth Bank, David Murray.

    While I am supportive of most of the government’s responses, there are at least two that concern me.

    The first is the decision to not support the recommendation of the FSI to ban gearing (borrowing) in Self-Managed Superannuation Funds (SMSFs). Typically, this is in the form of limited recourse borrowing to purchase real estate. This is not a marginal issue. The sector accounts for over 99% of all superannuation fund entities (of which, at June 2015, there were over 560,000). SMSFs are also the biggest single sector of the market, controlling over 30% of the $2 trillion in Australian superannuation savings.

    Gearing introduces significant risk into the system and in some cases, high risk. While the level of gearing in SMSFs is not large at this stage, the trend is clear. Eventually, there will be individual financial tragedies, if not large scale public scandals. It’s only a matter of time which is why public policy action should be taken before the inevitable financial and political pain demands intervention to clean up the mess.

    I respectfully suggest that decision makers have lost sight of why the SMSF sector was allowed to exist as a unique and relatively unregulated category in the first place. SMSFs (then called section 23F or ‘exempt funds’) were originally allowed by government in the 1980s as a simple ungeared safe harbour for Mum and Dad investors to place their retirement funds, in return for which they were promised limited regulatory intervention (in contrast to the heavily regulated APRA funds).

    So if we are going to continue to allow gearing in SMSFs (which readers may recall was an unintended consequence of poorly drafted legislation designed to allow the Howard government to sell Telstra to SMSFs via warrants), we must consider whether:

    1. a) The people of Australia should be subsiding this form of gearing (often negative gearing) through the superannuation system; and
    1. b) Whether the amount of intervention and regulation by government should be increased to ensure the system isn’t compromised or rorted.

    Having lived through 30 years of SMSF reforms, particularly in the early days when they were quite simply tax rorts with the ability to borrow and lend through all manner of direct and obscure techniques, I regret to say that increased regulation of SMSFs is inevitable. Of course, the response from supporters of gearing is simply that the regulator should get rid of the ‘rorters’, the ‘spruikers’ and the ‘bad apples’. That’s an easy thing to say, but as we’ve seen in the financial planning industry in recent years, doing so is never easy and always involves much cost which taxpayers will have to cover.

    I suppose we can be at least thankful that the government has announced that it will monitor and formally review SMSF gearing within three years. Of course, we can be sure that changing anything at that time will be much harder, unless by then the industry has come in for a very hard landing (which legislative action in 2015 would avoid). Regrettably, we rarely seem to learn the lessons of the past.

    On a more positive note, I was pleased to see the government’s agreement to the FSI’s recommendation to mandate higher education, an industry exam, a professional year and an approved code of ethics for financial planners/advisers. All of these initiatives are worthy courses of action which should be supported. However, we must not lose sight of the fact that ethics is the key to success for the new reforms. A university degree is a good idea because it makes a person more competent (I hope); but it certainly doesn’t make a person ethical and trustworthy. Adoption of (and adherence to) a set of ethical and professional standards does that.

    This brings me to my second concern. What will the approved code/s of ethics contain? If they accept the continuity of %-based asset fees (aka commissions paid by clients), life insurance commissions and other product sales incentives allowed in the Future of Financial Advice legislation (2013/14), remuneration conflicts will continue and only a limited amount will be achieved for consumers of financial advice which, after all, is supposed to be the ultimate purpose of these reforms.

    I’m reminded of the ‘agri-business’/’tree’ saga of recent sad memory. Many of the offending unethical advisers were members of my profession. That is, they were experienced chartered accountants or CPAs with relevant university degrees. All of them had done an exam (many exams actually), had undertaken a professional year (two years in some cases) and had signed up to a ‘stringent’ (but inadequate and mostly unenforced) code of ethics. So why did it all go so wrong? As always, the answer is the corrupting influence of conflicted remuneration. So this week’s announcement, whilst most welcome, is yet another case of “the devil will be in the detail”.

    Good progress has been made. However, I remain concerned that gearing of SMSFs is an accident waiting to happen and that failure to comprehensively remove conflicted remuneration will cause the proposed reforms to fall far short of consumers’ expectations. 

    Robert M C Brown AM BEc (Syd), FCA

    Robert Brown is a Sydney-based chartered accountant with over 30 years of experience in public practice. He is a member of the Australian government’s Financial Literacy Board and a director of Financial Literacy Australia Ltd, a not-for-profit company which provides grants for the development of community-based financial literacy programs. He was awarded membership of the Order of Australia for his work in the superannuation industry.  

     

  • Jon Stanford. Australia’s New Submarine: What is its Mission?

    Recent papers published in Pearls and Irritations by Jon Stanford and Rear-Admiral Ian Richards have suggested respectively that:

    • the case for providing significant financial support to the naval shipbuilding industry is flawed, both on defence policy and industry policy grounds
    • there are unacceptable risks involved in building Australia’s proposed new fleet of submarines locally.

    In this article I seek to move back from the issue of local or overseas acquisition of the new submarines and attempt first to address the more fundamental question of what exactly the Australian government wants these submarines to do. That then leads on to the second question of what technologies the submarines will need to deploy in order to undertake this mission most effectively and at minimal risk to their crews.

    What is the new submarine for?

    The role for the new submarines was set out in the 2009 Defence White Paper prepared by the Rudd government. This remains a remarkable document, particularly in the context of a genre usually characterised by emollient phraseology, platitudes and evasion.[1] In setting out how Australia’s strategic circumstances have changed, largely due to the rise of China, it ventured into territory where previous Defence White Papers had feared to tread:

    “It is conceivable that, over the long period covered by this White Paper, we might have to contend with major power adversaries operating in our approaches – in the most drastic circumstance, as a consequence of a wider conflict in the Asia-Pacific region. In such a circumstance, it is not a current defence planning assumption that Australia would be involved in such a conflict on its own. But we do assume that, except in the case of nuclear attack, Australia has to provide for its own local defence needs without relying on the combat forces of other countries. The Government considered such contingencies because although they are unlikely, they are not so remote as to be beyond contemplation. …In such circumstances, in order to defend ourselves we might also have to selectively project military power beyond the primary operational environment described in this White Paper, for instance in maritime Southeast Asia.” (Page 65.)

    The key requirement here is for the ADF to be capable, not only of operating independently and without the protection of a ‘great and powerful friend’, but ultimately of unilaterally projecting military power a long way from home, in maritime Southeast Asia. Indeed, the White Paper explicitly states that “we will use strategic strike if we have to” (page 59).

    It soon becomes clear from the White Paper that the new submarine would discharge a number of roles, including that of being the primary asset for the delivery of strategic strike:

    “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. “(Page 70.)

    How will the strategic strike capability be delivered? The acquisition of cruise missiles was seen as a key priority, to be delivered by the Royal Australian Navy (RAN), and, if operating in waters a long way from Australia, it seems clear that submarine launched missiles would be the preferred means of delivery:

    “The Government places a priority on broadening our strategic strike options, which will occur through the acquisition of maritime-based land-attack cruise missiles. These missiles will be fitted to the AWD, Future Frigate and Future Submarine. …The incorporation of a land-attack cruise missile capability will be integral to the design and construction of the Future Frigate and Future Submarine”. (Pages 70 and 81.)

    The 2009 White Paper has been quoted at length because it set out in quite precise terms what the future submarine’s multi-role mission would be. The 2013 White Paper, produced by the Gillard government, was far more reticent in every way than the 2009 version, and was virtually silent on the role required of the new submarine.[2] Yet while the tone may have changed, neither the strategic posture nor the requirements for the future submarine as laid out in the 2009 White Paper have been refuted or significantly amended in subsequent government statements.

    More recently, for example, as evidence of the changed emphasis since 2009, the previous Chief of Navy (2011-14), Rear Admiral Ray Griggs, defined the major operational task for the future submarine as “sinking hostile ships and submarines. In contrast, other roles such as intelligence collection, transporting special force teams and land strike using cruise missiles are very much secondary and not significant design drivers.” Yet force projection operations far from home for the submarines still appear to be high on the agenda. “The area of operations seems clear. Admiral Griggs considers the South China Sea as the area of most interest.”[3]

    In summary, therefore, while the tone may have become more diplomatic, in public at least, the overall mission of the future submarine is very much along the lines set out in the 2009 White Paper. If some roles have been downplayed by Admiral Griggs, none of them has been deleted from the list. Indeed, in proposing that the main area of operations for the future submarine will be the South China Sea, a contested and congested location not easily accessed from Australia, Admiral Griggs has endorsed a high risk, proactive role for the new boats a long way from base. This is entirely consistent with the 2009 White Paper.

    Technology: what kind of submarine does Australia need?

    What does this imply for the design of the new submarine? The problem is that some of the roles set out in the 2009 White Paper and later described by the then Chief of Navy can only be effectively discharged by a nuclear powered attack submarine (SSN). Undertaking strategic strike missions, for example, landing special forces or attacking warships and submarines in the South China Sea requires a submarine to have two important attributes apart from state-of-the-art sensors and weaponry.

    The first vital attribute is high speed. The 2009 White Paper tacitly acknowledged this (page 70): “long transits and potentially short-notice contingencies in our primary operational environment demand high levels of mobility and endurance in the Future Submarine”. A SSN can make 35 knots underwater indefinitely, while a conventional submarine (SSK) may travel at 20 knots using its batteries but only for very short distances. Using air independent propulsion (AIP) it proceeds at a leisurely four knots. The second attribute is a low indiscretion rate. A nuclear submarine never needs to surface when in its patrol zone whereas a SSK without AIP needs to come to periscope depth, where it can be detected by hostile forces, relatively frequently in order to charge its batteries.

    Overall, the high transit speed of a SSN and its ability to remain submerged for weeks on end provide immense strategic advantages. As the British demonstrated in the Falklands War after sinking the General Belgrano, the threat posed by the presence of one or more SSNs can lock up an enemy fleet in port and take it entirely out of the game.

    The government, therefore, has written a job description for a nuclear powered submarine. Yet the 2009 White Paper states clearly (page 70) that the “Government has ruled out nuclear propulsion for these submarines”. This decision has been endorsed by subsequent governments. There is an inherent contradiction here that needs to be addressed.

