Category: Politics

  • Walter Hamilton. The Great Wall in the South China Sea

    As Australians enter the end-of-year ‘doze zone’ they would do well to take time to watch a report, available online, prepared by the BBC’s Rupert Wingfield-Hayes, which lifts the curtain on China’s bid to permanently militarise the South China Sea.

    Wingfield-Hayes and his crew defied threats from the Chinese Navy in order to video construction activity at several disputed coral reefs currently being turned into military airfields and bases through massive dredging and construction operations. The BBC report shows scores of ships moored around what previously were largely submerged atolls.

    This is the modern equivalent of the Great Wall of China going up before our eyes­­––except that it’s not easy to train our eyes, or our cameras, on specks of land in a distant sea. China is counting on that.

    The Spratly Islands are variously claimed by Vietnam, the Philippines, Malaysia, Taiwan and, of course, China. Beijing is intent on resolving this long-running territorial dispute unilaterally, by chasing its rivals out of the area and using its engineering and military muscle to illegally transform several of the atolls into exclusion zones.

    Wingfield-Hayes states the case succinctly:

    China is bound by the United Nations Convention on the Law of the Sea (UNCLOS), which it has ratified. The law states that sub-sea structures, such as reefs, cannot be claimed as sovereign coastline, and that building artificial structures on top of them does not turn them into sovereign territory either.

    A country that owns a natural island can claim a 12-nautical-mile territorial limit around it, both on the sea and in the air. But artificial structures do not confer any such right. In other words, we would be able to fly our aircraft right up to China’s new islands without breaking any international laws, and China should not interfere with our flight.

    But interfere China did. As the BBC-chartered aircraft flew even within 20 nautical miles it was bombarded with radioed warnings: ‘Unidentified military aircraft [the aircraft was a single-engine Cessna, about as civilian as you can get] in west of Nanxun Reef, this is the Chinese Navy. You are threatening the security of our station! In order to prevent miscalculation leave this area immediately!’ Nanxun Reef, also known as the Gaven Reefs, naturally comprise 150 hectares of coral outcrops less than two metres above sea level at their highest point. Furious reclamation activity since last year has turned it into another fortress in the new Great Wall.

    The biggest construction project, however, is at Fiery Cross Reef in the Spratlys, which, according to reports, is being turned into an artificial island twice the size of the US military base of Diego Garcia in the Indian Ocean. At Mischief Reef, just 140 nautical miles from the Philippines coast, a new runway is also under construction. The BBC cameras caught a view of ‘the lagoon teeming with ships large and small. On the new land, cement plants and the foundations of new buildings’.

    The United States and its allies do not recognize China’s bid to assert sovereign rights over virtually the entire South China Sea by means of this island-building exercise. The US military has undertaken well-publicised cruise and overflight operations to uphold ‘freedom of navigation’ principles. Australia, on the other hand, is attempting to steer a middle course––exercising the freedom, but on the quiet. The BBC chanced upon an RAAF aircraft traversing the area and sending out the following radio message:

    China Navy, China Navy, we are an Australian aircraft exercising international freedom of navigation rights in international airspace in accordance with the international civil aviation convention and the United Nations Convention on the Law of the Sea––over.

    The BBC said the message was not acknowledged. But neither was any warning directed against this Australian military aircraft, as it had been against the BBC’s civilian plane even after it identified itself.

    The RAAF overflight, conducted several weeks ago, was not publicised at the time by the Defence Department in Canberra. Only after the BBC report disclosed the incident did the Chinese acknowledge it. Beijing’s position is that it ‘resolutely opposes any country using freedom of navigation and overflight as a pretext for harming China’s national interest’. For now, however, it doesn’t want to draw Australia into the squabble and thus is content to play along with the ‘don’t ask, don’t tell’ gambit being run out of Russell Hill.

    There is a big game being played out here from which Australia cannot hide. If our rights and interests are being impinged by China, as clearly they are under the terms of the United Nations Convention on the Law of the Sea, we should not hesitate from forthrightly defending them. Instead, we invite a Chinese entity, the Landbridge Group, which has close links to the PLA and the Chinese Communist Party, to operate the strategically important port of Darwin, and quietly watch as the new Great Wall goes up across the South China Sea, the main pathway to Darwin.

    When Japan sent ships into the southern ocean to hunt for whales, Australia took it to the International Court of Justice to uphold its rights under the International Whaling Convention. It was a high profile, hard-fought case on a principle. China asks: Why should Australia involve itself in the South China Sea dispute when its ships and planes are still allowed to travel through unimpeded? Japan asks: Why should Australia object to another country catching an unthreatened species of animal that Australians don’t even eat? To both of them, the answer is the same: You signed up to be a good international citizen, behave like one.

    Walter Hamilton is a former ABC Tokyo correspondent.

     

     

     

  • The Refugees and the New War.

    In the New York Review of Books, Michael Ignatieff draws a link between failure of Western policy in the Middle East, it’s failure to counter ISIS and the resulting refugee flow into Europe. He says

    ‘ISIS wants to convince the world of the world’s indifference to the suffering of Muslims; so we should demonstrate the opposite. ISIS wants to drag Syria even further into the inferno. … The US needs to use its refugee policy to help stabilise its allies in the region. … If Europe and the US show them a way out, refugees won’t take their chances by paying smugglers using rubber dinghies.’

    John Menadue.

    Michael Ignatieff is Edward R Murrow Professor of Practice at Harvard Kennedy School. He was formerly Leader of the Liberal party of Canada.  See article link below.

     

    http://www.nybooks.com/articles/2015/12/17/refugees-and-new-war/

  • Jon Stanford. Paris Agreement on Climate Change: Implications for Australia

    Despite a generally positive reception to the Paris accord on climate change, the ideologues on both sides of the debate regard it as a failure. For the sceptics, the agreement that developing countries (which played a negligible role in causing the problem) can continue to increase emissions is so inequitable that it undermines the whole deal. For the more extreme green groups, given their view that renewables are ready to take over from fossil fuels now, the ambition is not nearly high enough and much more should have been done.

    But for the non-ideological majority, the Paris agreement is significantly better than could have been expected even twelve months ago. The nations of the world, including the major emitters, have committed to taking action over time to meet a 2 degree target and even, potentially, a 1.5 degree target. It was always a dream to suppose that a grand global treaty could be achieved, with ambitious, legally binding commitments to cut emissions, sanctions for the underperformers and all achieved by recourse to a global emissions trading scheme. Post Kyoto, the US, China and India, all major emitters, signalled that they would not ratify any legally binding treaty that would commit them to reduce greenhouse gas emissions.

    The Paris agreement, supported as it is by the major emitters and with each nation’s efforts subject to regular peer review, is as good as it was ever going to get and better than most observers expected. With the review mechanism and the widespread recognition that greater emissions reductions will be required in the future, countries are unlikely to take their commitments lightly.

    To be sure, the current commitments, even if they were met, would not stabilise the global temperature increase at 2, let alone 1.5, degrees Celsius. Taking account of likely recalcitrants, we are now looking at perhaps 3 degrees. But that’s not the point. Dealing with climate change was always going to be a very long game. Even if nations were willing to write-off the current capital stock in the emitting sectors, the inescapable fact is that the world does not yet possess the necessary technologies at an acceptable cost to be able to get rid of fossil fuels. Close to home, the current problems with the South Australian electricity system, with its over-reliance on wind and consequent spikes in power prices, provide some evidence of this.

    That is why people such as Bjorn Lomborg suggest that the clean technology fund established at the Paris conference by Bill Gates is more important than the agreement itself. Committing greater resources to R&D and innovation in the area of clean energy is a sine qua non for an effective response to climate change in the medium and longer term. Apart from hydro, nuclear energy is currently the only available technology for the provision of zero emissions base load power at reasonable cost (although outside China the costs remain excessive). If solar is going to provide base load power in any quantity in the future, not only must the problem of storage be solved, but the physical footprint of solar thermal technologies must also be drastically reduced. All this, of course, must also be achieved at an acceptable cost.

    What are the implications of the Paris agreement for Australia? First of all, it is quite clear that early reports of the death of coal have been greatly exaggerated although, in the next few years, thermal coal at least may enter a slow but terminal decline. On the one hand we have yet to find a substitute for steel in many of its applications and demand for coking coal will not go away any time soon. On the other hand, developing countries, particularly India, will continue to rely on thermal coal for the foreseeable future to provide low cost electricity to millions of people emerging from poverty.

    The main issues, however, are Australia’s emissions targets and the policy measures that are required to achieve them. Although our relatively high population growth needs to be taken into account, Australia’s current emissions targets are not particularly ambitious nor indeed, adequate in the context of stabilising at 2 degrees or less. There is a strong case now for raising Australia’s 2020 target from 5 to at least 10 per cent, which is achievable. The review of targets scheduled for 2017 could well look to increasing the 26-28 per cent target for 2030. Although our 2030 target is comparable to those of Canada and the US, it is now manifestly inadequate in the light of the higher global ambition since enshrined in the Paris agreement.

    Finally, Australia has time to design a comprehensive policy approach to reducing emissions significantly post 2020. While most economists always will prefer market-driven mechanisms like a carbon tax and emissions trading, we must recognise that these have become politicised, perhaps fatally, and examine some second-best options such as regulation. The Grattan Institute is currently working on this, with a detailed report to be released early in 2016.[1]

    A thorough review of these issues by the Productivity Commission could make a very useful contribution to the government’s consideration of policy options. Yet, fearing that such a review will merely lead to a clarion call for an ETS, the government may be reluctant to establish a Productivity Commission inquiry. This would be unfortunate, and the terms of reference could be crafted so as to address the government’s sensitivities. This could include a requirement to evaluate all major potential policy instruments and how they would impact on the different emitting sectors of the economy, on user industries and on the community in general.

    Jon Stanford is a Director of Insight Economics and has undertaken numerous assignments on climate change for government and industry. While he was at the Department of Prime Minister and Cabinet in the 1990s, he was Chair of the Interdepartmental Committee on Greenhouse.

     

     

     

    [1] Tony Wood, David Blowers and Greg Moran (2015), “Post Paris: Australia’s climate policy options”, Grattan Institute Working Paper, December.

  • Rod Tiffen. Chris Mitchell at The Australian.

    Chris Mitchell’s place in Australian journalism history is secure. The newspaper he edited lost more money during his tenure than any other paper ever has or will be allowed to again. Mitchell was editor in chief of The Australian for 13 years, and while News Corp is studiously coy about how much profit or loss the paper has made each year, it has certainly been losing money in recent years and probably on a grand scale. News Corp’s star columnist Andrew Bolt said recently The Australian was losing $20 million a year.

    The parade of tributes from News Corp personnel about Mitchell’s genius would make Kim Jong-Un blush, but strangely this record goes unmentioned. Of course, Mitchell’s losses are not on the scale of his Australian colleague, Col Allen, whose losses on the New York Post are rumoured to be around $100 million annually, while Robert Thompson, the global chief executive of News Corp, once told Michael Wolff that the London Times was losing a similar amount of money.