    To be sure, Defence has stated that Australia’s new submarine will have a greater ability than Collins to remain submerged for longer. Of the three contenders for the contract, both the French and German shipbuilders are offering AIP. This solution would allow the submarines to remain submerged for about two weeks. Speed, however, is limited to less than five knots and the AIP units are heavy and expensive.

    The third contender, the Japanese evolved Soryu class, proposes a different technology, with Lithium-ion batteries replacing lead acid batteries and without recourse to AIP systems. This is potentially a more effective solution and with the rapid development occurring in Lithium-ion technology may well become much better still in the future. More powerful batteries would allow a higher underwater speed, greater endurance and a lower indiscretion rate. Yet there are some significant problems to be overcome. For example, Japanese Lithium-ion batteries used in the Boeing 787 Dreamliner have been known to catch fire, an unacceptable outcome in a submerged submarine, particularly one that is operating in hostile waters.

    While an SSK using AIP or Lithium-ion may be quieter than a nuclear submarine, the advantage when compared to a modern American or British SSN such as Virginia or Astute is now marginal. This benefit is outweighed by a considerably slower transit speed for the SSK, slower speed when operating submerged and higher indiscretion rate.

    Until recently the RAN did not need to consider the acquisition of nuclear submarines in order to retain its technological edge in the region. Only the Americans and Russians operated nuclear submarines in their Pacific fleets and the games they played were predominantly with each other. In the Asian maritime region, first Australia’s Oberon class and then, in their early years at least, the Collins class were leaders in technology. A few other countries operated less effective conventional submarines but nothing that would cause any concern to the RAN.

    That situation has now changed substantially. Several countries in the region operate boats that are technologically more advanced than the Collins class. Even some SSKs, particularly those that are equipped with AIP, outclass Collins in important respects. Of more concern is the upsurge in nuclear submarine acquisitions. Apart from the United States and Russia, both China and India now operate nuclear submarines in the maritime Asia-Pacific and are building up their fleets. Some of these boats have the capability to attack Australian cities with ballistic and cruise missiles. China and India are also building SSNs designed to hunt and destroy other submarines, with the slower SSKs being most vulnerable to such attacks.

    The role of China’s nuclear submarine fleet is fairly clear. If positioned west of Hawaii, the new Jin class of ballistic missile submarines could threaten the whole of the continental United States as well as Australia. On the other hand, the role for the Shang class of SSNs apparently is to establish a strong presence in the South and East China Seas. According to one commentator:

    “One goal of Chinese submarines is to create an anti-access/area denial zone up to what it refers to as the First Island Chain, consisting of the Kuril Islands, Japan, Taiwan, and the South China Sea. The chain represents the absolute minimum to defend the Chinese mainland. The second goal would be to enforce China’s claims on the East and South China Seas.”[4]

    While China’s current fleet of nuclear submarines may lag behind western technological standards at this stage, that nation’s ability to catch up with the west in a short period of time should never be underestimated. Currently, for example, the civilian nuclear industry is developing at a rapid pace in China, with considerable resources devoted to small modular nuclear reactors (aka nuclear submarine power plants). China is also leaping forward in the area of defence electronic systems, particular sensors. Given that Australia’s new submarine will remain in service for perhaps 40 years, it is important to ensure that it is not outclassed before the first boat has left the shipyard.

    In a paper on the Future Submarine presented in 2014, Andrew Davies, a naval specialist at the Australian Strategic Policy Institute (ASPI), has analysed future trends in anti-submarine warfare. He concluded that developments in technology, particularly in sensors, would make life increasingly difficult for all submarines, but particularly SSKs. He stated that:

    “The design of the future submarine has to be cognisant of these trends, which will make penetration of adversary space or operations in contested chokepoints by the submarine itself very much harder. Basing our investment around traditional ideas of submarine operations isn’t likely to be a winning strategy a couple of decades from now”.[5]

    Davies goes on to summarise the implications of his analysis for Australia’s future submarine:

    “The net summary is that future submarines will need to:

    • operate away from chokepoints and contested spaces but be able to project influence into them
    • have a low indiscretion rate
    • be a hub for a suite of long-range sensor and weapon systems
    • be networked with other units, including electronic warfare platforms and systems
    • be able to manoeuvre quickly in response to a rapidly changing threat environment.”[6]

    Davies goes on to say: “of course, that list pretty much says ‘SSN’, but that’s not going to happen”. Because of that restriction Australia needs “to decide whether our subs are going to play in the highest end operations. If we decide we need to, we’re necessarily going up the risk reward curve for a conventional boat.” In layman’s terms, that means that if Australia decides to employ a SSK to undertake missions suitable only for a SSN, the lives of the crew would be put at high risk.

    Implications

    Drawing these threads together, it is not difficult to conclude that, unless the government downgrades the tasks it expects the future submarine to undertake, Australia’s next submarine needs to be nuclear powered. First, any SSK, even a leading-edge boat using Lithium-ion batteries, cannot dominate the battlespace in a region of the world where other countries are deploying nuclear submarines. Secondly, to send a conventional submarine into the South China Sea to attack hostile warships and submarines, to launch cruise missiles or conduct infiltration and exfiltration missions on a hostile shore would not be an efficient or effective use of naval assets and it would place naval personnel at very considerable risk.

    The next question is whether Australia is capable of acquiring and operating a fleet of nuclear submarines. Clearly there would be major hurdles, apart from the domestic political issues (incidentally, it would be impossible to build a SSN locally). First, we would need US support which is not likely to be forthcoming. This may well be negotiable, however, particularly if Australia agreed to assume a greater defence responsibility in the region in the context of the US strategic tilt to Asia.[7] Secondly, because we have no nuclear industry, conventional wisdom suggests Australia cannot maintain a nuclear submarine’s reactor. Perhaps the US Navy could be engaged to undertake this task, preferably in Australia but if necessary in Hawaii.

    If Australia were to acquire an established class of nuclear submarines from the US or Britain the cost could be substantially lower than acquiring a fleet of newly designed SSKs, particularly if they had to be built in Adelaide. We would certainly not require more than six SSNs and, in contrast to the three conventional submarine offerings currently on the table, we would be buying a tried and tested model. We could also acquire them much more quickly and allow the troubled Collins class to sail into a merciful sunset.

    Alternatively, we could accept that Australia would never go to war with a major adversary except as a member of a coalition led by the United States. In that case we could appropriately leave force projection activities in the South China Sea to the US Navy. The role of the ADF, inter alia, would then be to deny any adversary access to the approaches to Australia’s littoral. This may well be a much more realistic and less risky strategy.

    But that raises a critical question. Do we need to spend up to $40 billion on new submarines in order to defend Australia’s maritime approaches? The answer to this may well be in the negative because Australia is already acquiring a number of other advanced defence assets that can accomplish this. These include a new generation of frigates that will be highly capable in anti-submarine warfare (ASW). These will be networked into very substantial RAAF assets, including the six airborne early warning Boeing Wedgetails, up to 12 Boeing P-8 Poseidon long-range maritime patrol aircraft, 36 Super Hornets (including 12 of the very advanced electronic warfare ‘Growler’ version) and 72 F-35 joint strike fighters. We already have an excellent aerial refuelling capability. With its ability to locate and destroy hostile submarines as well as surface ships, the new Poseidon in particular will be an important asset in denying access to Australia’s approaches. It is therefore difficult to see how a SSK would be required to play a role here.

    Finally, to venture into more sensitive territory, it is not difficult to deduce that the main reason the US is keen for Australia to acquire a new generation of SSKs is not power projection but rather the contribution they would make to intelligence gathering, specifically in the area of communications electronics support measures (CESM). The Kestrel CESM system fitted to the Collins class, for example, provides “wideband signal search, narrowband audio interception and direction finding (DF) over the HF, VHF and UHF bands”.[8] Apart from the considerable strategic benefit offered by the intelligence it provides, this capability presently gives Australia valuable ‘coin’ in the intelligence sharing agreement with the US. Whether or not it could be provided safely and effectively by sophisticated aircraft (manned and unmanned) or satellites rather than submarines is a key question.

    Prime Minister Turnbull has stated that, across the broad spectrum of government policy, all options are on the table. In that context, mature analysis of these strategic considerations, before committing to buy very costly submarines, is a major priority. The issue of whether or not the submarines should be built in Adelaide pales into insignificance next to these fundamental questions.

     

    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 both in the public service and subsequently as a consultant. 

     

    [1] Australian Government (2009), Defending Australia in the Asia Pacific Century, Defence White Paper, Canberra.

    [2] Australian Government (2013), Defending Australia and its National Interests, Defence White Paper 2013, Canberra, pages 81-82.

    [3] Peter Layton (2015), “Australia’s next submarine – will it be the Soryu”, Defence Today, Vol 11, No 4, page 8.

    [4] Kyle Mizokami (2013), “Asia’s Submarine Race”, USNI News, US Naval Institute, November, http://news.usni.org/2013/11/13/asias-submarine-race

    [5] Andrew Davies (2014), Trends in submarine and anti-submarine warfare, Australian Strategic Policy Institute, Canberra, http://www.aspistrategist.org.au/wp-content/uploads/2014/04/ASPI-submarine-conference-2014-Davies.pdf

    [6] Ibid.

    [7] In recent times the US has been more forthcoming in terms of its willingness to transfer sensitive defence technologies to Australia. To date, for example, Australia is the only country outside the US to acquire the highly advanced electronic warfare EA-18G ‘Growler’ version of the Super Hornet fighter-bomber.

    [8] Daronmont Technologies, http://www.daronmont.com.au/dartweb/index.php/projects/kestrel

  • Ian Richards. The Submarine Menace

    Way back in the 1980s, then Defence Minister Kim Beasley gave birth to the greatest industrial White Elephant in the history of our nation  –  the establishment of the submarine construction facility in Adelaide,South Australia.   So much has been written and said about the Collins Class submarine construction  project that I do not need to elaborate upon it.  Suffice it to say that it was succinctly described in the media  as a “disaster”. It would be hard  to find many who would disagree.

    Politicians of both persuasions have since that time  prostituted their principles in pursuit of their holy grail – VOTES.  In this case, votes in South Australia. . The beauty of these kinds of long-term projects from a Minister’s perspective is that while they get the kudos from announcing the project and cutting a ribbon, they will be safely drawing their superannuation when the full horror of a disastrous acquisition begins to unfold.

    As a result we are now embarked upon the second saga in this sorry tale.  We are building three orphan Destroyers  unique to Australia.  As an alternative, we could have purchased three US built ARLEIGH BURKE class  destroyers – considerably more capable ships – plus a hundred fully equipped regional hospitals for the same total project  cost.  The media reports that the  first ship is way over budget and three years late.  This augurs badly for the future of these ships – if construction delays resulted from unmanageable complexity – and why else??  – the lifetime logistic support will be a nightmare. .  As Australian orphans we will have to provide a costly  inventory of lifetime spares – rather than tap into the US stockpile if we had purchased the ARLEIGH BURKEs. The initial and annual  costs of the Destroyer dedicated bureaucrats in the Defence Materiel Organisation  will amount to a staggering figure.

    A passing comment by an industry rep at a Sydney Trade Fair  some years back perhaps says it all  – “The propeller shafts were designed in Finland, manufactured in Holland and will be powered by what is known in the trade as ‘the bastard Caterpillar’, a US Caterpillar diesel modified by the Spaniards”.  I cannot vouch for his accuracy, but I suspect the principle in his comment is correct. The first of class is already effectively three years old  –  the second and third will be five? six? years out of date on commissioning. Ten years after commissioning, how many of the companies providing installed equipment will still be manufacturing suitable spares?

    The Government is now faced with a decision on the procurement of new submarines.  For a moment, leave aside manufacturing or employment considerations and look only at the requirements for the defence of Australia.

    A fundamental consideration must be – “Conventionally armed conventionally powered submarines have made no significant contribution to strategic imperatives or military operations in the past 70 years”.

    At a Naval seminar some two or three years ago the Chief of Navy laid emphasis on the transition of the Navy to an amphibious capability greatly enhanced by the new CANBERRA class helicopter carriers. An overbalance of submarine capability does not fit into this theme.

    Submarines are a major all-out- war weapon against a major foe.  When our projected  new submarines  are torpedoing  Indonesian, Chinese, Indian,Russian merchant ships and warships or our very expensive very advanced projected  new submarines are firing missiles into Shanghai, or Djakarta or Delhi or Vladivostok  our new submarines could be usefully employed. Short of such a scenario, our new submarines will be of little consequence.

    That said, a case can be made for a small number of modest capability submarines in a balanced Australian Defence Force. A force of 12 submarines for Australia as proposed by the previous Government is nothing short of absurd.

    Looking now at the manufacturing and employment considerations, surely we have demonstrated with the Collins Class and now the Air Warfare Destroyers that it is not possible for a small nation with limited requirements and limited high tech industrial infrastructure to build very advanced warships or submarines in tiny numbers other than at prohibitive cost and with production delays and lifetime logistic problems.  Argentina, a country not too dissimilar to Australia, demonstrated abundantly in their disastrous  submarine building programme why not to go there. “Building submarines” is of course a misnomer  –  we are not “building” submarines, but building a metal box . At least  95% of the contents will be  made overseas – all the weapons and most of the systems and sub-systems will be foreign made. Bought in penny packets, the cost of “making” a motor car in this fashion would be huge  –  for a submarine, even more so. It is almost certainly less costly to buy a submarine complete off the shelf than to buy all the components to assemble it in Australia. The Australian “building” thus adds no value but huge cost to the equation.

    If we were determined to build high tech high risk submarines in Australia, surely we would have chosen one of our industrially developed areas rather than a charming rural backwater that has a demonstrated incapacity to build merchant ships or even motor cars competitively.

    There are so many arguments against this project.  But the White Elephant is trumpeting to be fed, spurred on by its clamourous mahout, the South Australian Parliament.

    The submarine Project is a serious menace to the wellbeing  of Australia’s future taxpayers. It is for the Government to show its wisdom in deciding whether or not  to continue with a project that will extract  $20,000,000,000 or $30,000,000,000 from them  with little improvement in the Nation’s defence. There are many other projects that would be more valuable, create more employment  and justify such expenditure.

    Ian Richards, AO, retired as Rear Admiral, Royal Australian Navy, in 1984. He variously commanded HMAS Perth, Stuart and Third Destroyer Squadron. He was Director of Naval Plans and Chief of Joint Operations, Defence. He was Deputy Chief, Naval Staff, when he retired as Rear Admiral.

  • John Menadue. Coal is good for humanity! The Tony Abbott story continues.

    The messenger may have changed, but apparently not the message. Only this week our new Prime Minister said ‘Can I simply say, the government’s policies are unchanged’

    An obvious example of this unchanged policy is that Malcolm Turnbull has agreed to the go-ahead of the $16 b. Carmichael Coal Project in central Queensland. This is despite the stand he used to make that burning fossil fuels was a major contributor to carbon pollution and climate change.

    To reinforce that ‘policies are unchanged’ and picking up where Tony Abbott left off Malcolm Turnbull’s new Energy Minister, Josh Frydenberg, tells us that the mine would ‘help lift millions of people out of energy poverty’. He pointed out that over a billion people around the world don’t have access to electricity. He is telling us in another way what Tony Abbott kept telling us that ‘coal is good for humanity’.

    Only three months ago Oxfam Australia reported that coal is ‘not good for humanity’. It said

    Four out of five people without electricity live in rural areas that are often not connected to a centralized energy grid so local, renewable energy solutions offer a much more affordable, practical and healthy solution than coal. The Australian coal industry faced with the rapid decline in the value of its assets and an accelerating global transition to renewable energy has been falsely promoting coal as the main solution for increasing energy access and reducing poverty around the world. But as well as failing to improve energy access for the world’s poorest people, burning coal contributes to hundreds of thousands of preventative deaths each year due to air pollution and is the single biggest contributor to climate change, pushing people around the world deeper into poverty. … the world’s poorest people are made even more vulnerable through the increasing risk of droughts, floods, hunger and disease due to climate change. Australia must rapidly phase out coal from its own energy supply and as a wealthy developed country, do far more to support developing countries with their own renewable energy plans. 

    Recently the Lancet, the UK medical journal, said

    ‘Climate change fuelled by the burning of coal as well as other fossil fuels, presents a potentially catastrophic risk to human health through heat stress, floods, droughts, extreme weather events, air pollution and the spread of disease.’ 

    In the face of an abundance of expert opinion, Malcolm Turnbull and Josh Frydenberg keep approving new coal mines. They accept the spin of the coal mining industry that ‘coal is good for humanity’.

    If they really want to help the poor and the planet, they would facilitate the wind-back of thermal coal production and re-double efforts to extend wind and solar power that doesn’t need a centralized distribution grid and can be deployed much more quickly and cheaply. Malcolm Turnbull talks about technology disruption. That would be a good way to help the planet through battery storage for solar power.

    Far from helping humanity to wind back the fossil fuel industry, the government is doing the reverse. A test of Malcolm Turnbull’s commitment to the environment is whether he will wind back the $6 b. annual subsidy that taxpayers pay to fossil fuel companies that have devastating environmental records and lobby incessantly and successfully to keep their hands in the taxpayers’ pocket.

    This $6 b. annual fossil fuel subsidy includes two really big hand-outs. The first is the fuel tax credit scheme costing about $2 b. which favours the big miners. Secondly, the oil and gas industry also get a massive tax break through accelerated depreciation that is approaching $2 b. p.a.

    The OECD only recently reported that ‘The time is right for countries to demonstrate that they are serious about combatting climate change and reforming harmful fossil fuel support is a good place to start.’ The OECD identified that its member countries had fossil fuel subsidies of $US 200 b. p.a.

    The Abbott government cut our foreign aid funding from $5.6 b. in 2012-13 to $4 b. in 2015-16. These are the largest ever multiple-year and single-year cuts in ODA in our history. Julie Bishop accepted these cuts. The wealthy miners with their lobbyists speak up all the time. But there are few to speak for the poor who need ODA.That is why foreign ministers have such an easy time. They have no domestic constituency. The don’t need to listen to the poor in Myanmar or Bangladesh.

    These cuts in ODA say a lot about the priorities of the Australian government. It cuts our aid to some of the poorest countries in the world but continues subsidies to those companies causing devastating climate change. By abolishing the carbon tax the polluters can continue to pollute without any penalty. It is time to reject the spin of the miners and stopped pretending that ‘coal is good for humanity’.

  • Luke Fraser. Rail and roads: a reform blueprint to match Turnbull’s boldness and innovation

    Australia’s new Prime Minister demands boldness and innovative action. Amen. To date road and rail reform has proven too dry and monolithic for most Prime Ministers. But failure to act is now accruing several billion dollars in road debt annually. Transport consumes over $30 billion of taxpayer treasure annually. Boldness and innovation here can bankroll many other solutions across Australia’s economy.

    Recently I juxtaposed the continued failure of Australian rail with the US experience, where Jimmy Carter’s bold market reforms have seen $AUD 800 billion of market money invested in rail since 1980. But what are the solutions for Australia?

    I propose five matters which promise to not only solve our core rail freight issues, but which will also bring responsible and productive reform – indeed, tax reform – to our road sector:

    1. Don’t look to government’s Inland Rail project for any answers

    Inland Rail is a $10 billion dollar project conceived by the transport bureaucracy to link Australia’s east coast freight task. Good in theory, but execution falls flat: several hundred pages of government business case fail to present a plausible commercial prospect to investors at even the thinnest rates of return. Even at a lower government investment rate, Inland Rail only shows an economic benefit cost ratio of 2.6:1 – and a great deal needs to go right to make even that ratio realistic[i]. Spending taxpayer treasure to build this would be lunacy. Inland Rail only works in the context of pricing reforms for east coast highway trucking.

    1. Address the lack of direct pricing arrangements for inter-capital road freight

    Is our economy big enough for a fully commercial east-coast freight railway? Probably. But for now over 85 per cent of Australia’s east coast interstate freight runs on trucks[ii], because they offer a more efficient service than rail can provide. This is primarily due to the antiquated way trucks are charged and the overwhelming historical expenditure bias towards highways. No other modern large economy is so truck-dependent for long haul.