    At least at this stage of his life, Rupert Murdoch’s favoured publications are no longer subject to the disciplines of the market place, perhaps he is more interested in their political impact or the clout they give him with governments, or just past caring.

    The key to Mitchell’s longevity was not his entrepreneurial ability or his commercial success, but rather that he produced the type of newspaper that his proprietor and patron wanted.

    Before coming to The Australian, Mitchell had edited the Courier-Mail. The worst blunder of his time there was the paper’s claim that one of Australia’s most eminent historians, the late Manning Clark, was a Soviet agent. The paper devoted pages to this claim, even though it essentially rested on the fact that Clark had worn a memorial badge he had received in the Soviet Union to a Soviet Embassy function. Mitchell had allowed his prejudices, and perhaps his love of controversy, to over-ride the lack of credible evidence. In many news organisations, this egregious error would have been career-ending, but not in News Corp.

    Mitchell said that the low point of his career was convincing Murdoch to support Kevin Rudd in the 2007 election. Murdoch’s Australian press split down the middle in that election. Whatever conversations the editors had with Murdoch, the Murdoch press would have exposed their ineffectualness if they had all supported Howard. Rudd was going to win anyway whatever Murdoch newspapers, and especially whatever TheAustralian, did. To win in the face of Murdoch opposition would not only have damaged the proprietor’s myth-making, but also given him no leverage with the new government.

    The most notable feature of The Australian during Mitchell’s tenure has been its intellectual decline. Its previous editors Paul Kelly and David Armstrong had maintained an intelligent newspaper, not only in its comment columns, but in its reporting. Mitchell has made the paper much more one-sided, and also less intelligent.

    Matthew Ricketson and Andrew Dodds looked at the paper’s Media Section, introduced by Kelly, and at first it was a very useful and informative addition to Australian public life. The years since have seen a long decline, and now it is principally a vehicle for News Corp propaganda, praising itself and allies and attacking enemies. Over several years now, the paper’s coverage of the ABC has bordered on the moronic, never acknowledging the broadcaster’s achievements, outdoing itself in rhetorical denunciations of any alleged transgressions. You would never guess from the paper’s coverage how much higher the national broadcaster stands in the public’s esteem than the Murdoch press.

    For a project a couple of years ago I looked at its coverage of climate change issues. Robert Manne did an analysis of their editorial positions for his Quarterly Essay Bad News, but I think the judgements of newsworthiness are more revealing and more important. One aspect that stood out to me was that scientific reports were rarely reported straight, but often framed in terms of political controversies surrounding the issues. Important stories that favoured action were downplayed; while stories thought to be adverse were highlighted and visited again and again.

    Since I finished that work, the paper has given front page and extensive coverage to quite ridiculous claims about the Australian Bureau of Meteorology falsifying historical records to make global warming look more severe, plus a study of two couples, self-selected, complaining about the damage wind power was doing to them. The bizarre judgements of newsworthiness meant that anyone seeking to follow the issue through the pages of the Australian would have had a very distorted view.

    Although the tedious, repetitive commentary columns occasion the most criticism, the paper’s erratic judgements of newsworthiness and the declining accuracy of some of its reporting are Mitchell’s principal legacy. 

    Rod Tiffen is Emeritus Professor, Government and International Relations, University of Sydney.

     

     

  • Gabrielle Appleby. What say do our elected representatives have in going to war?

    The authorisation of military force is one of the most serious and consequential powers that governments possess. This power should be exercised with appropriate caution and, where circumstances allow, considered deliberation. Governments should be publicly accountable for its exercise.

    Across the world, debates have emerged around the extent to which the legislative branch should be involved in – and even have the final say on – authorisation of military deployment. So what are the debates, and current practice in, three key Western nations grappling with the threat posed by Islamic State (IS) – the UK, the US and Australia?

    In these three countries, the legislature’s involvement in decisions to use force has little connection to explicit constitutional or statutory provisions. Rather, it is governed by practice and convention, and the ongoing political commitment to such practices by both the government and the legislature.

    The UK: convention requires parliamentary approval

    In the UK, the power to make war, deploy military force and declare peace forms part of the “prerogatives”. The government of the day can exercise these powers without any obligation to consult, or seek authorisation from, parliament.

    Like Australia, the UK operates under a parliamentary system. As such, the government’s exercise of its powers is always subject to scrutiny by the parliament through Prime Minister’s Questions (known as Question Time in Australia) and committee inquiries, or subject to override or control by legislation.

    The government’s exercise of its powers is also often constrained by constitutional “conventions” – established practices that have strong political and moral force, even though they may not be legally enforceable.

    In the last 15 years, a constitutional convention has developed that the government will consult the House of Commons and seek its approval before deploying military force. The practice was first invoked in 2003, when then-prime minister Tony Blair asked for parliamentary authorisation for Britain to enter the Iraq War.

    Parliamentary approval for use of force is not required by any constitutional or legislative provision in the UK. But, by 2011, the government acknowledged that – except in cases of emergency – convention required it to provide the House of Commons with an opportunity to debate and authorise military force.

    There have been some calls to pass this practice into law, or at least formalise it in a parliamentary resolution. But there has been little movement to clarify it, or protect its status in this way.

    Nonetheless, the force of this convention has proven remarkably strong. In August 2013, Prime Minister David Cameron accepted the outcome of the House of Commons vote against further use of military force in Syria. Last week, Cameron again felt obliged to seek approval to expand the British military’s role in Syria. The House of Commons passed the motion after ten hours of debate.

    The US: constitutional requirement is largely inconsequential

    Article 1, Section 8 of the US Constitution provides that:

    Congress shall have power to declare war.

    On its face, this provision places responsibility to initiate war in the legislature’s hands. However, since the second world war there have been no formal declarations of war. The constitutional requirement is now largely inconsequential.

    But, in 1973, following the unpopular involvement in Vietnam, Congress passed the War Powers Resolution. This requires – with some emergency exceptions – the president to notify Congress within 48 hours of committing American armed forces to hostilities, and congressional approval to continue that commitment beyond 60 days.

    Despite these provisions, as a matter of practice Congress has ineffectively constrained and scrutinised the president’s power to deploy the military. Bill Clinton committed forces to the former Yugoslavia and Kosovo without seeking congressional authorisation, beyond pointing to congressional authorisation of military funding for the campaign.

    Barack Obama committed American forces to Libya in 2011 without seeking congressional approval. The president claimed that the commitment fell short of hostilities that would engage the War Powers Resolution. Congress issued Obama with a rebuke for not complying with the resolution, but brought no further sanctions against him.

    Obama’s deployment of forces in Iraq and Syria against IS reveals that the responsibility for the failure to obtain congressional approval may at least partly lie with Congress itself. That is, while presidents might be inclined not to seek authorisation, Congress has also been inclined not to insist upon it.

    Obama’s initial decision to deploy forces to Iraq and Syria in September 2014 purportedlyrelied on previous congressional authorisations to use force following the September 11, 2001, terror attacks. But by February 2015, Obama attempted to obtain new congressional authorisation. Congress, unable to agree on whether to expand or constrict the campaign, has yet to consider it.

    Australia: calls for reform grow louder

    The Australian Constitution makes no mention of the government’s power to declare war and deploy military forces overseas. Rather, this forms part of the executive powers contained in Section 61 of the Constitution. Their extent and restrictions are considered to mirror the UK government’s foreign affairs prerogatives.

    In direct contrast to the US Constitution, there is no requirement in the Australian Constitution for parliamentary authorisation – or even a requirement to consult parliament – before these powers are exercised.

    Historically, however, there was a practice that following the declaration of war or the deployment of forces, the government would inform parliament and a debate would occur. It did not amount to authorisation. But this practice was consistent with fundamental tenets of Australia’s parliamentary system, where the government’s actions should be reported to and scrutinised by parliament.

    Since the commitment of Australian forces to Afghanistan in 2001, this practice has fallen away. In contrast to the increased parliamentary involvement in the UK since 2001, in Australia there has been a general resistance across both major parties to greater parliamentary involvement by allowing more substantial debate, let alone authorisation.

    The Greens and independent MPs (and before them, the Australian Democrats) have consistently called for the deployment of military force to be preconditioned on parliamentary debate and authorisation. But government decisions to deploy the military generally receive strong bipartisan support.

    Thus, neither the government of the day nor the parliament has sought or insisted upon greater transparency or parliamentary scrutiny.

    However, there are some signs this might be changing. In October, Deputy Opposition Leader Tanya Plibersek moved a motion that parliament be given an opportunity to debate the government’s strategy in Iraq and Syria.

    Since taking office, Prime Minister Malcolm Turnbull has made repeated promises to increase the level and openness of public debate over government policy. This is yet to materialise with respect to use of military force. But these statements provide promising signs for reconsideration of Australia’s current practice.

    Gabrielle Appleby is Associate professor, UNSW Law School. This article was first published in The Conversation on 10 December 2015P

  • Michael Keating. The Turnbull Government’s Fiscal Strategy

    This second article, in response to the release of the Government’s Mid-Year Economic and Fiscal Outlook (MYEFO) on Tuesday 15 December, focuses on the Government’s fiscal strategy. It is a companion piece to another article that focussed on the Government’s economic strategy and what the Government expects that economic strategy to achieve.

    As had been well telegraphed in advance, total budget receipts are now expected to be $33.8 bn lower over the next four years of the forward estimates than expected last May in the 2015-16 Budget. This reduction in receipts mainly reflects lower than forecast commodity prices impacting on company profits and a weaker outlook for wage growth. On the other hand, and consistent with the Government’s tight fiscal strategy, spending decisions have been more than offset by other decisions to reduce expenditure elsewhere in the Budget.

    In sum, the budget deficit (technically known as the “underlying cash deficit”) as projected in MYEFO shows a small deterioration of about $2 bn., or ¼ per cent of GDP for the current financial year, resulting in a projected budget deficit for 2015-16 of $37.4 bn., equivalent to 2.3 per cent of GDP. In the following three years, however, the projected deterioration in the budget deficit increases to around ½ per cent of GDP.

    Notwithstanding this projected deterioration in the budget deficit, the MYEFO continues to project an eventual return to a small budget surplus, equivalent to 0.2 per cent of GDP in 2021-22, a year later than previously projected in the May Budget. For a few more years after 2021-22, small budget surpluses are projected, but by 2025-26 this latest projection shows that surplus is back down to 0.2 per cent of GDP, after which the Budget is likely to slip back into permanent deficit if present policies are maintained. In other words, even if one accepts the authenticity of these latest projections, the extent of the planned fiscal repair would appear to be inadequate.

    Furthermore, given the recent history of these projections for the Budget deficit, a first question is how credible is this latest one? The Treasurer tells us that fiscal repair is a long journey and we must be patient, but equally this journey could be characterised as the pursuit of a mirage that is forever on the horizon.

    More seriously, the credibility of this projected fiscal repair strategy depends upon the underlying economic assumptions and the commitments under-pinning that fiscal strategy.

    The economic projections have been revised downwards, as described in the companion article to this one. These revised economic projections probably do now present a more realistic view of the future economic outlook, given the Government’s economic strategy and noting the risks involved in any such projections.

    As regards the credibility of the Government’s fiscal strategy, the key commitment reported in the MYEFO is to maintain strong fiscal discipline with

    1. The expenditure to GDP ratio falling, with spending measures having to be more than offset by reductions in spending elsewhere in the Budget
    2. A ceiling on taxation revenue equivalent to 23.9 per cent of GDP
    3. A target of achieving budget surpluses building to at least a 1 per cent of GDP as soon as possible.

    In principle, commitments of this kind can greatly help in maintaining the necessary fiscal discipline. They only work, however, if they are carefully calibrated so that they represent what can realistically be achieved, given the range of the Government’s other priorities and policy commitments. Equally if the fiscal commitments cannot realistically be met, nothing is achieved by them – instead the Government only ends up with broken promises and a loss of its economic credibility.

    Judging by the nature and quality of the expenditure savings announced in the MYEFO, the Government may well find that it will continue to have difficulty in finding savings of sufficient quality to achieve its first commitment to a falling ratio of expenditure to GDP. Indeed, this mid-year review has already included some $20 bn. of savings which have so far been rejected by the Parliament. Now the Government is promising more of the same, with controversial measures which will reduce bulk billing for example. While administrative savings to improve compliance for welfare recipients and tinkering with the funding standards for aged care, even if acceptable, have a long history of under-delivering in practice.

    The root of the problem is that the Government’s approach to achieving expenditure savings seems to be to remove funding from a lot of relatively small programs. This typically results in a loss of services, including from non-government agencies; a reduction in the quality of public functions such as the arts and culture, the environment, and numerous humanitarian causes; and various categories of people missing out, and often perceived as unfairly missing out. Instead a better approach to public expenditure control would be to focus on long-term improvements in the efficiency and effectiveness of programs, especially major programs such as health and education that involve very large expenditures.

    In my article, “Fixing the Budget – Part Two” published in Fairness, Opportunity and Security, I outlined how this alternative approach to expenditure control might actually work. I used evidence from a number of sources, including other contributors to this blog, and showed that net expenditure savings ‘reaching around $20 bn. annually should be possible in the budget over the next four to five years, mainly from health and infrastructure, if genuine reforms were introduced’. These savings would not be front loaded and would require some time to be realised, but frankly that would be a good thing, given the present economic outlook.

    Even these quite large savings, however, would not be sufficient to achieve a return to a sustained fiscal surplus. Realistically an increase in taxation revenue is unavoidable if we want to retain the government responsibilities and quality of services that the vast majority of us expect. Indeed, when we compare ourselves with other like-minded countries, such as New Zealand, we find that we expect the same of government but are only paying 15 per cent less in total taxation as a share of GDP. It is time that our politicians recognised this basic fact and shaped the future public debate about budgets accordingly, otherwise I fear that we are doomed to endless fiscal failure.

    That brings us to the Government’s second fiscal commitment, that taxation revenue will be held to no more than 23.9 per cent of GDP. The MYEFO projections indicate that adherence to that commitment would allow taxation revenue to rise by about half a percentage point of GDP in 2028-19. It is very unlikely that additional revenue limited to half a per cent of GDP will be sufficient to repair the Budget on a sustained basis. Furthermore, it is likely that the States will demand some of that additional revenue and/or be responsible for raising it.

    Accordingly the value of presently limiting taxation revenue to 23.9 per cent of GDP must be doubted. In addition, any such limit privileges those programs that are funded by way of taxation concessions, which are then often able to escape proper scrutiny. Whereas in reality there is no real difference between programs funded on the expenditure side of the budget and those which are funded by way of reduced taxation. In short, this limit on the share of taxation is therefore an imperfect constraint.

    Instead the Government needs to approach the task of fiscal repair and tax reform starting from a consideration of its overall fiscal requirements. As argued above, this review should lead to a recognition that some increase in the overall revenue will be required. This increase could in turn then come from some change in the overall mix of taxation and/or a review of the various tax concessions, while still allowing some scope for moderate income tax cuts sufficient to offset the impact of bracket creep over the last few years.

  • Michael Keating. The Turnbull Government’s Economic Strategy

     

    The Government’s Mid-Year Economic and Fiscal Outlook (MYEFO) released on Tuesday 15 December outlines the Government’s economic and fiscal strategy and, equally important, what it expects that strategy to achieve. It is especially significant on this occasion, as it represents the first major economic statement by the still relatively new Turnbull Government. As such this statement allows us to put some more content into our assessment of what, in its short life so far, has principally been an “aspirational government”.

    In this article I will discuss the Government’s economic strategy, as revealed in the MYEFO. In a second companion article I will discuss the fiscal strategy.

    The Government’s Economic Strategy

    According to its MYEFO the Government has an ‘integrated national plan for economic growth and jobs’. The Government is putting in place policies, which it hopes will ‘create a dynamic, competitive economy that rewards effort, incentivises innovation and sets Australia up to capitalise on the abundant opportunities in the fast-growing Asian region’.

    The key elements of this strategy as stated in MYEFO are:

    1. The recently announced National Innovation and Science Agenda
    2. The free trade agreements concluded with China, Japan, Korea, and the Trans-Pacific Partnership
    3. Record levels of infrastructure investment through the $50 bn. infrastructure package, which allegedly will increase the economy’s productive capacity
    4. The Government’s response to the Financial System Inquiry, which is expected to strengthen Australia’s financial system further to meet new needs and support sustainable economic growth
    5. Strengthening Australia’s competition frameworks, including working with the States ‘to unlock the benefits of choice and diversity in areas such as health and aged care’
    6. ‘A comprehensive dialogue on how to create a “growth friendly” tax system,
    7. A strengthening budget position.

    Assessment of the Economic Strategy

    On the Government’s own admission, the results that it expects from its economic strategy are less than impressive, at least by past standards. In the current financial year GDP is only expected to grow at an annual rate of 2½ per cent, and by 2¾ per cent in the next year. The economy is facing a difficult transition from the resources boom, but nevertheless the short-term outlook for economic growth is disappointing bearing in mind the extent of excess capacity.

    Furthermore, the forecast   rate of productivity increase over these two years is only ½ and 1 per cent respectively – well under the normal rate of 1.5 per cent annual increase. And the forecast for non-mining investment, which should be an important part of the transition from the resources boom, has been revised down in the MYEFO to show a small fall in the current year, and a much slower rate of recovery next year.

    Looking further ahead, the Treasury has now revised downwards its expectation for the economy’s long-run growth potential, with Treasury now believing that realistically potential output can only be expected to increase at an annual rate of 2¾ per cent. This rate of potential output growth compares very poorly with an average annual rate of economic growth of 3½ per cent over the 1990s and 2000s, let alone the 4¼ per cent and 5 per cent average growth rates experienced in the 1950s and 1960s respectively. Indeed, it was only in the period of stagflation from 1974-75 to 1982-83 that economic growth was as low as we are now being asked to accept as being the best that we can do.

    In short, on its own evidence the results expected from the Government’s economic strategy, as outlined above, are disappointing, at least compared to past performance of the economy. While the individual elements of that strategy may appear reasonable, it equally seems reasonable to query whether the strategy as a whole is adequate to the task.

    For example, the National Innovation and Science Agenda contained a number of useful new initiatives, but most of the money came from switching money from other science related programs, and arguably a lot more money is really needed to become an advanced economy that produces as well as uses leading edge technologies.

    Similarly, the free trade agreements have been massively over-sold. Their principal focus has been on achieving improved market access, but that of itself does not improve productivity and economic growth potential. Instead, more attention is needed on how to extract productivity gains by switching resources to more productive activities.

    In the case of infrastructure investment, every parrot in the pet shop is calling for more infrastructure investment. But most of this investment is not subject to proper cost-benefit analysis, which helps explain why such analysis is never publicly available. An informed guess suggests that more than half of the Government’s $50 bn. infrastructure package would be better not spent.

    Finally, one can be sceptical whether strengthening Australia’s financial system, giving people greater choice and lowering taxes will really make much difference to Australia’s rate of productivity growth or employment participation – the key drivers of economic growth. It is not that these elements of the Government’s economic strategy are without merit – in particular, ensuring financial stability and the integrity of the financial system is critical. Rather these sorts of initiative are unlikely to lift the rate of economic growth to the levels that Australians are used to and to which they aspire.

    Instead a bolder economic strategy is called for which would focus much more on:

    1. Achieving a major increase in skills, involving a substantial increase in investment to more than replace the cuts made in recent years
    2. A stronger focus on making the best use of our skills as the key to enhancing future productivity growth. This would require a renewed management focus on achieving improvements in the organisation of work, a principle source of innovation, and less focus on cost cutting, which at worst can lead to lower productivity
    3. Much more carefully targeted infrastructure investment, based on the introduction of proper pricing signals. As all conservatives should understand, pricing something for nothing is bound to lead to over-demand. Instead future infrastructure investment should be in guided by what will deliver the greatest economic returns, having regard to the value that users are prepared to pay for, and not in response to political whims.

    Conclusion

    Australia does face a difficult task adjusting to the end of the resources boom. It is being helped in this regard by the accompanying decline in the exchange rate and lower interest rates. But relying only on such market mechanisms is unlikely to achieve the results that Australians expect. The Government could and should do more to improve the supply-side of the economy, principally by improving the education and skills of the workforce, the way in which those skills are then used, and the quality of infrastructure investment, of which far too much is wasted on politically selected projects.

     

     

  • The end of the NBN – missed opportunity for the innovation agenda?

    In BuddeBlog, Paul Budde again outlines the major problems that the NBN faces. In this article he draws attention to reports that the government may be considering selling the NBN. He points out that it was remarkable that the NBN did not feature in Malcolm Turnbull’s Innovation Statement.

    See link to BuddeBlog below.

    http://www.buddeblog.com.au/frompaulsdesk/the-end-of-the-nbn-missed-opportunity-for-the-innovation-agenda/

  • Andrew Willcocks. The multi-billion dollar trade agreement you’ve never heard of.

    In less than a week trade ministers from across the globe will come together at the 10th Ministerial Conference of the World Trade Organisation (WTO) in Nairobi, Kenya.

    The meeting follows more than a decade of stalled global trade negotiations since the WTO’s Doha Round of talks in 2001.

    Dominating the Nairobi discussion is the expectation that an impasse will continue over the scope and future of the multilateral Doha trade agenda, particularly given the influence of large newly-minted regional trade agreements.

    Given the slow movement of the WTO talks since the Doha Round in 2001, many country members have forged ahead and conducted so-called “mega-regional” trade agreements amongst themselves, designed to be “WTO plus”.

    These agreements – including the Trans-Pacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (TTIP) – commenced life as draft propositions between government negotiators, generating little public interest until they burst onto the world stage and into the public lexicon.

    Like many countries in the Asia-Pacific region, Australia has also taken part in a growing number of mega-regional and bilateral trade agreements. These include more recently the TPP and free trade agreements with China, Korea, and Japan.

    Each agreement promises to deliver substantial benefits to goods and services exports worth billions of dollars, and each has generated significant media interest and political debate.

    However, in June, to little fanfare, Australia formally accepted a pending treaty that will be part of the Nairobi talks worth hundreds of billions of dollars annually to global trade, known as the WTO Trade Facilitation Agreement (TFA).