    While highway trucks pay steep fuel tax and registration charges for their contribution to road damage, the devil lurks in the detail of this charging system: it is an entirely averaged charge across all trucks and roads nationwide. In other words, charges don’t reflect the true costs of maintaining the major east coast highways which out-compete rail: a semi-trailer pays the same taxes and charges, whether it is hauling interstate freight on the Pacific Highway or delivering to a farm on a dirt road in the outback. Not all roads need to attract a direct charge, but the major highways which compete directly with railways should be so charged (initially the charge might not even need to be actually levied, but rail investors at least need to see what it might look like).

    To put this in context, average road charging of trucks on the major rail-competitive highways would be like our electricity providers charging a flat connection fee for suburban homes and large factories alike: the quantum of fees raised might be right, but home-owners rightly would be furious at having to cross-subsidise the business sector.

    In some cases, developing direct prices on the intercapitals might make some road freight routes even cheaper. So be it: rail and road investors and their financiers simply need certainty and transparency around pricing before anyone will open their chequebook on any projects. This step would bring competition reform to roads in a controlled and useful way, one designed explicitly to minimise unintended consequences.

    1. Market-test the government’s national railway – but be careful about it

    The government signalled the sale of Australia’s national railway (the Australian Rail Track Corporation – ARTC) in its 2015 budget. This is the right outcome: Experienced market proponents are the only people to run commercial rail. As in the United States, the new owners should be relieved of all commercially-crippling passenger train responsibilities.

    But if a ‘quick and dirty’ asset recycling of ARTC occurs without first establishing the fair direct price trucking should be paying for use of competitor highways to the railway, the new owner of Australia’s railways will be buying a pig in a poke.

    Tasmania and Victoria allowed this to happen to their grain branch lines around 15 years ago – railways were sold, the new commercial owner found them mostly non-commercial against trucking and promptly began ‘asset stripping’ to make what was left viable. this resulted in the Crown buying back railways at a cost of hundreds of millions of dollars and great embarrassment. Western Australia and its grain growers are living through precisely the same stuff-up today. To allow this to happen to Australia’s national mainline network would be not far short of economic vandalism. An ARTC sale could consider appropriate enforceable obligations, such as allowing connected rural branch railways to be run profitably by farmer cooperatives to the mainline, as often occurs successfully across North America. But the vendor should not be too prescriptive about what stays, what goes and what new railways get built.

    Inter-capital highways are the only parts of the road network competing directly with national rail for freight custom. Highways are also one of the biggest spending pressures on our spiralling, debt-laden roads budget. They should be the first subject for innovative and responsible road reform.

    1. Align funding control with accountability: hand national highways over to the Commonwealth

    Since Whitlam, most ‘national’ highways have been the sole funding responsibility of the Commonwealth, yet for over 40 years Canberra has taken no responsibility whatsoever for their delivery. This disconnect encourages Federal transport ministers to throw vast taxpayer dollars at highway ribbon-cutting and then blame the states for failure to deliver when anybody criticises highways. The States should stop being made the whipping boy here and call Canberra’s bluff in an important reform to Federation: hand full responsibility for all national highways to the Commonwealth – make Canberra directly responsible to the voter for the outcomes of profligate, politicised and erratic highway spending patterns.

    1. Examine market models for national highways

    It would be logical for Canberra as sole owner and financier of a national highways network to examine more productive commercial operation of these highways, with trucks paying a fair and transparent direct charge in return for pro rata fuel tax and registration rebates: in short, productive fuel tax reform.

    Throughout Europe, professional road services companies have managed highways very effectively for decades, providing good service levels far more efficiently than bureaucracies with their large fuel taxes and inflationary construction costs. Bringing pricing and spending disciplines to the expensive highways might even reduce the cost of truck charges overall because the quantum of non-commercial road spending would be reduced significantly.

    The alternative to bold and innovative future with a competition reform pedigree is more mindless, politicised highway spending, more State and Commonwealth transport blame games, billions in new government debt accrued each year, no national rail sector of any substance and little if any productive market investment in either rail or highways.

    That is not a future that squares with our new Prime Minister’s narrative.

     

     

    Luke Fraser is founder and principal of Juturna, a public policy consultancy specialised in road and rail freight and market investment reforms. He is a former national trucking industry CEO and has authored several reform studies for Infrastructure Australia. In 2012 he was appointed to the COAG Road Reform Board. He was for a time a chief of staff in the Howard government.

    [i] Remarkably, the Inland Rail business case appears to overlook specific new motorway infrastructure in northern Sydney – Northconnex – which is likely to reduce interstate road freight travel times significantly on the run through Sydney. This might render Inland Rail’s stated improved delivery times thoroughly uncompetitive.

    [ii] Bureau of Infrastructure Transport and Regional Economics Interstate Freight in Australia Research Report 120 (2010)

     

     

  • John Menadue. Is Malcolm Turnbull sacrificing his principles?

    The polls show most Australian voters have welcomed Malcolm Turnbull’s election as Prime Minister. I did.

    It is very early days, but I am concerned by signs that he is bowing very much to the right wing of his own party and former Abbott supporters rather than spelling out clearly his own policies that we heard about for years. He told the Parliament today ‘Can I simply say the government’s policies are unchanged’

    A strong leader imposes his views on the organization he leads and not the other way around. In the longer term, Malcolm Turnbull can’t please those who welcomed his election as a sign of change and improvement, and those who stuck stoically to Tony Abbott.

    For years in opposition and then in government Malcolm Turnbull gave us a contemporary, appealing and relevant outline about what we should be doing in our national interest. Is it still there?

    Despite early signs of a more humane approach to asylum seekers and refugees, he has re-appointed the hardline ex-policeman, Peter Dutton, as his Minister for Immigration and Border Protection. It was a ‘captain’s pick’ that he didn’t need to make. I was looking for signs of change in this area, or at least a signal that change was in prospect. It did not happen. Only last week, Peter Dutton told us that he would not be blackmailed by pregnant asylum seekers on Nauru. What courage! I don’t think that is what many in the Australian public, or even Malcolm Turnbull himself, hoped for in his Minister for Immigration and Border Protection.

    Adam Bandt asked Malcolm Turnbull in the parliament about releasing children in detention. What we got was a justification from Malcolm Turnbull on Coalition refugee policies that were ‘tough’ and even ‘harsh’.

    Climate policy has been the defining issue of Malcolm Turnbull’s political career. He lost the leadership of the Liberal Party on just this issue. He once described the Coalition’s policy of Direct Action to reduce carbon emissions as ‘fiscal recklessness on a grand scale’. He also described Direct Action as a ‘fig leaf’ when you haven’t got a policy. Now Malcolm Turnbull describes Direct Action as a ‘resounding success’.

    In 2010, Malcolm Turnbull told us that ‘to effectively combat climate change’, the nation ‘must move … to a situation where almost all or most of our energy needs to come from zero or near zero emissions sources’. Now he tells the parliament that ‘[Opposition leader, Bill Shorten] is highlighting one of the most reckless proposals the Labor Party has made. Fancy proposing without any idea of the cost of abatement, the cost of proposing that 50% of energy had to come from renewables! What if that reduction in emissions you needed could come more cost-effectively from carbon storage, by planting trees, by soil carbon, by using gas, by using clean coal, by energy efficiency.’ That is dramatic turn-round in policy by Malcolm Turnbull. Was it just political rhetoric or has he changed his mind on renewable energy?

    Barnaby Joyce maintains that in the deal with the National Party, Malcolm Turnbull agreed that water policy would be transferred to his agricultural portfolio. That suggests that the interests of farmers will be placed ahead of the ecological health of the Murray-Darling Basin. That again raises serious doubts about Malcolm Turnbull’s environmental credentials. Even that resolute climate sceptic, Tony Abbott, never put Barnaby Joyce in charge of water in the Murray Darling Basin.

    The Turnbull government has now approved the $16 b. Adani Carmichael Coal Project in Queensland. In doing this, Malcolm Turnbull told the parliament that ‘clean coal’ and ‘carbon capture’ were viable responses to fossil fuel pollution. But he told us in 2010 that ‘despite all the money put into carbon capture and storage there is still, as of today, no industrial scale coal fired power station using carbon capture and storage ‘. As far as I can understand carbon capture and storage is still a pipe dream, as it has been for decades.

    The tide of informed opinion is turning very strongly against new investments in thermal coal projects like Carmichael. The governor of the Bank of England only recently warned about the risks of investing in fossil fuel and that such investments would likely become ‘stranded assets’. In 2010 Malcolm Turnbull told us that building a future that is not reliant on fossil fuels for energy is ‘absolutely essential if we are to leave a safe planet to our children and the generations that come after them.’ Yet he has now approved the Carmichael coal mine that will be one of the largest in the world and the largest in Australia. It will increase carbon pollution dramatically and put at risk the Great Barrier Reef. We are paying a heavy price for another Malcolm Turnbull somersault.

    In his own electorate of Wentworth, Malcolm Turnbull had a strong reputation and record in support of marriage equality. But that is also changing. He has now endorsed the position held by Tony Abbott. As prime minister, he has told the parliament ‘the Coalition, our government, has decided that the resolution of this matter [marriage equality] will be determined by a vote of the people by a plebiscite to be held after the next election’. Tony Abbott must be pleased. No wonder Tony Abbott said, perhaps a little mischievously that the Turnbull Government had not changed any policies of his own government.

    In Opposition, Malcolm Turnbull described data retention laws as ‘expensive, invasive and useless’. He is now over-seeing a huge expansion in the amount of information the government can access from the public. There is no sign yet that he is likely to rescue us from the ‘digital dungeon’ he warned us about.

    Tony Abbott was determined to destroy the National Broadband Network. Malcolm Turnbull, it could be argued, helped to rescue it. But the political compromise between Tony Abbott and Malcolm Turnbull has given us a much inferior NBN. Almost all informed advice tells us that we are spending massive sums on a project which will result in this country having inadequate internet speeds. This will stifle the sort of innovative businesses which Malcolm Turnbull says the country needs. Yet he has shown no signs of building an NBN which, instead of relying upon slow and antiquated Telstra copper, connects most Australian premises to fibre. All we have had is waffle from the new minister about the government being technologically “agnostic”, whatever that means.

    It is early days yet for the Turnbull government, but the events of the last month are cause for concern. Tony Abbott and the old guard are winning consistently on policies.

    Gough Whitlam indelibly stamped his policies on the ALP long before he became Prime Minister. The reverse now looks to be in play with the Coalition stamping its policies and prejudices on Malcolm Turnbull after he became Prime Minister.

    In the end we didn’t expect much from Tony Abbott, but with Malcolm Turnbull we have much higher expectations. He has set the bar much higher for himself and our country. We were encouraged by this. But he is showing a tendency to keep running under the bar he set.

    He has given the Liberal party a lift in its political capital of about 3/4%. But has the Liberal party learned a lesson about the need for genuine change along the lines formerly advocated by Malcolm Turnbull or will the Liberal party head back to its old agenda?

    Will Malcolm Turnbull be there when we need him and help realise the high expectations we have of him. I hope so. But political compromise in the grab for power has been obviously on show in the first few weeks.

     

     

  • Nicholas Reece. Falling behind in the innovation stakes

    Malcolm Turnbull has promised a new innovation policy for Australia by Christmas. Bill Shorten has pledged to be a “jobs prime minister for the new economy”. For the first time in a long while, the political rhetoric matches a genuinely huge national policy challenge.

    In the past 15 years, there have been more than 60 reports on Australia’s national innovation system. They all broadly reach the same finding: Australia suffers from a failure to turn public research into commercial outcomes, to generate higher levels of business research and development, to adapt new technologies and skills, and to participate effectively in global value chains.

    Despite all the reports, there has been precious little action and an embarrassing lack of coherence in Australia’s policy settings. As a result, Australia finds itself languishing near the bottom of the Organisation for Economic Co-operation and Development when it comes to the commercialisation of research and in the middle of the pack when it comes to investment in higher education, research and innovation. This is a very dangerous portent for future prosperity.

    If there is a silver lining in Australia being so far behind world leaders in innovation – such as the Nordic states, Israel, Singapore, Britain, South Korea and United States – it is the existence of strong evidence about what works. Now we just need our leaders to make the bold policy interventions that will drive Australia’s economic transformation.

    These advanced economies all approach innovation systematically, with agile development agencies that foster collaboration and plug gaps in the innovation ecosystem.

    According to chief scientist Ian Chubb​, Australia is the only country in the OECD without a national research and innovation plan. China has the explicit goal of being the greatest investor in research and development in the world within a decade. Japan wants to be the No. 1 global innovator by 2018. Australia?

    We need a clear plan with an inspirational vision and goals – all backed up by our political leaders as proselytisers-in-chief.

    One useful intervention would be to set up a national innovation body like NESTA in Britain, to provide strategic leadership of the nation’s innovation and research effort, and stimulate debate and entrepreneurial activity. If the Productivity Commission is like Australia’s personal trainer, keeping the economy lean and fit, then an Australian NESTA could be the coach, driving the relentless pursuit of innovation and building entrepreneurial skills and culture.

    Instead, we have a Canberra-based bureaucracy that thinks its only purpose is to find and destroy “rent seeking”, like a heat-seeking missile. The result is that high-potential industries do not get the support they need, and globalisation has left us with a national economy that resembles a twisted reflection in a circus hall of mirrors: a gutted manufacturing sector; a dominant mining industry with its cycle of boom and bust; and domestically focused oligopolies of banks, insurers and retailers.

    Australia needs to make a game-changing investment in wealth-generating research, innovation and commercialisation.

    The Australian government allocates about 2.4 per cent of gross domestic product to research and innovation – about the same as it did in 1984. By comparison, South Korea has a target of 5 per cent.

    But the problem is much deeper than just the quantum. The priorities and incentives embodied in the allocation of funds are also problematic. More than half is allocated to public research agencies, medical research institutes and universities. A further 30 per cent goes to business through R and D tax measures. Comparatively little funding is available to support research engagement between business, universities and research organisations.

    For example, the Co-operative Research Centres program, which builds links between researchers and business, makes up just 1.5 per cent of total support for science, research and innovation, and the recently revamped Entrepreneurs’ Program accounts for 0.4 per cent.

    Britain has allocated $3 billion over five years to its Catapult Centres, promoting industry/university collaboration, compared with $190 million over the same period for the Growth Centre equivalents in Australia.

    The US government invests nearly 10 times more than we do as a percentage of GDP in business feasibility studies intended to convert research into proven technologies. The lack of an equivalent to the widely lauded US Small Business Innovation Research scheme here represents a major hole in our innovation ecosystem. That scheme is credited with triggering a fundamental shift in attitudes in US universities towards research being converted into a product or service.

    Australia also needs to plug gaps in the innovation pipeline that funds research and technology breakthroughs into commercial applications. The “valley of death” for businesses that have received venture capital is well known, but other gaps exist at the pre-seed, proof-of-concept,  and angel investor stages. The problem can be fixed with improved funding programs run by sector experts, and new taxation arrangements.

    Finland, with a quarter of the population of Australia, invests about $200 million a year in young growth companies. In Australia, the closest equivalent program is investing $350 million over 14 years.

    Finally, our government could do something really bold with our immigration program. Immigrant-led entrepreneurism is a key ingredient in the economic success of countries like Australia and the US. Immigrants make up 17 per cent of the US economy, yet 50 per cent of business start-ups in Silicon Valley have at least one immigrant as a founder. Nearly all of them are graduates of the US university system.

    The evidence in Australia tells a similar story. The University of Melbourne runs the Melbourne Accelerator Program, ranked 13th in the world among university business accelerators. Over the past three years, 46 per cent of the new businesses that have come through the program have had at least one immigrant founder.

    The Obama administration has moved to offer overseas graduate students six-year working visas. Australia should match it with something equally brave.

    Nicholas Reece is a principal fellow at Melbourne University and a former policy adviser to Julia Gillard, Steve Bracks and John Brumby.

  • Luke Fraser. Shorten, Infrastructure Australia and boldness.

    Infrastructure Australia (IA) has truly become something to conjure with; it has even spawned a comedy series. Where is it headed? Last week Federal Opposition Leader Bill Shorten outlined Labor’s vision. This involved:

    • a new $10 billion IA financing facility to encourage spending;
    • putting trillions of Australian superannuant money to work in infrastructure investments;
    • IA to become an investment bank of sorts

    The problem here lies in promoting more investment in infrastructure along the same lines as today.

    Lack of infrastructure spending is the least of Australia’s problems.

    Michael Keating and I demonstrated in an article ‘Infrastructure: Improvement or Impoverishment?‘ the Fairness, Opportunity and Security series just how vast infrastructure spending has become in less than a decade: between when Kevin Rudd assumed power in 2007 and relinquished it in 2013, public capital formation – mostly infrastructure investment – rose by over a third. Capital formation in transport, postal and warehousing grew by almost 50 per cent; net capital stock grew by an almost incredible 39 per cent. If spending is your goal, then as Harold Macmillan said, stop complaining – you’ve never had it so good.

    The real problem is what we spend the money on and at what cost.

    In roads, Australia spends over thirty billion dollars each year without recourse to independently verified business cases for most large projects. Few appear economic, even fewer bankable. Some are community service obligations and probably justified on this basis. Other very clearly are not: they are simply enormous wastes of money. Non-bankable projects pose a problem for Shorten’s hopes to unlock trillions in superannuation finance.   East-West Link was an $8 billion dollar project with a business case delivering as little as 45 cents in the dollar, yet it was supported at the very highest levels of Victorian and Commonwealth transport bureaucracies and treasuries. Shorten’s reforms are silent on this sort of incompetence, but it is the main game. There have been plenty of similar duds promoted under Labor state governments. Both sides of politics are caught in a ridiculous system: political will for infrastructure is all-consuming, but the appetite for clear-sighted microeconomic reforms which nurture more productive investments is absent.

    What is this costing? Modern road spending above available fuel tax and vehicle registration revenue saw roads generate multi-billion dollar new government debt in each year from 2007 onwards. The last reported figures (2012-13) work out to over $26 billion; today’s real figure is probably more like $38 billion. This is a worthy challenge for a new Commonwealth Treasurer keen on arresting wasteful spending.

    IA’s assertion that all this spending is about busting congestion is based heavily on long-discredited data around urban car use: actual growth in capital city car use from 2007 to 2014 has been overstated by factors of between around six and eight for all state capitals. In Adelaide, 2014 government figures show car growth actually dropped over those years in net terms, rather than grew[i]. Yet the 2007 forecasts continue to be quoted.

    Australia can do better.

    IA should list all projects it has rejected and publish the detailed reasons for rejection. This would inform better policy making. Conversely, it would be cause for concern if IA hadn’t rejected any projects lately: it should be either helping projects towards productive inception or showing them the door.

    An ambitious government should support IA to walk and chew gum at the same time: to get its head above projects and call out the structural reforms that – if pursued – could attract large, bankable new investments. IA has developed a reputation for too carefully picking and choosing its fights on this higher plane. It was entirely silent on the National Broadband Network. Since 2013 it has maintained silence on government road debt. It offers little on some other highly-prospective areas for investor upside.

    Take irrigation: there have been no IA calls to roll back the flawed Murray-Darling Basin Plan, corporatize the delivery of water in the basin, rein in the over-allocation of water licenses and establish the necessary structural adjustments for those affected. This is a sector crying out for plain speaking: superannuation funds and banks should have reforms explained to them in longhand that if pursued could unlock productive, multi-billion dollar investments in irrigation infrastructure. Farming should be engaged on how irrigation reform can present Asian markets with a far greater Australian farm value proposition than it does today.

    In contrast, IA’s limp 2015 Infrastructure Audit offered only a line on page 127 of a report few will ever read, saying ‘more market reform in rural water is warranted’. No data quantifying how flawed the sector is to shame to action. No sketch of bankable deal structures that might be on offer to commercial investors if Australia reformed rural water. In short: not serious.