    The TFA is a rescued component of the original Doha Round, concluded at the last WTO Ministerial in Bali in 2013. Once in force, it will benefit global trade through harmonisation of customs procedures, improved cooperation between customs and trade authorities, linkages on facilitation between the private sector and Customs, and a raft of capacity development programs for Least Developed Countries (LDCs).

    The economic benefit to global trade arising from full implementation of the TFA is simply staggering.

    Research undertaken by the OECD has found that in some African countries, estimated revenue losses from inefficient border procedures exceed 5% of GDP. Full implementation of the TFA would stem such losses, reducing trade costs by 16.5% in low income countries, by 14.6% in upper-middle income countries, and by 11.8% in OECD countries.

    A World Bank study in March 2015 estimates that the global trade cost savings from full implementation of the TFA will conservatively amount to US$210 billion per year. To put this in perspective, that’s a gain of US$33.31 per year for each and every person residing in a WTO member country.

    And yet despite its imminent extraordinary global impact, the TFA has earned barely a mention in the international discourse on trade, compared with the attention afforded to the mega-regional trade agreements such as the TPP and TTIP.

    This suggests that the TFA has been dramatically undersold in the lead-up to Nairobi, with the influence of the mega-regionals serving to dominate and further split the discussion on achievements and direction.

    Resulting speculation as to the relevance, scope and future of the WTO’s Doha trade agenda has gripped the Nairobi dialogue. In a recent speech, US Trade Representative Michael Froman called for “credible” results in Nairobi. This may indicate a normative expectation – is the scope of the TPP the new credible?

    Across the Atlantic, the European Parliament has pushed for an ambitious but “realistic” result in Nairobi that takes into account the needs of LDCs. Is the TTIP, on which the EU is presently focused, the new global realistic?

    However, in the same way as the mega-regional agreements grew from small contractual propositions into influential normative actors, so too has the TFA begun to take hold amongst members, suggesting that the WTO’s normative power is far from decrepit.

    To date, 53 countries have already ratified the deal, with that figure growing every month. The TFA will enter into force once two-thirds of WTO members have completed the ratification process.

    Each time a country ratifies the TFA, they are obliged by Article 13 of the Agreement to form or designate a National Committee on Trade Facilitation (NCTF). These committees have already been set up in many countries, and will facilitate implementation of the TFA between domestic Customs, industry, and other stakeholders.

    The NCTF customs-to-stakeholder interaction on facilitation is arguably where the rubber hits the road for ratifying governments, and where the real delivery of benefits will occur. The World Customs Organisation will act as a key player in this space, and some of this work has already commenced.

    The emergence of the Trade Facilitation Agreement onto the world stage should be a core focus of public discussion in the lead-up to the Nairobi Ministerial. It is without doubt a real and tangible success story for the WTO in recent years, limiting popular arguments that the WTO agenda is at risk of being blunted by mega-regional agreements.

    The rapid ratification rate of the TFA also demonstrates members are voting with their feet, further underscoring the argument that although mega-regional agreements dominate present discourse, there are substantial areas of global trade regulation over which the WTO necessarily retains normative primacy.

    Andrew Willcocks is PhD Candidate, ANU Centre for European Studies, ANU.  This article was first published in The Conversation on 10 December 2015.

  • John Menadue. The ‘claytons’ NBN

    In his statement on innovation, Malcolm Turnbull said ‘the internet and the technology it enables means we are now part of the truly global market place. It means there are few barriers to entry for Australian businesses, no matter where they are located, right across Australia and they can sell their products and services to just about every corner of the globe.’ 

    The internet is the bedrock for innovation today. But unfortunately, Malcolm Turnbull, as our former Minister for Commerce, damaged the internet. He introduced an internet censorship scheme at the instigation of the copyright cartel. He presided over a pervasive data retention scheme that has imposed a heavy burden on the whole communications sector.

    But the biggest problem is the ‘claytons’ NBN.

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

    In The Conversation five days later Rod Tucker commented further ‘Under Turnbull the NBN budget has blown out as much as $A18 b. and on current projections is four years behind the original schedule.’ 

    Paul Budde in his blog BuddeBlog on 29 September 2015 said ‘When the NBN was launched in 2009 one of the goals was to get the country into the top ten of the international ladder. Now in 2015 we have dropped to 42nd position.’

    In this blog on 2 November 2015, Mark Gregory, a Senior Lecturer in the School of Electrical and Computer Engineering at RMIT University said ‘The decision by the Coalition government that was implemented by Turnbull in 2013 to adopt the obsolete FTTN technology for a significant percentage of the NBN will, in future years, be seen as economic madness. … The NBN is likely to be the most expensive lemon in Australian history. … ‘

    For further elaboration of these comments, see ‘Malcolm Turnbull and the NBN mess’ in this blog on 3 November 2015.

    And the criticism of Malcolm Turnbull’s stewardship of the NBN is gathering pace.

    In the SMH on 11 December 2015, under the heading ‘Malcolm’s mess: how the Coalition’s NBN came unstuck’, Hannah Francis describes the mess that we now have with the NBN.

    Malcolm Turnbull is right that the internet is the key technology that enables us to be part of the global market. But the high cost, slow and second-rate NBN which is now being rolled out is going to be a major handicap.

    But there may be more to come. In the AFR on 4 December 2015, Andrew Clark said ‘the Turnbull government is in discussions with large telecommunications companies about selling large chunks of the government-owned NBN, including its huge hybrid fibre cable, copper and fixed line networks. A combination of the government’s dire fiscal position and criticism of the progress of NBN is fuelling the decision to engage in what would in effect be the biggest privatisation since the Howard government offloaded Telstra.’

    Could this be an attempt to bury the NBN debacle before the final bills come in?

    Godwin Gretch was an error of judgement without serious national consequences But the errors of judgement on the NBN have profound national consequences.

    In all this sorry mess Jason Clare has gone missing in action.

     

     

     

  • Brendan Mackey. How good is the Paris Agreement?

     

    Finally, we have a new international climate change agreement to guide action post-2020. The Paris conference delivered on its promise thanks to skilful diplomacy by the French, a general sense of good will among nations, dedicated national delegates working through the night more often than not seeking consensus language on difficult issues, along with numerous high-level backroom machinations.

    The question now of course is just how good an agreement is it and by what criteria should it be judged? The philosopher Reinhold Niebuhr warned against allowing sentimentality, naive thinking or plain stupidity to cloud our judgment on prospects for enlightened public policy to be sustained in the face of powerful vested interests especially those underpinned by hard line ideologies. We should therefore keep Niebuhr’s advice in mind as we consider the Paris Agreement especially given the well-known influence of the fossil fuel industry on climate change matters and the reluctance of most governments to seriously address the issue.

    The international climate change negotiations, now in their 22nd year, revolve around a complex and growing agenda. Negotiations in Paris hinged on finding “landing sites” where governments could converge on agreed text around key issues concerning (1) the level of ambition regarding the global mitigation goal, (2) differentiation between nations with respect to responsibilities and capacities, (3) providing the finance needed to support climate action in developing countries, and (4) the adequacy of the national mitigation pledges contained in the so-called Intended Nationally Determined Contributions (INDCs) along with mechanisms for their monitoring and compliance. As these issues are interdependent, the negotiations were complex and evaluation of the outcomes is not straightforward. Here I limit myself to commenting mainly on the level of ambition and INDC issues.

    Article 2 sets the long term mitigation goal as “Holding the increase in the global average temperature to well below 2 °C above pre-industrial levels and to pursue efforts to limit the temperature increase to 1.5 °C above pre-industrial levels”. The international Community had already agreed to limit global warming to below 2 °C but recognizing the need to reach for 1.5 °C is a major advance as this would potentially avoid many significant impacts including inundation of the coastal zone and tipping points in Earth’s climate system.

    Combining estimates from the IPCC 5th Assessment Report and the Global Carbon Project, the total global carbon budget for 2 °C (i.e., the amount of carbon dioxide than can be safely emitted from 2016 onwards) is only about 863 billion tonnes of carbon dioxide (CO2). A synthesis analysis undertaken by the U.N. climate change secretariat of mitigation commitments submitted by nations in INDCs estimates that global cumulative atmospheric CO2 emissions are expected to reach 748.2 billion tonnes in 2030. This is 87% of the post 2015 global carbon budget for 2 °C, leaving only 235 billion tonnes of CO2 or about a further 23 years of business-as-usual. The global carbon budget for 1.5 °C has yet to be rigorously estimated by the IPCC.

    The inadequacy of the INDCs in light of the 1.5-2 °C goal is recognized in the “Decisions” part of the conference outcomes document and the Paris Agreement establishes the INDC as an ongoing instrument for ramping up mitigation action on an ongoing basis as prescribed in Article 4.3 “Each Party’s successive nationally determined contribution will represent a progression beyond the Party’s then current nationally determined contribution and reflect its highest possible ambition…”. Furthermore, Article 13 establishes a Transparency Framework to monitor and review on a 5-year cycle the adequacy of INDCs in light of a global stocktake of the aggregate mitigation efforts and compliance in terms of their implementation, among other things.

    While the INDC and Transparency Framework provisions in the Agreement are commendable, providing a practical pathway for working towards the agreed global mitigation goal, and are applicable to all countries, major concerns remain. The compliance committee that is established under Article 15 to monitor and review the INDCs and their aggregate impact is something of a toothless tiger being “… expert-based and facilitative in nature and function in a manner that is transparent, non-adversarial and non-punitive…”. It would seem that “name and shame” will be the primary tool available for this committee to deploy should individual countries fail to meet their mitigation commitments and increase their ambition or if national commitments in aggregate continue to fall short of the emissions reductions needed to limit warming to the 1.5-2 °C goal.

    If the year was 2006, the Paris Agreement would be rightly heralded as an extraordinary achievement and deserve without reservation a 5-star rating. However, as we enter our 22nd year of climate change negotiations under the U.N. Framework Convention, all the heavy lifting remains to be done by the next generation and too much is left to good will and the hope of technological innovation yet to come.

    However, we should celebrate the fact that 195 countries have reached consensus and voluntarily given their consent to be bound by this Paris Agreement. When we look at the situation in Syria, it is far better to be addressing international problems through dialogue and cooperation than by dropping bombs. The Paris Agreement does establish processes and mechanisms that will enable significant mitigation and adaptation actions. It unambiguously signals that humanity and our economies have embarked on a fossil-free, low carbon future. For the first time, it is formally recognized in climate change law that conserving ecosystem carbon stocks including forests is central to achieving mitigation goals and that both biodiversity and human right must be protected when taking climate action.

    Being an optimist, I am giving the Paris Agreement a 3-star rating. I do hope events show, in this case, Niebuhr to be wrong and that I have not allowed sentimental and naïve thinking, or worse, to cloud my judgement.