    To be fair to Mr Shorten it is hard to capture public attention with a vague call to put steel and leadership into Infrastructure Australia, yet these are the qualities most lacking. The new PM’s call to boldness should be heeded: IA should call a spade a spade on the wasteful, unreformed and unimaginative infrastructure sectors which hold Australia back. If those in charge can’t or don’t want to do so, they should hand in their badges. Government too should be bold enough to demand better solutions from its infrastructure tsar.

    Solutions are there for the asking. Investors are waiting.

    A forthcoming post offers some possible reform solutions and deal structures for the road and rail sectors – a follow up to an earlier piece on rail.

    Luke Fraser is founder and principal of Juturna, a public policy consultancy specialised in roads, freight and market investment reforms. He is a former national trucking industry CEO and has authored several reform studies for Infrastructure Australia. In 2012 he was appointed to the COAG Road Reform Board. He was for a time a chief of staff in the Howard government.
    [i] Sources: Bureau of Transport and Regional Economics, Estimating urban traffic and congestion cost trends for Australian cities Working Paper No 71 www.bitre.gov.au/publications/2007/wp_071.aspx;

    Bureau of Infrastructure, Transport and Regional Economics, Australian infrastructure statistics yearbook 2014, December 2014

     

  • John Menadue. The infrastructure mess and wasteful road spending.

    Former prime minister Tony Abbott said that he planned to be the infrastructure prime minister. There was little to show for it apart from wasteful spending on roads. He said that the Commonwealth should ‘stick to its knitting’ and not get involved in funding public infrastructure. His focus was on roads.

    Our new prime minister, Malcolm Turnbull has spoken at the weekend of exploring radical road and rail funding, and has announced Commonwealth funding for a light rail project on the Gold Coast.

    Last week Bill Shorten announced a $10 b. infrastructure plan which even suggested giving Infrastructure Australia a trading licence!

    There is a lot of rhetoric and a lot of talk about infrastructure. Before it all gets out of hand we should stop and consider the present mess. And a mess it is. The motoring, road construction and political lobbies are promoting waste and confusion.

    In July last year Infrastructure Australia put out a draft report to canvas public comment. This is quite usual practice. The report was hastily withdrawn and the Co-ordinator General sent on ‘extended leave’. It seems that the government didn’t want a rigorous and transparent discussion on infrastructure.

    There were two particular media reports at the time that are worth re-reading. Extracts from an article by Alan Kohler give a flavour of his concern. “The whole problem with road funding in Australia is too much government involvement and not enough private rigour … Here’s the arresting heading of one of the chapters [in Information Australia’s draft report] … Australia’s nearly $20 b. annual road spend can only be described as hideously inefficient. … Australia has a true gamblers’ addiction to roads: the money spent is not a rational investment.”  See link to Kohler article below.

    www.ycat.org.au/?news=why-dont-they-do-it-in-the-road

    Josh Gordon in The Age said ‘“The Infrastructure Australia report … has delivered a scathing critique of monopoly state run road entities such as VicRoads, claiming a culture of resisting reform that has led to a situation in which political leaders are held captive to demands for more funding. … More than $20 b. a year of national road funding is being spent in a hideously inefficient manner. … The current Australian system assumes that roads are an answer to most transport problems and seeks more and more funding to that end with little consideration of alternatives that most other parts of the world enjoy, such as significant heavy intercontinental rail networks and dominant heavy mass transit systems. … The report is also critical of the federal government’s efforts to predict increases in road traffic, claiming urban congestion has consistently been overstated as a result.  See link to article below:

    http://www.theage.com.au/victoria/billions-spent-on-roads-in-8220hideously-inefficient8221-way-20140722-zvqcg.html

  • Bob Kinnaird. 750,000 temporary residents with work rights.

    The recent Fairfax/ABC Four Corners reports exposing widespread exploitation and wage abuse of overseas students and other visa workers in 7-11 stores, horticulture and other sectors have been justly applauded as outstanding examples of investigative journalism.

    Their impact has been immediate, forcing 7-11 to set up an independent investigation panel chaired by Alan Fels and 7-11 chairman Mr Russ Withers to resign.

    The latest Fairfax report was titled ‘The Precariat’ (SMH, 3 October 2015). The term combines ‘precarious’ and ‘proletariat’ and was coined by British economist Guy Standing. It means broadly workers reliant on transitory and insecure work, though not necessarily low-skill.

    The government’s response to the scandal so far has been underwhelming. This is strange, since Trade Minister Robb says that two ‘super-growth’ industries for Australia’s economic and jobs future are international education and tourism. Both are indirectly implicated in the exploitation scandals in 7-11 and elsewhere. A prudent government would do more to secure their long-term future.

    Senator Cash In her new capacity as Employment Minister in the Turnbull government declared there was no need for government regulation of the labour hire industry, one of the central players in this sordid scene: industry self-regulation was her preferred way.

    As Assistant Immigration Minister she had earlier announced that three months ‘volunteer’ (i.e. unpaid) work by working holiday 417 visa-holders would no longer qualify them for a second-year 417 visa. That long-overdue correction was a reaction to an earlier ABC Four Corners program on mainly Asian working holiday makers being exploited in the fruit and vegetable sector.

    The Fairfax ‘Precariat’ report points out that the end of last year, Australia was host to 750,000 foreigners on temporary visas with some work rights, mostly on student, working holiday and 457 skilled visas. Another 470,000 people were here on visitor visas, largely for tourism. Technically they have no work rights but many do work unlawfully.

    This 750,000 figure actually understates the size of the temporary visa workforce because it is a snapshot at 31 December when many temporary visa-holders go home for the work shutdown or summer break and are outside Australia at this time. In June 2014, the figure was 840,000.

    Alongside the foreign worker exploitation issue, two related issues need attention. The first is the impact on Australian workers especially young people who bear the brunt of cut-throat job competition from the burgeoning temporary visa-holder work force. Between June 2007 and 2014, the number of overseas students and working holiday visa holders in Australia grew by 50 per cent, from 324,800 to 490,960.

    Expressed as a proportion of the 15-24 year old labour force (June 2007 vs 2014, latest available), the stock of WHMs and overseas students has grown from 16 per cent to 24 per cent of the total youth labour force in Australia.

    Most of these temporary visa-holders are young people and compete in the entry-level job market. Not all work, but most do.

    The impact on young Australians is clear in many indicators: declining labour force participation rates among young people, rising youth unemployment and underemployment, increasing unemployment rates among new graduates and many others.

    Competition from the growing temporary visa work force is not the only factor responsible. Increased participation rates in higher education and some welfare disincentives to work also contribute, among other things. Successive governments have failed to commission any serious study of the labour market impacts of this recent explosive growth in this temporary visa workforce. But this level of growth in labour supply is bound to have major impacts especially in times of sluggish employment growth, even before considering the characteristics of the additional labour.

    The second issue is the role of government international education and visa policies that are feeding the growth in Australia of a vast underclass of temporary visa holders desperate for work and ripe for exploitation.

    These policies need to change or the already large underclass of temporary visa workers will grow even larger, if international education and tourism do become Australia’s super-growth’ industries.

    International education and visa policies

    The two most serious examples are international education and visa policies for overseas students and graduates. Working holiday visas are also another serious area, not dealt with here.

    When Australia’s international education industry started in the mid-1980s under Labor, overseas students had no work rights in Australia. The target market was foreign students whose families were wealthy enough that their fee-paying sons and daughters didn’t need to work in Australia to survive. They were also in university study only, not low-rent private vocational colleges.

    Over time the government’s international education policies have changed dramatically. They now increasingly target overseas students from families with far less wealth and resources especially in the vocational education (VET) sector. Many go into debt to fund their Australian study and hope for a long-term employer-sponsored 457 visa or permanent residence (PR) visa. Many of these students need to work for much of their time here just to survive or send money back home, and are prepared to work for $6/hour or less. Some even pay their employer for the job, to secure 457 employer sponsorship or employer certification of ‘work experience’ needed for some visas, as reported in a Monash study I co-authored with Bob Birrell and others (‘Cooks galore and hairdressers aplenty’, People and Place, 2007).

    Over time the government has also expanded work rights for overseas students and graduates to give Australian international education providers a marketing advantage over other competitor destinations. What is being sold here is not the quality of the education offering but the right to work in Australia.

    The work rights on student visas now are 40 hours a fortnight during term and unrestricted hours the rest of the year.

    The most important recent development is the post-study work visa (485 visa) introduced by the former Labor government. This visa now gives overseas student graduates from higher education degree courses, in any field of study, unrestricted work rights in Australia for 2 to 4 years, depending on the qualification level. The vocational education (VET) sector is lobbying hard for the same post-study work visa. It is probably just a matter of time before they succeed. At present overseas student VET graduates can only get a more restricted 485 visa, limited to courses in occupations on the government’s skill shortages list and only for 18 months.

    The Immigration department says it expects 70 per cent of eligible overseas student graduates to take up the post-study work visa – a massive 200,000 by 2017-18, regardless of unemployment among Australian graduates whose numbers are set to grow rapidly at exactly this time, a result of policy-driven increased enrolments in the last five years or so.

    All overseas students and the graduates on 485 post-study work visas compete in the labour market with no legal obligation on employers to give preference to young Australians or to undertake labour market testing. Many overseas student graduates on 485 post-study work visas will end up competing in the lower-end of the job market, if UK experience with a similar program is any guide. That means even more pressure on young Australians with low skills looking for entry-level jobs.

    Incredibly, none of these extensions of work rights to overseas students or graduates including the post-study work visa has ever been based on any serious assessment of the impact on Australian residents in the job market. The Knight review, which recommended introducing the post-study work visa, completely ignored its potential labour market impact on local graduates and non-graduates.

    The main policy driver, as always, is to grow the international education sector and increase overseas student numbers and revenue. Governments like this, because it takes pressure off their education budgets. Business likes this, because it means a larger domestic market for their products and services, increased labour supply and downward pressure on wages.

    The policy changes needed are clear but unlikely, given the institutional resistance and vested interests.

    First, Australia’s international education policies should not be targeting relatively poor overseas students for onshore course delivery in Australia. Onshore provision should be targeted more to high-yield/high fee courses and well-funded students, not at overseas students so poor they have to work 40 hours/fortnight just to stay alive. If this segment is to be targeted, more emphasis should be given to providing courses offshore.

    Second, the overseas student graduate post-study 485 work visa needs a complete rethink. The timing is bad enough, coming into operation just as the Australian economy faces several years of below-trend growth, with no visa mechanism for protecting Australian graduates and job seekers. The number of 485 visas is not limited in any way and will be determined simply by graduate demand for them.

    At the very least, the visa should be restricted to graduates in occupations on the skill shortage list.

    Bob Kinnaird is Research Associate with The Australian Population Research Institute and was National Research Director CFMEU National Office 2009-14.

     

     

  • Wasteful costs in health.

    Following the ABC Four Corners program on health costs in Australia, there have been a number of very good follow up articles.

    The first, in The Conversation on 29 September is by Ray Moynihan ‘Costly and harmful: we need to tame the tsunami of too much medicine’.

    https://theconversation.com/costly-and-harmful-we-need-to-tame-the-tsunami-of-too-much-medicine-48239

    The second, in the AFR on 5 October, is by Neil Soderlund, Sam Stewart and Jan Willem Kuenen is entitled ‘Why overtreatment is costing Aussies $30 billion per year and how to fix it’.

    http://www.afr.com/opinion/why-overtreatment-is-costing-aussies-30-billion-per-year-and-how-to-fix-it-20151005-gk1ktn

  • Mark Carney and climate change – an historic speech

    The following are extracts from a speech given by Mark Carney, The Governor of the Bank of England at a Lloyd’s of London dinner on 29 September 2015

    He outlines how climate change is a huge financial risk, particularly for investments in unburnable fossil fuel assets. He points out that  the vast majority of these assets could be ‘stranded ‘and that the window of opportunity to address climate change is ‘finite and shrinking’

    The media has described this as a ‘milestone speech’   See link  to full speech and references.

    Extracts follow   John Menadue

    The tragedy on the horizon

    There is a growing international consensus that climate change is unequivocal. 2

    Many of the changes in our world since the 1950s are without precedent: not merely over decades but over millennia.

    Research tells us with a high degree of confidence that:

    • In the Northern Hemisphere the last 30 years have been the warmest since Anglo-Saxon times; indeed, eight of the ten warmest years on record in the UK have occurred since 2002; 3
    • Atmospheric concentrations of greenhouse gases are at levels not seen in 800,000 years; and
    • The rate of sea level rise is quicker now than at any time over the last 2 millennia. 4

    Evidence is mounting of man’s role in climate change. Human drivers are judged extremely likely to have been the dominant cause of global warming since the mid-20th century. 5  While natural fluctuations may mask it temporarily, the underlying human-induced warming trend of two-tenths of a degree per decade has continued unabated since the 1970s. 6

    While there is always room for scientific disagreement about climate change (as there is with any scientific issue) I have found that insurers are amongst the most determined advocates for tackling it sooner rather than later.  And little wonder.  While others have been debating the theory, you have been dealing with the reality:

    Since the 1980s the number of registered weather-related loss events has tripled; and inflation-adjusted insurance losses from these events have increased from an annual average of around $10bn in the 1980s to around $50bn over the past decade. 7

    The challenges currently posed by climate change pale in significance compared with what might come.  The far-sighted amongst you are anticipating broader global impacts on property, migration and political stability, as well as food and water security.

    We don’t need an army of actuaries to tell us that the catastrophic impacts of climate change will be felt beyond the traditional horizons of most actors – imposing a cost on future generations that the current generation has no direct incentive to fix.

    That means beyond:

    • the business cycle; 9
    • the political cycle; and
    • the horizon of technocratic authorities, like central banks, who are bound by their mandates.

    The horizon for monetary policy extends out to 2-3 years. For financial stability it is a bit longer, but typically only to the outer boundaries of the credit cycle – about a decade. 10

    In other words, once climate change becomes a defining issue for financial stability, it may already be too late.

    This paradox is deeper, as Lord Stern and others have amply demonstrated. As risks are a function of cumulative emissions, earlier action will mean less costly adjustment. 11

    The desirability of restricting climate change to 2 degrees above pre-industrial levels 12 leads to the notion of a carbon ‘budget’, an assessment of the amount of emissions the world can ‘afford’.

    Such a budget – like the one produced by the IPCC 13  – highlights the consequences of inaction today for the scale of reaction required tomorrow.

    These actions will be influenced by policy choices that are rightly the responsibility of elected governments, advised by scientific experts.  In ten weeks representatives of 196 countries will gather in Paris at the COP21 summit to consider the world’s response to climate change. It is governments who must choose whether, and how, to pursue that 2 degree world.

    Climate change and financial stability

    There are three broad channels through which climate change can affect financial stability:

    – First, physical risks: the impacts today on insurance liabilities and the value of financial assets that arise from climate- and weather-related events, such as floods and storms that damage property or disrupt trade;

    – Second, liability risks: the impacts that could arise tomorrow if parties who have suffered loss or damage from the effects of climate change seek compensation from those they hold responsible.  Such claims could come decades in the future, but have the potential to hit carbon extractors and emitters – and, if they have liability cover, their insurers – the hardest;

    – Finally, transition risks: the financial risks which could result from the process of adjustment towards a lower-carbon economy.  Changes in policy, technology and physical risks could prompt a reassessment of the value of a large range of assets as costs and opportunities become apparent.

    The speed at which such re-pricing occurs is uncertain and could be decisive for financial stability.  There have already been a few high profile examples of jump-to-distress pricing because of shifts in environmental policy or performance.

    Risks to financial stability will be minimised if the transition begins early and follows a predictable path, thereby helping the market anticipate the transition to a 2 degree world.

    Transition risks

    The UK insurance sector manages almost £2tn in assets to match liabilities that often span decades. While a given physical manifestation of climate change – a flood or storm – may not directly affect a corporate bond’s value, policy action to promote the transition towards a low-carbon economy could spark a fundamental reassessment.

    Take, for example, the IPCC’s estimate of a carbon budget that would likely limit global temperature rises to 2 degrees above pre-industrial levels.

    That budget amounts to between 1/5th and 1/3rd world’s proven reserves of oil, gas and coal. 24

    If that estimate is even approximately correct it would render the vast majority of reserves “stranded” – oil, gas and coal that will be literally unburnable without expensive carbon capture technology, which itself alters fossil fuel economics. 25

    The exposure of UK investors, including insurance companies, to these shifts is potentially huge.

    Conclusion

    Our societies face a series of profound environmental and social challenges.

    The combination of the weight of scientific evidence and the dynamics of the financial system suggest that, in the fullness of time, climate change will threaten financial resilience and longer-term prosperity.

    While there is still time to act, the window of opportunity is finite and shrinking. 31

    Others will need to learn from Lloyd’s example in combining data, technology and expert judgment to measure and manage risks.

    The December meetings in Paris will work towards plans to curb carbon emissions and encourage the funding of new technologies.

    We will need the market to work alongside in order to maximise their impact.

    With better information as a foundation, we can build a virtuous circle of better understanding of tomorrow’s risks, better pricing for investors, better decisions by policymakers, and a smoother transition to a lower-carbon economy.

    By managing what gets measured, we can break the Tragedy of the Horizon.

  • Michael Keating. Austerity, the Greek Economy and Grexit

    Faced with an unenviable choice between more austerity and a Grexit from the Euro the Greek Government after six months of resistance caved in and reluctantly opted for more austerity. Two weeks ago in the recent elections the Greek people endorsed that choice, although the record low voter turn-out suggests with little enthusiasm and much political weariness. On the other hand, the Euro-zone authorities are no doubt breathing a sigh of relief. But what can Greece (and its creditors) expect from this deal.

    The popular image of Greece portrayed by its creditors is of past profligacy which the Greeks must now pay for. There is some truth in this presentation as the Greek government financial deficit in the good years represented as much as 7.5 per cent of GDP in 2004 and still amounted to an excessive 6.7 per cent of GDP on the eve of the Global Financial Crisis (GFC) in 2007.

    What seems to have largely escaped attention, however, is the extent to which Greece has already tightened its belt since the GFC. In fact, the amount of this fiscal tightening far outranks that undertaken by other major countries which are lecturing to Greece.

    When making any such comparative assessment it if of course necessary to extract the impact of economic growth on each country’s fiscal position. Indeed, the restoration of many countries’ fiscal positions since the GFC owes as much or even more to the automatic improvement in tax revenues as economic growth recovers.

    Consequently, there is a need to strike a balance between discretionary fiscal tightening on the one hand, and avoiding too much counter-productive contraction on the other. Unfortunately it is very likely that Greece has already erred on the side of too much discretionary fiscal tightening, and this is one reason why the overall rate of reduction in its fiscal deficit has been disappointing.

    The table below shows the change in the general government underlying fiscal balance between the low point following the GFC, 2009, and the present year, 2015; along with the change in the normally reported nominal fiscal balance over the same time period. It is the change in the underlying balance which portrays the extent of discretionary fiscal action, as it excludes the effect of the business cycle and any one-offs.

    Change in General Government Balances

    Contraction (+) Easing (-) as per cent of GDP

    Actual Balance Underlying Balance
    Greece 11.9 18.7
    Germany 3.5 1.4
    United Kingdom 7.0 3.3
    United States 8.8 7.0

    Source: OECD Economic Outlook June 2015

    The results reported in this table clearly substantiate that:

    1. Greece has taken far more discretionary action to reduce its fiscal deficit than the other major countries shown. Thus the fiscal consequences of the discretionary measures taken by Greece over the period 2009-15 in total amounted to a very large 18.7 per cent of GDP. By comparison similar discretionary fiscal action by Germany only amounted to the equivalent of 1.4 per cent of GDP. Even in the US, which had the next largest discretionary fiscal contraction, the size of the package was only just over one third the size of the Greek package.
    2. The reduction in the fiscal balance actually achieved by Greece has been less than the size of the discretionary measures introduced. This is clear evidence that contractionary impact on the economy significantly reduced the amount of deficit reduction which Greece was able to achieve. By contrast in the other three countries shown, the actual size of budget turn around was greater than the total of the discretionary measures. Instead for these countries increasing economic growth made a major contribution to deficit reduction, and in the case of Germany and the UK, the positive effect of economic growth accounted for more than half of the reduction in the deficit actually achieved.