    Brendan Mackey, Director, Griffith Climate Change Response Program, Griffith University

     

  • Allan Patience. Fighting Holy Wars in the Middle East

    How do we deal with Daesh? The Islamic State (ISIS) has proven to be a brutally formidable force in Syria and Iraq. As we saw recently in Paris, it has spread its vicious tentacles into Europe. It is highly probable that we’ll see it erupt in North America and very possibly again here in Australia, quite soon. It is clear that for all the blood and treasure invested in the conflicts in Iraq and Syria – heavy bombing raids, military advisors/trainers on the ground, intelligence gathering on an apocalyptic scale, all to the tune of billions of dollars – little has been won and much has been lost. Death rates and injuries (especially among civilians) are mounting every day and the refugee crisis is now counted in the millions. What is to be done?

    Tony Abbott spent much of his onerous prime ministership weighing into the conceptually confused, strategically clouded, and ultimately futile military debacle in the Middle East. Most of his interventions were designed to invoke fear and loathing, especially of Islam. In his latest (post-prime ministerial) intervention he called on Islam to reform itself. He also proposed a hierarchical theory of cultures – certain cultures, he suggests, are superior to others and Islamic cultures are apparently inferior to Western cultures. The implication is that the most advanced cultures are to be found within his beloved “Anglosphere” which includes America, Britain, and the former white settler British colonies of Canada, New Zealand and Australia.

    Daesh claims to be fighting a series of holy wars. In the process its counterfeit imams are grotesquely distorting an absolutely central component of the historical human experience – viz., that humankind possesses a deeply ingrained religious instinct that the full barrage of modernity’s scientism, rationalism and secularism has failed to obliterate. In fact modernity has a worrying record of misunderstanding and distorting the deeply experienced human drive for searching for transcendental meaning in the face of a cruel and unjust world. Modern critics of religion conventionally view that drive as irrational. Moreover, its myriad distortions (whether self-made or externally inflicted) make it particularly vulnerable to attack. Yet for all its being ridiculed down the years, it has been remarkably resilient despite all of modernity’s secular (and mostly reductive) accounts of what it means to be human.

    What do we make of Abbott’s demand that Islam reform itself? First, it shows how ignorant he is about Islam. He clearly does not understand that it is one of the most sophisticated versions of the monotheism to come out of the historical Middle East. Its sister religions are Judaism and Christianity with which it shares many theological insights, ethical principles, prophetic traditions, and historical experiences. And all three of them draw heavily from Hinduism, the central wellspring of advanced religious thought.

    Nor does Abbott show any understanding of the historical causes of the contemporary crisis in the Middle East. At the forefront of those causes are the egregious colonial adventures of Britain (the centre of his Anglosphere). The role of the British in dominating Egypt for their own purposes and disregarding Palestinian resistance to the creation of Israel, and their imperial arrogance in other zones in the region, constitute one of the most ignominious eras in all of colonial history. The world is now reaping in the Middle East what the British sowed in centuries past.

    Misunderstandings abound among Islam’s critics and enemies, especially those – like Abbott – who want us to believe that it is the fons et origo of Islamist terrorism in contemporary global politics. But this ignores (probably for ulterior purposes) the fact that central to those conflicts are the brutal machinations of tribal warlords, crime bosses, crazed firebrands, mercenaries, naïve fools, angry young men, and insurgents in the contemporary Islamic world. While imposing an Islamist gloss on what in truth are fights about who wields power, occupies territory, monopolizes resources and controls states, the combatants in these conflicts are appropriating a religious identity to which they have no legitimate theological claim. They slander Islam into the bargain. This is by no means the first time a religious tradition has been maligned by being associated with malevolent political causes. Christianity’s record in this is also appalling.

    The Koranic tradition teaches that Jihad is an intensely personal struggle with one’s conscience. It entails submitting one’s self-hood to Allah through the teachings of the Prophet. It is fundamentally about being a good human being, compassionate, tolerant and peace loving. As with the Bible, its underlying message requires a deep understanding of its central hermeneutic. And precisely like the Bible, the Koran contains some horrific passages that can be simplistically lifted out of context by malevolent commentators and used as a blanket condemnation of the entire religion. This is evidence of bad faith and appallingly third-rate scholarship. Just as we should expect people like Tony Abbott to respect Christianity’s central message of loving unconditionally – despite the Spanish Inquisition, for example, or those in the Catholic hierarchy today who would cover up for pedophile priests – so we should expect them to recognize the profound dignity of Islam, despite the evil fanaticism of fundamentalist Islamism today.

    Abbott’s assertion that some cultures are superior to others is an echo from a dead imperialist past. It belongs to the discredited “class of civilizations” thesis once spruiked by the late Samuel Huntington. Edward Said reminds us that all cultures are intertwined. They all influence and transform each other all the time. All cultures are hybrid. Islam played a major – indeed vital – historical role in curating and contributing to classical Greek philosophy and scientific theorising, ensuring that this knowledge was available to the West at the beginning of the Renaissance. There would have been no Renaissance without it. In short, historical Islam has played a major civilizing role in the evolution of the West. Abbott seems ignorant of this history. His clumsy foray into cultural studies would be risible were it not so crude.

    Dealing with Daesh means we have to sort out the religious wheat from the political chaff. It will also require a general acknowledgement that the religious instinct is an unchangeable aspect of the human condition that urgently needs far greater understanding than modernity has so far been able to offer. And it will require an educated awareness that Islam is being dangerously slandered by commentators like Tony Abbott whose own religious backyard is a foul’s own nest if ever there were one.

     

    Allan Patience is a Principal Fellow in the Asia Institute, University of Melbourne.

     

  • David Charles. The National Innovation and Science Agenda – Will it be different this time?

    The Prime Minister and his government are welcoming us to the ideas boom. Showing a great sense of timing the innovation statement was made almost at the same time that Atlassian was listing on the NASDAQ. The Statement points to Atlassian as being valued at over US$3 billion. Today the company is valued at close to US$6 billion making billionaires out of its founders Mike Cannon-Brooks and Scott Farquhar and millionaires out of many of their co-workers.

    Perhaps it is true that there has never been a more exciting time to be an innovator in Australia. But as the Atlassian example demonstrates, becoming an overnight sensation has taken them 14 years of effort.

    With the long running resources boom having passed its peak and commodity prices tumbling, Australia needs to make a transition to a different kind of economy that will be driven by services and high value added manufacturing. Success in these areas is based on innovation.

    Prior to the recent change in Prime Minister there was no great sense of confidence that the transition could be made without Australia going through a rough period with low or even perhaps negative economic growth. Part of the reset brought about by Malcolm Turnbull’s government has been to build confidence in Australia’s ability to compete and succeed in the emerging global economy whose features are being redrawn by waves of disruptive technological change, new businesses, new business models and new supply chains.

    The innovation statement has been well received with the main quibbles being about its size compared to the opportunities and challenges ahead and the feeling that some are being left out – the statement is primarily perceived as being about start-ups and new business formation and heavily based on STEM skills which doesn’t leave much of a role for the humanities.

    For the old hands there is a bit of sense of déjà vu. Haven’t we lived through a number of high profile innovation statements over the last 20 years but in some way the challenges remain the same. For example, the one put out by the Keating Government in December 1995 spoke about Australia adding value to the IP we create. Even more notable was the innovation statement of the Howard Government in January 2001 Backing Australia’s Ability which provided $2.9 billion over 5 years.

    The question arises: what is different this time? Is there really something new going on or is this just another worthy effort that will be forgotten in 5 years?

    The Innovation Statement

    There is about $1.1 billion in initiatives over 4 years provided in the innovation statement. The initiatives are spread across 25 individual measures.

    The National Innovation and Science Agenda focuses on four points:

    1. Culture and capital
    2. Collaboration
    3. Talent and skills
    4. Government as an exemplar

    As pointed out, the Agenda comes on top of the investment of around $9.7 billion in research and development in 2015-16.

    The measures that have received the most media attention are those relating to start-ups. These range from new tax breaks for early stage investors who will receive a 20% non-refundable tax offset based on the amount of their investment as well as a capital gains exemption, to reform of the insolvency laws, to the establishment of two funds designed to assist start ups: the new $200 million CSIRO Innovation Fund and the new Biomedical Translation Fund to co-invest $250 million with the private sector.

    Less attention has been given to the additional commitments for building world-class research infrastructure. These measures are important and give greater long term funding certainty. Over the next decade $520 million will be provided to the Australian Synchrotron, $294 million to the Square Kilometre Array radio telescope project while the National Collaborative Research Infrastructure Strategy will receive $1.5 billion.

    Other measures involving financial commitments are included but arguably of greater importance are the changes that have been introduced in the governance of innovation. One of the key concerns has been the tendency for instability in support arrangements for innovation and science and the lack of real priority accorded to these areas. An important goal should be to ensure that all arms of government are singing from the same hymn sheet and that the music is not changed mid stream.

    A Cabinet Committee for innovation and science will be established chaired by the Prime Minister. A new independent statutory authority, Innovation and Science Australia, is also being established supported by a chief executive officer accountable through the Industry Minister to the Cabinet Committee. One of its first jobs will be to review the R&D Tax Incentive to improve its effectiveness and integrity.

    Importantly, the innovation statement makes clear that the Government will be open to adapting and changing course if things don’t work.

    The Ghosts of Innovation Statements Past

    Australia has had quite a number of innovation statements over the last 20 years or so. Rather more, if we take into account the introduction of the 150% R&D Tax Concession in 1985,the Cooperative Research Centres program in 1991 and various attempts to kick start a venture capital sector.

    There has been a longstanding recognition that while Australia performs reasonably well in terms of its support for public sector research in the universities and bodies like CSIRO, the return on such investment when measured in terms of the creation of technology intensive businesses based on Australian developed ideas has been less impressive.

    The 1995 Keating Government statement on innovation provided about $400 million over four years for a range of measures designed to strengthen Australia’s innovation and science capability. Like the recent innovation statement, the measures supported both the commercialisation of ideas and the science base itself. About $64 million was earmarked for major investments in science facilities. At the time the Australian government was spending about $3.5 billion on support for R&D.

    Perhaps as a case of history repeating itself, the then leader of the Opposition claimed the Keating innovation statement was full of ideas stolen from Coalition policy. Perhaps in innovation policy there is something to be said for being a rapid adopter. It has considerable historical precedent.

    The next major innovation statement came in January 2001 in the form of Backing Australia’s Ability delivered by the then Prime Minister John Howard. In the statement the government committed $2.9 billion over 5 years to a range of innovation and science initiatives.

    The initiative for the statement came from the Innovation Summit held in 2000 in response to urging by the Business Council of Australia who at the time were seeking the restoration of the 150% R&D Tax Concession. While they did not get the answer they were looking for, the government did introduce a wide ranging set of spending commitments in innovation and science. One of the more important, accounting for $736 million, was the doubling in ARC grants to match the earlier decision to double NH&MRC grants.

    Reflecting the increasing awareness of the importance of new developments in communications and IT for future economic growth, the National ICT Authority was established.

    Two further innovation statements much closer to us in time should be mentioned. Both in their own ways reflected the thought that eco-systems are increasingly important to success.

    First, the Gillard Government ‘s “A Plan for Australian Industry and Jobs – Industry and Innovation Statement” of February 2013 which set aside $1 billion for the establishment, amongst other things, of a number of industry precincts.