    In the light of this experience, it must be asked whether the imposition of further austerity does not risk again being counter-productive.

    Right now in 2015 Greece has an unemployment rate of 25 per cent. Its GDP has declined by 26 per cent from its previous peak in 2007, and according to the OECD, even its potential output has declined by 6.5 per cent since the GFC. This is a worse situation than most countries, including Greece, experienced in the Great Depression in the 1930s.

    The experience so far clearly shows that further contraction of the economy will not help fix the budget. As I have argued previously, the much better alternative would be for Greece to exit the Euro and thus reverse the massive deterioration in its competitiveness (see posting 8 July). Otherwise it is difficult to see how the Greek economy will ever start to grow strongly over at least another ten years. Certainly more austerity will not help, and without strong economic growth it is equally difficult to see how Greece can make serious inroads into reducing its debt.

    Dr Michael Keating AC is former Secretary of the Department of Finance and Secretary, Department of Prime Minister and Cabinet. 

     

  • John Menadue. The government just does not get it on Free Trade Agreements.

    I hope readers are not getting tired that I have said many times that the government continues to exaggerate the benefits of bilateral FTAs, most recently with Japan, Korea and China. With so little to show after two wasted years – increased debt, increased deficits, and not ‘stopping the boats’ despite telling us of success a thousand times – it is perhaps inevitable that the government will cling to small improvements in trade. But the gains are small. In the AFR on 30 September 2015, Bill Carmichael, former chairman of the Australian Industries Assistance Commission, said

    We will undoubtedly gain valuable export opportunities from the Free Trade Agreement with China. But we could have achieved a great deal more, if when preparing Australia’s market opening offers, our negotiators had recognised the obligation to reduce our trade barriers as an opportunity to improve productivity. … The opportunity to life productivity was missed by the Abbott government in negotiating all three FTAs concluded last year. … The Department of Foreign Affairs and Trade … has resisted any change in its flawed approach to trade negotiations. … In defending secrecy, Trade Minister Andrew Robb maintains that public involvement would compromise his negotiating position. As has been explained in the AFR, there is no conflict between his need for secret negotiations and a Productivity Commission process, introducing public input to our negotiating agenda. DFAT’s flawed approach to trade policy cannot be pushed aside as having marginal consequences.

    See link to full article below.  John Menadue

    http://www.afr.com/opinion/columnists/alan-mitchell/how-malcolm-turnbull-can-use-free-trade-agreements-to-boost-productivity-20150929-gjx1to

  • Why the Rich are so much Richer in the US

    Nobel Prizewinner Joseph E. Stiglitz has been at the forefront of the debate in the US and elsewhere about growing inequality. In a recent review in the New York Review of Books, James Surowiecki comments on three recent books by Stiglitz. He says:

    “The numbers are, at this point, woefully familiar: the top 1% of earners take home more than 20% of the income and their share has more than doubled in the last 35 years. The gains for people in the top 0.1%, meanwhile, have been even greater. Yet over that same period, average wages and household incomes in the US have risen only slightly, and a number of demographic groups (like men with only a high school education) have actually seen their average wages decline.”

    See link to article below.       John Menadue

    http://www.nybooks.com/articles/archives/2015/sep/24/stiglitz-why-rich-are-so-much-richer/?utm_medium=email

  • Ian McAuley. Economic Management, Lobbyists and the Coalition Government.

    On Abbott’s political departure David Marr wrote in The Guardian “Within days of his fall he’s looking like a prime minister Australia once had a long time ago”.

    Most people and organisations who have given him unwavering support ever since his narrow win as Opposition Leader in 2009 were remarkably quick in endorsing Turnbull’s judgement that he “has not been capable of providing the economic leadership our nation needs”.

    Of course many independent economists had been saying that and more about Abbott’s economic management – it was indeed disastrous. But the surprising phenomenon was the sudden turnaround by those who had been loyal right up to the end.

    This sudden switch was most noticeable among spokespeople for so-called “business” lobbies (as if “business” is some homogenous collection of like-minded people with identical interests), but it was also noticeable on the street. In the Essential opinion polling in early September voters gave the Abbott government strong marks on economic management, but journalists’ roving microphones in the days after the transition found few, if any, people willing to say anything positive about his economic management. As Bob Dylan said of people who so readily switch their loyalty “You just want to be on the side that’s winnin”.

    In one of those twists of politics it was only the Murdoch tabloids that maintained some level of integrity in not switching loyalty. Otherwise there was a media scramble to revisionism.

    It was reminiscent, in a scaled-down way, of Stalin’s denouncements. Once Bukharin, Rykov and others had been led away after their show trials, it was almost forbidden to utter their names. “Comrade who?” was the polite warning to anyone who made the slip of mentioning those who had been purged.

    Of course Turnbull is no Stalin, indeed in his liberalism he couldn’t be further away politically. But the process takes place almost automatically, best described in Orwell’s Nineteen Eighty-Four, which recounts the story of the hapless Winston Smith, whose job is to re-write newspaper accounts that don’t fit with the contemporary political mood. These days his task would be to sanitize web pages. “We’ve always been at war with Eastasia”, “We’ve always said Abbott was a poor leader”.

    The “right” tried to own Orwell’s Nineteen Eighty-Four as a comment on Stalin’s dictatorship, but its message was directed much closer to home. He wrote it in 1948 when Britain was involved in all manner of rapidly-shifting postwar alliances. (It is in Animal Farm where he deals explicitly with the Soviet dictatorship.)

    Having worked behind the scenes as a public servant and an academic, I can recall many instances when executives in business lobbies have been privately critical of Coalition governments, while publicly giving them their fullest support. So I was not particularly surprised by the sudden turnaround in sentiment last week.

    But I would like it if our lobby groups could break from that puerile and hypocritical practice of giving uncritical public support to Coalition governments, and, to quote from the Prime Minister “respect the intelligence of the Australian people”.

     

  • John Menadue. The smoko continues.

    I have posted many blogs on this subject – how we have failed to equip Australia for our future in Asia. We just do not have the Asian literacy and skills we need for our future in the region.

    See blogs. The smoko continues (3 December 2014) and Will the new Colombo Plan work? (12 August 2014).

    Our business sector talks endlessly about the need to improve productivity in Australia particularly through labour market reform. At the moment the business campaign is to reduce penalty rates. Yet the business sector has failed comprehensively to equip itself with the skills needed for the Asian Century.

    Over forty years ago there was a surge in language learning in Australia. Ross Garnaut reported in 1989 in his report Australia and the North-East Asian Ascendancy about the need for Asian literacy and skills in business and in the wider community. But it petered out because there were so few businesses employing the new Asia-literate graduates.

    In 2012 the White Paper on Australia in the Asian Century commented:

    “The share of Australian students studying languages, including many Asian languages, is small and has fallen in recent times. Between 2000 and 2008 the share of Australian students learning a tertiary accredited language other than English in year 12 dropped in a time where overall student numbers increased by almost 9%. In 2008, less than 6% of Australian school students studied Indonesian, Japanese, Korean or Chinese (Mandarin) in Year 12.”

    The Foreign Minister, Julie Bishop, has now a new Colombo Plan in reverse to fund internships for young Australians to work and study in Asia. But its value will be limited unless Australian employers lift their game and employ qualified Asia-literate people.

    With others, I campaigned in the 1970s and 1980s for Asian language education. There was a lift in Asian language leaning in schools and universities. But unfortunately those with Asian skills were in general not able to obtain work in Australia and drifted off to work in places like Hong Kong and Singapore.

    The Diversity Council Australia has just released a report ‘Leading in the Asian Century – a national scorecard of Australia’s Asian capability’. In the launch of this report this month, DCA said :

    DCA’s first ever research on workforce AQ in Australia has revealed that for Australian businesses, one of the biggest impediments to realising business and investment opportunities in the Asian region is a lack of understanding about Asia capabilities. In particular, Australian businesses are not identifying and cultivating the Asia capabilities that are critical to business success. Key findings include:

    There is a strong business case for fostering workforce AQ. Seven out of Australia’s top ten export markets are in Asia, and constitute 66% of our total export market. More than 50% of the world’s population lives in Asia and its consumer demand is worth US$10 trillion annually, similar to the U.S.

    Asia capable talent is available. AQ is considerably higher in some groups – in particular the 16.7% of Australian workers who have an Asian cultural identity, the 15.9% who have lived and worked in Asia and the 20.9% who can read, write and/or speak an Asian language (at least basic proficiency level).

    But a third of workers have low AQ. While one in ten (10.8%) of all Australian workers have excellent Asia capability, one third (34.7%) have none or very little. Close to two-thirds of workers have no or very little working knowledge of how to effectively manage in Asian business contexts. Overall, our workforce scores three out of five for Asia capability.

    Senior executives & managers are more likely to have higher AQ. Australian senior executives and managers are more likely to have excellent Asia capability than non-managers (13.9% of managerial workers versus 10.3% of non-managerial workers).

    Fluency in Asian languages is low. Only 5.1% of workers are fluent in one or more Asian languages (i.e. can comfortably discuss and write about highly complex issues with colleagues/clients in an Asian language).

    Having business interests in Asia doesn’t guarantee AQ. Workers in organisations with Asian business interests are less likely to have excellent Asia capability (16.4%) compared with workers in an organisation with an Asian head office (29.8%).

    There is too much talk and not enough action. While a fifth of workers said their organisations valued the AQ of their workforce (19.1% strongly agreed), fewer said their organisation was likely to effectively use these capabilities (12.6%).

    (AQ is defined as an “individual’s ability to interact effectively in Asian countries and cultures, and with people from Asian cultural backgrounds to achieve goals.” In this research initiative DCA was partnered by Norton Rose Fulbright, Telstra, the CMIC Group and Asialink Business.)

    Indeed as the report says ‘There is too much talk and not enough action’ The smoko continues. Even the White Paper on Australia and the Asian Century has been taken down from the government’s website.

    I have yet to meet or hear of a Board member or senior executive of any of our top 100 companies who can fluently speak any of the major languages of our region.

    Parochialism reigns supreme.