    Second, the Abbott Government’s Industry Innovation and Competitiveness Agenda of October 2014 which allocated about $200 million to a number of measures including the establishment of 5 growth centres which was its centre piece. The language around the statement was in terms of improving collaboration between industry and researchers and lifting commercialisation.

    The Business Council of Australia played an important role in preparing the ground for the growth centres initiative.

    What is different this time?

    While a case can be made that over an extended period the basic objectives of lifting Australia’s innovation performance and building the science base have remained, and hence a lot of the surrounding political rhetoric sounds similar, the reality is that the circumstances facing Australia and the global economy in which it is placed have changed a lot requiring policy settings themselves to change.

    What are some of these realities to which policy makers have had to respond?

    By and large, Australia has not been a leader in the formulation of policies for innovation and science. Individual initiatives have achieved international recognition (eg the CRC program) but on the whole these have been notable exceptions. As the globalization process has progressed so has Australians awareness of what other countries are doing in these fields. Notable examples in recent times have been the set of innovation policies introduced by the UK Government which have strong echoes in Australia’s recent decisions. The Growth Centres owe a lot to the Catapult Program and the tax breaks for early stage investors to the Seed Enterprise Investment Scheme.

    Governments in Israel and Singapore have placed a huge emphasis on creating an environment supportive of start-ups. Again, Australian policy has drawn on their experiences as knowledge of them increased.

    The potential impact that a more successful approach to encouraging start-ups can bring has been brought home by some spectacular examples such as that with Atlassian which have received very wide media exposure. Start-ups are no longer seen as an interesting but relatively small phenomenon. Much of the growth in the market value of listed enterprises in China is associated with companies like Baidu, Alibaba and Tencent – all IT based companies of recent origin.

    Successful policy generally requires that it is running with the grain of economic developments rather than against it. Australia is now starting to see enough examples of successful tech-based start-ups to break through the recognition gap both of entrepreneurial inclined young people and parts of the capital market. A serious effort will be made to support the needed cultural change in terms of the toleration of the risk of failure. While the direction of earlier innovation statements was broadly right, important parts of the underpinnings for success were lacking. The innovation statement has the powerful advantage of building on underlying momentum and giving things a strong additional push.

    It is not perhaps something the media has picked up on, but the fact that the Turnbull innovation statement includes important supporting governance arrangements is different from previous experience and gives greater confidence in steadier and more predictable policy making. Turning support on and off is highly disruptive.

    People are always important and on this occasion it is notable that key people such as the Chief Scientist, Alan Finkel, the CEO of CSIRO, Larry Marshall, and the Chair of Innovation and Science Australia, Bill Ferris, all have a strong background in new business creation and financing.

    All things considered, a case can be made that this time it may well indeed be different.

    What lies Ahead?

    Innovation and science are now seen on both sides of the political divide as crucial to the successful transition of the Australian economy and to lifting productivity. Hopefully that will result in a workable, if not a high, degree of bipartisanship.

    The innovation statement makes it clear that close attention will need to paid to the initiatives that have been taken to ensure that any shortcomings are addressed and that initiatives that are failing to meet their objectives are closed down. As in most areas of policy, a more evidence-based approach is needed.

    While the focus of this statement is on start-ups (although it is recognized that some important things have been done to give greater certainly to longer term investments in the research infrastructure), at the end of the day start-ups are by no means the whole innovation story. Attention will need to be continued to be directed to improving the innovation performance of existing businesses. Non science elements such as design should perhaps be given greater attention as they are in successful innovation based economies.

    The innovation statement is a valuable start and a strong expression of direction. This is not to be underestimated as we know that industry policy is about 90% psychology. But it should not be seen as the last word on innovation and science, especially at a time of very raid change. More will almost certainly have to be done if Australia is to be globally competitive.

    In a difficult fiscal environment there will no doubt be times when parts of government are tempted to ensure innovation and science programs bear there share of the savings burden. This will be a real test of the new governance arrangements and will be a real indicator of whether things this time really are different.

    David Charles is a Director of Insight Economics. He was formerly Secretary of the Department of Industry and Commerce from 1985 to 1990. He co-founded the Allen Consulting Group in Melbourne. 

     

     

     

     

     

     

     

     

  • Michael Keating. The Key Options for Tax Reform

    One useful outcome from the Council of Australian Governments (COAG) meeting on 11 December, was its acknowledgement of the “emerging budgetary pressures across all levels of government, particularly in the health sector.” This acknowledgement must be the critical starting point for any serious consideration of tax reform.

    Quite naturally it was equally acknowledged that government expenditures must be efficient. However, the understandings reached at both the Treasurers’ meeting and at COAG, seemed to be that action on the revenue side of government budgets could also not be avoided.

    Prior to these two meetings the principal direction for tax reform under consideration seemed to be to increase the GST revenue by some combination of increased tax rates and/or base broadening by removing some of the presently untaxed expenditures. Interestingly the meetings agreed to widen the scope of the options to include:

    • Further consideration of the States own revenue raising efforts, and
    • Granting the States access to the personal income tax revenue

    The implications of each of these three strategies for raising additional revenue will be examined below.

    State Government Revenue Raising Capacity

    Many State taxes are inefficient and ideally would be removed. The States do, however, have two major tax bases – land taxes and payroll taxes – from which revenue can be efficiently raised without much if any damage to economic activity and development. This is because:

    • Land is the ultimate immovable factor of production; increased taxation of land will not lead to any land being withdrawn and redeployed elsewhere; while
    • Payroll taxes may appear to be a tax on employment, but in fact payroll taxes are not very different from a value added tax, as wages account for over half of value added, and therefore the incidence of payroll taxes (in terms of who finally bears their cost) is likely to be broadly similar to the GST.

    With a good deal of justification, the Australian Treasurer, Scott Morrison, argued that the States need to improve their revenue raising efforts with both these taxes before the Australian Government would agree to augment the States’ revenue further. In particular, the States have competed with each other to exempt businesses from their payroll tax and to lower the rates. As a result this tax is now raising much less revenue relative to wages than it used to when it was passed over to the States by the McMahon Government more than 40 years ago. In addition, the coverage of the State land taxes is typically very low, with most properties exempt, so again the States could do more to help themselves before asking the Australian Government to increase its revenue raising effort.

    The GST

    As I argued in my posting on this blog (dated 10 December), “Ultimately the problem for the Australian government in relying heavily on the GST to raise extra revenue is that [under present arrangements] the proceeds only flow to the States”. So if the Australian Government wants to share the benefits of that extra GST revenue it necessarily would have to make offsetting cuts to the other main form of financial transfers to the States – namely the tied grants paid to the States by the Australian Government. Other things being equal, the bigger the increase in the GST revenue passed over to the States, the bigger the likely cuts by the Australian Government in its tied grants.

    For the most part, however, these tied grants are closely related to the Australian Government’s own responsibilities and reflect its own priorities. Furthermore, the politics are not straight forward either, as there would be many interest groups who would be most concerned if the Commonwealth were to withdraw from funding their preferences.

    Indeed, a relatively recent and interesting example, of these problems occurred when the Keating Government agreed with the States on a separation of road funding responsibilities. Instead of the previous shared responsibility for road funding, under this reform the States became solely responsible for all road funding other than designated National Highways, which were the sole responsibility of the Commonwealth. Immediately the States started lobbying to have more of their roads transferred to the Commonwealth as designated national highways. Then shortly after the Government changed in 1996, the National Party succeeded in abandoning this separation of responsibilities so that it could get back into its traditional business of doling out money to rural constituencies for their roads.

    In addition, the States have a further concern about their reliance on funding from the GST. This is because the GST has not proved to be the “growth” tax that was expected when it was introduced. First the coverage of the GST is just under half of total consumption, and household expenditure on the other excluded consumption items, notably private spending on health, education and financial services, is growing faster. Second, over the last decade household savings rates have increased (albeit from a zero base), and consequently household consumption expenditures have grown more slowly than incomes; although with currently falling incomes this might be about to change.

    Sharing Income Tax and GST Revenues

    Given these difficulties with relying heavily on an increase in the GST to remedy government budgets, it is perhaps not surprising that another revenue raising option was proposed to assist in meeting all governments’ future fiscal challenges. This latest strategy would involve:

    1. The Australian Government increasing the GST and keeping some or all of the additional revenue
    2. The States obtaining some or all of the extra revenue that they are seeking by gaining access to a share of the income tax, and
    3. Some or no cut to tied grants depending upon how much revenue is raised for the Commonwealth to retain and relative to the States by 1 and 2 above.

    On the face of it, this proposal represents a neat pragmatic solution to some of the various political problems involved in relying mainly on an increase in the GST to resolve future budget problems. In particular, it is easy to see why it would appeal to the States as it would seem to provide a stronger growth in their future revenue, while from the Australian Government’s point of view it would most probably require less reduction in its tied grants.

    On the other hand, this strategy would involve for the first time in more than seventy years, two levels of government sharing the major sources of revenue – the principal taxes on expenditure and income.

    This revenue sharing would completely contradict the principles of responsible and accountable government. It would most probably result in a return to the annual wrangle between the Australian Government and the States over their respective revenue shares. Furthermore, whenever there was a perceived deficiency in State government services, the States would be able to claim that they had insufficient revenue and needed a bigger share of either the GST or the income tax. In other words, the States would be able to argue that they should not be held accountable for poor State government services. Instead the States could blame the Australian Government on the grounds that the Australian Government was preventing State governments from accessing sufficient revenue.

    Most importantly, if fiscal policy is to retain its effectiveness for counter-cyclical purposes the Australian government must retain its flexibility to unilaterally set and change the income tax rates – reducing them to ward off recessions and increasing them in a boom. Furthermore, with interest rates testing new lows there is a risk that monetary policy may be less effective in future and that reliance on fiscal policy will therefore need to increase; indeed the evidence from a number of countries is that monetary easing since the GFC has mainly resulted in increasing asset prices, but has not produced the hoped for increase in real activity.

    In this context it also should be remembered that experience suggests that tax variations are much more effective in moderating fluctuations in economic activity than variations in government expenditures. Essentially history shows that consumers respond more quickly to variations in income tax, and that there are especially long lags before decisions to invest in more infrastructure start to impact on the economy. In addition, it is easier to make temporary variations in tax rates which can subsequently be reversed, whereas many form of government expenditure are difficult to reverse after the economy recovers.

    The use of the income tax to moderate fluctuations in economic activity means that the revenue from this source is more variable than other revenue sources. Furthermore, this is still true even if tax rates are not varied, although in that case the variations in income tax revenue would be less.

    A key issue would be whether the State budgets could cope with this amount of volatility in one of their key revenue sources. A risk with any sharing of income tax revenue is that the States could spend up in the boom years and return cap in hand to the Australian Government seeking extra revenue in the lean years. Of course, any development along these lines would be the opposite of what would be required by a counter-cyclical fiscal policy.

    Conclusion

    In brief, the options for the Australian Government and the States to share tax bases, and especially the income tax, would represent a triumph of pragmatism over principle. Such a triumph of pragmatism is not unknown in Australian policy development – indeed some may consider it part of the Australian policy genius.

    In the present instance this pragmatism may help resolve some difficult political problems, but in terms of effective federalism arrangements it would represent a major step backwards. Not only would there be no clear assignment of many expenditure responsibilities, but if governments also share their revenue bases the accountability for financing all State government services would also be muddied.

    It would be particularly strange for a Liberal Government to adopt revenue sharing along these lines, as historically the Liberals have been more concerned about separation of roles and responsibilities of the different level of government than Labor. And any national government must be concerned about any weakening of its capacity to meet one of its greatest responsibilities – to ensure economic stability and growth.

    Thus effective tax reform would still seem to be some way off. The end result will almost certainly represent a compromise involving a mix of options, including measures that were not on the COAG agenda, such as broadening the income tax base by reducing concessions.

     

  • Jon Stanford. Defence procurement and the new submarine

    When people remember Gough Whitlam, few would identify him as an economic rationalist. Economics was not his primary interest and, partly because of the perceived urgency of implementing “the programme” after 23 years in opposition, partly because of the incompetence of some of his Ministers, the budget blew out excessively on his watch. Yet in terms of microeconomic reform his record was, in many ways, better than that of previous and subsequent Coalition governments. Even including all the reforms by the Hawke/Keating governments in the 1980s and 1990s, Whitlam’s 25 per cent tariff cut in 1973 remains the single greatest stand alone initiative to open the Australian economy to international competition.

    A lesson from the past

    Whitlam’s economically rational approach also spilled over into defence procurement. This is an area, as experience demonstrates, that provides spectacular opportunities for squandering public money, not least in the naval shipbuilding industry.

    By the early 1970s, the Royal Australian Navy (RAN) needed to replace some obsolescent warships of British origin, many of which had been built at high cost and over excessive lengths of time in Australia’s government-owned shipyards. Defence’s preference was to design and build locally an Australian light destroyer, the DDL project. When the Whitlam government came to power, design work on the DDL had been going on for some years under the Coalition and the Navy was an enthusiastic supporter of the project.

    While there would have been significant political benefits in endorsing the project, clearly the risks of a local design and build would have been high. The complexities of integrating a new platform with overseas sensors and weapons, even the less complex systems available in the 1970s, would have led to substantial risks. Building ships locally to an original design would have inevitably resulted in higher unit costs, even in an efficient shipyard, than purchasing a ship from a longer production line overseas. On the basis of the local shipyards’ demonstrated past performance, bringing the project in on time and on budget was highly unlikely.

    In 1973, soon after coming to office, the Whitlam government considered the proposed DDL project. While recognising the need for a new acquisition, it also considered that there was no unique mission for a surface warship in the RAN that would justify the costs and risks of designing and building a new Australian platform. The government therefore rejected the DDL and told Defence to go away and look at overseas platforms. Grumpily, Defence came up with two options. The Navy liked the handsome British Type 42 destroyer platform but not its sensors and weapons systems. It approved of the US Oliver Hazard Perry class (FFG) systems and missiles but not the platform, which had a single propeller shaft and resembled a container ship. Typically, Defence sought to mix and match. It wanted the British platform with the US missiles and radars and an American 5-inch gun.

    The Whitlam government faced Defence down again. It rejected the mix and match option as being excessively risky and an Australian build as not cost-effective. In 1974 it ordered the FFG ships with all their systems, to be built in the United States with no significant modifications. The Navy was not happy. The Perry design had been described huffily by Defence project staff as “a second rate escort that falls short of the DDL requirements on virtually every respect”.[1] But the government understood that the frigate would provide technological superiority in our region at low cost, with the Australian ships coming off a production run of over 50 vessels. The RAN did not require the world’s best frigate; it was unlikely to be confronting the Northern Red Banner Fleet in the Barents Sea.

    In service, the FFGs have been successful. They were minimalist platforms that did the job, to the extent that subsequent governments decided to build two more ships locally (a decision that initially seemed disastrous until Transfield acquired the Williamstown shipyard from government and delivered them on time and on budget). They were also tough and durable. The Perry class USS Stark survived two hits from Exocet missiles, while the Type 42 HMS Sheffield, with significant aluminium in its platform, was destroyed by one. Critically, because they were not unique ships for which the RAN had parent navy responsibilities, through life support and maintenance, undertaken in Australia to US schedules, was cost effective.

    More recent history

    To clarify, through life support for the FFGs was cost-effective during their planned economic lives, but then Defence delayed the procurement process for their replacement, namely the air warfare destroyers (AWDs). Seriously bad decisions then raised their ugly head.

    First, at a time when the US was retiring their Perry class FFGs, Australia decided on a unique major upgrade for its six ships, including improved sensors, modern systems, better anti-submarine weapons and vertically launched anti-air and anti-ship missiles. Awkwardly for those who believe we need to build ships locally in order to modify them, ADI (later Thales) in Sydney won this contract in competition with the Transfield shipyard in Williamstown that had very recently built the last two FFGs. The cost and timeline for the upgrade blew out substantially, with the modifications then being limited to four of the six ships. The other two FFGs were scrapped much earlier than intended. The cost ended up being $1.6 billion for four ships as against a budget of $1.266 billion for six, a blowout per ship of 90 per cent. Two ships short, they were also delivered two years late. In addition, there have been suggestions that the additional weight exceeds the ships’ design parameters, potentially creating stability problems.[2]

    Secondly, following the successful local construction of the Anzac class frigates, the Howard government decided to procure the AWDs locally. Compared to the Anzac acquisition, the decision was a bad one for a number of reasons. First, there was no fixed price contract for the successful tenderer or any notion of specifying a similar cost to acquiring the ships offshore. Secondly and quite extraordinarily, while the Williamstown yard with its experienced workforce on the Anzac ships still in place was a tenderer, the contract was awarded to ASC in Adelaide that had never built a surface ship. The shipyard was dedicated to submarine maintenance and had no shipbuilding workforce. Thirdly, building three ships locally (as against ten Anzacs) was never going to be economic because of limited opportunities to exploit scale economies and learning curve benefits. Overall, if we had bought three larger and more capable Arleigh Burke ships off a 100 plus production run in the US, the RAN would already be deploying them and, rather than waiting for three smaller ships to be delivered three years late, the government would have banked significant budget savings.[3]

    Lessons learnt

    There are multiple lessons to be learned from these and other recent acquisition experiences. In particular:

    1. Acquiring a unique platform, as Australia did with the Collins class submarines, brings with it substantial risks and almost certainly excessive costs compared to an off the shelf acquisition. Some of these costs are reflected in the parent navy responsibilities for a unique class, which lead to higher through life support costs – currently running at nearly $1 billion annually for Collins. Implication: if Australia does not have a unique defence mission, then we should not acquire a unique platform.
    2. Mixing platforms from one country with systems from another involves very high risks, and frequently gives rise to unforeseen costs and delays that exceed substantially any perceived military benefits. Implication: only mix and match systems and platforms as a last resort and only if the risks are understood and accounted for in the budget and timeline.
    3. Developments in technology mean that obsolescent platforms do not necessarily need to be replaced by similar assets. For example, some of the roles of a submarine could be taken over by aircraft, unmanned aerial vehicles or the Australian Signals Directorate. Implication: focus on the defence requirement, not the particular platform, and assess how it might be best achieved at lowest cost and acceptable risk.
    4. Building major defence assets locally often involves very substantial risks, higher costs and contingent liabilities that are almost impossible to justify. For example, we would not contemplate designing and building in Australia a major aircraft like the F-35 joint strike fighter or a main battle tank for the Army. There are no significant defence benefits in building platforms locally and the level of protection to naval shipbuilding is higher than for the car industry. Implication: only build major platforms locally under a fixed price contract and where the cost is comparable with that of offshore acquisition – it’s time to end the age of entitlement for the naval shipbuilding industry.
    5. The main role of defence industry should be through life support – as Australia’s record with RAAF assets show, we don’t need to build platforms locally in order to sustain them at the highest level. Implication: try to shift the political debate away from building defence assets, which leads us into sub-optimal acquisitions, to focussing on the benefits of maintaining Australia’s assets in top condition for the benefit of ADF personnel.

    Implications for the new submarine

    On the basis of the above analysis, we need to consider the implications for Australia’s new submarine’s acquisition process. Currently, three broad proposals have recently been lodged by shipbuilders in France, Germany and Japan. These proposals are for a large conventional platform, unique to Australia, with a combat system and weapons systems sourced from the United States. The government intends to select one of these proposals in the near future to be taken forward in a detailed design.

    In terms of the first implication above, the fundamental question is whether Australia needs to acquire a unique submarine platform to meet its requirement and discharge its mission. The only fairly detailed definition of the new submarine’s mission was contained in the 2009 Defence White Paper:

    The Future Submarine will be capable of a range of tasks such as anti-ship and anti-submarine warfare; strategic strike; mine detection and mine-laying operations; intelligence collection; supporting special forces (including infiltration and exfiltration missions); and gathering battle space data in support of operations. [4](Page 70.)

    Subsequently, the then Chief of Navy suggested that the main task of the new submarine was “sinking hostile ships and submarines” with “the South China Sea as the area of most interest”.[5] Overall, it seemed clear that one important role for the new submarine was power projection in waters far from home.

    While this is an ambitious mission, particular for a middle power, it is by no means unique. All five of the permanent members of the UN Security Council would have a similar role for their submarines. Among western platforms, the power projection role in the South China Sea, although challenging, could be best discharged either by a Virginia class submarine from the US, an Astute from the UK or a Suffren boat from France. These are all nuclear submarines. While Australia would face some challenges in acquiring nuclear submarines, these are not insuperable. A nuclear submarine off these existing production lines may well be no more expensive than the unique conventional submarines under consideration and we would need fewer of them.

    On the other hand, attempting to undertake this mission in a conventional submarine would be less effective and more dangerous. The submarine’s slow underwater speed and significant indiscretion rate would increase the risk of detection and destruction. The recent acquisition of nuclear attack submarines (SSNs) by China and India in our region suggest that any conventional boat operated by Australia would not enjoy technological superiority in the South China Sea. By the time the new Australian submarines are commissioned in ten or fifteen years time, both countries are likely to possess a fleet of SSNs, the more modern ones of which will be quieter and more efficient than the prototypes. This raises the awkward question of whether an Australian government would be willing to send young Australians into harm’s way in very expensive but technologically inadequate kit.

    If the answer to this is “No” but the government remains unwilling to acquire nuclear submarines, then logic suggests that the mission needs to change. Specifically, the government could discard the power projection role and leave that task to a better-equipped ally. Forget discharging cruise missiles at a “major adversary” and scratch the idea of sinking ships in the South China Sea. This then leads to a sea denial role in the context of the defence of Australia, with additional intelligence gathering responsibilities. Would this require a unique platform? Again the answer is “No”. These tasks could be undertaken by existing conventional submarines available off the shelf from a number of shipbuilders, including all three of those in the design competition for Australia’s new submarine. One obvious candidate would be the existing Soryu class, which is larger than other available designs and, in its latest guise, takes advantage of advanced Japanese Lithium-ion technology.

    If the government were to change the mission to sea denial and intelligence gathering, however, then it should first look at whether a submarine provides the most cost-effective means of fulfilling this role (see the third implication above). The capability of conventional submarines in the sea denial role is compromised by their slow speed, while to send a submarine to snoop off a neighbour’s shore is not necessarily the most cost-effective way of recording wireless transmissions overseas. By contrast, some of the RAAF’s fleet of modern aircraft, including the E-7A Wedgetail airborne early warning and control platform and, in the future, the P-8 Poseidon maritime patrol aircraft, have a potent capability in both sea denial and intelligence gathering.

     

    Conclusions

    In short, this analysis suggests three alternative ways forward for the new submarine:

    • Maintain the current mission and seek to acquire perhaps six nuclear attack submarines (at most) from the US, the UK or France.
    • Reduce the scope of the submarine’s role to sea denial and intelligence gathering and acquire, say, between four and six conventional boats off existing production lines overseas (possibly from Japan).
    • Examine whether the sea denial and intelligence missions can be delivered more cost-effectively by platforms other than submarines, such as aircraft already in service or currently being acquired.

    None of these options requires a unique platform or merits an Australian build. Importantly, all three options offer significant savings compared to the current approach. Even if the SSN option were to be pursued (it would require difficult negotiations with the United States and assistance in maintaining the reactors), the overall cost would be significantly lower than buying 12 unique platforms with a mixture of systems, particularly if they were built in Australia.

    All three options, however, would mean abandoning the current acquisition process. It is not too late to do that, but government would need to enter into an intensive process with some urgency to analyse the options in more detail. While strategic and technical military analysis is clearly required, it is of critical importance that these technical data should then be fed into an evaluation of risks, costs and potential pay-off for each option. It is not clear that such an approach, which would combine rigorous cost-benefit analysis with the investment appraisal disciplines of financial economics, is generally employed when Defence is assessing costly new acquisitions. Because Defence still has a single line budget appropriation (why?), its internal processes are often impenetrable to the keepers of the keys in Finance and Treasury.

    Why I began this article by reference to Gough Whitlam and the proposed DDL acquisition was to suggest, in agreement with Laura Tingle, that the government has lost its corporate memory and its ability to learn lessons from previous approaches.[6] It seems remarkable, for example, that our defence acquisitions keep repeating the mistakes of the past, from mixing and matching systems inappropriately and accepting excessive risks, to allowing political judgements to override efficiency considerations and the proper regard for the public purse. In the new submarine acquisition, we seem even to have learned nothing from the Collins class procurement. In both cases the French, surely laughing up their elegant sleeves, have offered us a dumbed down version of an existing nuclear submarine, with the reactor replaced by an updated version of the same diesel-electric technology that powered Australia’s first submarine, AE1, on its epic voyage from the UK in 1913.

    “We learn from history that we do not learn from history,” was Hegel’s gloomy prognosis. I prefer Santayana’s view, quoted by Laura Tingle, because it seems to offer a shred of hope: “Those who cannot remember the past are condemned to repeat it”.

     

    Jon Stanford is a Director of Insight Economics. He had a significant career as an economist in the Australian Public Service, ultimately in the department of Prime Minister and Cabinet. He has worked extensively on economic and policy issues around defence procurement and naval shipbuilding. 

    [1] Jones, Peter (2001). “1972–1983: Towards Self-Reliance”, in Stevens, David. The Royal Australian Navy. The Australian Centenary History of Defence (vol III). South Melbourne, VIC: Oxford University Press, page 220.

    [2] Defense Industry Daily (2014), http://www.defenseindustrydaily.com/australias-hazardous-frigate-upgrade-04586/

    [3] In the early 2000s, the US offered to sell three second-hand Arleigh Burkes to Australia for a good price so as to avoid the risky upgrade to the FFGs. The RAN rejected this, just as previously it had, with more justification, rejected the offer of the four very large destroyers of the Kidd class.

    [4] Australian Government (2009), Defending Australia in the Asia Pacific Century, Defence White Paper, Canberra, page 70.

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

    [6] Laura Tingle (2015), “Political Amnesia: How we forgot how to govern”, Quarterly Essay No. 60, Schwartz Media, Melbourne.

  • Michael Keating. Tax Reform and Future Federal-State Relations

    All informed opinion is that fiscal repair in Australia will require action on the revenue side as well as the expenditure side of the Budget. Accordingly at least some tax reform is essential and unavoidable.

    In addition, reform of the taxation system and the future of federal- state relations are inevitably closely connected. First, possible changes to increase the GST revenue are central to many of the proposals to raise the necessary extra revenue and would represent a key element of tax reform more generally. Second, for very good reasons all the revenue from the GST is passed to the States, so changes to the GST not only require the agreement of the States, but these GST changes are likely to involve further changes in Federal-State relations.

    Thus two meetings on Thursday and Friday of this week, the first of Treasurers and the second involving heads of Australian governments, loom as being particularly important for the future of federal-state relations and our economy. The focus will be on the options for improving all governments’ future fiscal positions, and while these meetings are unlikely to arrive at concrete decisions at this stage of the ‘reform’ process, they should set the direction for possible future reform.

    In what follows I consider some of the issues that these meetings of Treasurers and Heads of Government will need to address.

    What are the additional revenue options?

    It is understood that at the request of the States, the Australian Treasury has been modelling various options to (i) increase the rate of the GST and/ or (ii) to broaden its coverage, and/or (iii) raise the Medicare Levy over time. As reported in the press, the maximum revenue raised could be as much as $45 billion annually or as little as $15 billion.

    There is general agreement that the options to increase the revenue from the GST will only be adopted if adequate compensation is provided to the lower and middle income groups affected. This is, however, only one instance of the more general point that any assessment of these options for raising additional revenue cannot be divorced from what would be done with the very substantial revenue proceeds.

    Who benefits from any additional revenue?

    A critical problem in determining the purposes for which the additional revenue might be used is that under present laws all the extra revenue from changes to the GST would flow to the States, and the Commonwealth doesn’t benefit at all. Of course, the present assignment of the GST revenue to the States could be over-turned, but that would be a serious step backwards in federal-state relations. It would probably result in two levels of government sharing the same revenue source, and this would in turn most likely lead to a return to previous arguments over revenue shares, with the States being concerned that they were being short-changed by the Australian government. Essentially the accountability of which government was responsible for any poor performance would be further muddled by any shift in favour of revenue sharing.

    Accordingly, if the States are to retain all the extra revenue from any increase in the GST, then other ways will have to be found for the Australian government to meet its own demands for extra revenue – particularly to:

    • meet its essential demands to finance the compensation packages,
    • contribute to the restoration of its own fiscal surplus, and
    • provide some scope for tax cuts at least sufficient to remove the impact of bracket creep which is leading to middle income earners moving into higher tax brackets.

    A possible ‘reform’ package

    In the series Fairness, Opportunity and Security I outlined a strategy that met these demands by the Australian government and the States to spend the extra revenue that could be expected from options to change the GST. The critical element was a large reduction in specific purpose payments to the States. In this way the States would have a net gain from their increase in GST revenue, but much of the increase in the GST revenue gain would be offset by the reduction in specific purpose payments from the Budget.

    In principle, this reduction in specific purpose payments from the Australian Government to the states would reflect a rationalisation of the governments’ respective roles and responsibilities; the bigger the rationalisation, the bigger the reduction in the specific purpose payments. The States would no doubt welcome their increased autonomy, and it would be portrayed as a major reform of federal state relations, leading to less duplication and improved accountability. Nevertheless, another critical issue is how far the Australian government can withdraw from its present shared responsibilities with the States without jeopardising the achievement of objectives for which the Australian government is held accountable.

    In particular, it will be difficult to make large reductions in these specific purpose payments without some withdrawal from school or hospital funding as in the current financial year schools and hospitals account for some $30 billion of the $50 billion total in tied grants from the Australian government to the States. However, can the Australian government afford to totally withdraw from schools policy when innovation, employment participation and the future growth of the economy are all influenced by the quality and quantity of education. Similarly, the Australian Government is directly responsible for funding the provision of medical services through Medicare, but if it were to withdraw from the funding of hospitals there would probably be less integration in the provision of health services when desirably there should be more. On the other hand, it would however be difficult to reduce the funding of specific purpose programs by a lot without reducing Australian government funding for education and health.

    The Grattan Institute proposals

    Earlier this week the Grattan Institute made an important contribution to this discussion when it released a new report proposing A GST Reform Package. This report provides a more solid base of quantitative information which allows us to get a better handle on the exact dimensions of the choice between tax reform and more devolution to the States on the one hand, and on the other hand, the retention of influence by the Australian Government that it might need to achieve its own objectives.

    In brief the preferred option favoured by Grattan would increase the GST rate to 15 per cent, which is estimated to generate around an extra $27 billion in revenue. Grattan would then spend around 30 per cent of this extra revenue on welfare payments, and expects that this would leave most of the bottom 20 per cent of income earners better off. Second, Grattan would commit a further 30 per cent of additional revenue to income tax cuts which would allow the government to shave 2 to 2.5 per cent percentage points off the bottom two tax rates. Along with the higher welfare payments proposed, Grattan considers that tax cuts of this magnitude would fully offset the increase in GST for most low and middle income households – those earning up to $100,000 a year – while also providing some benefit for those further up the income distribution.

    At first glance this seems like a very attractive package, noting that it could be further tinkered with, especially by adjusting the ways in which the extra GST revenue is raised. As previously foreshadowed, however, the problem is how does the Australian government get its hands on the funds necessary to increase the welfare payments and reduce the income tax as proposed, let alone meet its responsibilities for returning the Budget to surplus. Instead, the reality is that the States are expected to pocket all the extra $27 billion GST revenue which would be raised in this package.

    Accordingly Grattan proposes that the Commonwealth reduce the amount of its tied grants to the States by $22 billion so that the States are only better off by around a net $5 billion. Whether that would be sufficient to buy the States support for this sort of package is a moot point, as $5 billion is well short of the $20 billion a year which has already been cut from their budgets for health and education. Furthermore, it would be almost impossible to cut $22 billion out of tied grants to the States without withdrawing from all tied grants other than for health and education, or alternatively making very deep cuts to the grants for health and/or education.

    But leaving these two problems aside for the moment, a further issue is that the fiscal position of the Australian government is only improved by a net $22 billion under the Grattan proposals. Out of this $22 billion the Australian government would have to fund an increase in welfare payments ($8 billion) and cuts in tax rates ($8 billion) leaving only around $6 billion to improve its budget and meet any other commitments, including the more ambitious tax cuts which the government would no doubt prefer.

    Conclusion

    What this Grattan package demonstrates most clearly is first, that as always, the devil is in the detail. Second, tax reform to put the nation’s finances on a more sustainable footing is necessary, but equally it is not easy. In particular, this specific package by the Grattan Institute raises the question of whether the relatively small gains are worth the pain?

    Ultimately the problem for the Australian government in relying heavily on the GST to raise extra revenue is that the proceeds only flow to the States. So if the Australian Government wants to get more of that extra revenue it has to cut its tied grants harder, but for the most part these are closely related to its own responsibilities and reflect its own priorities.

     

    Michael Keating AC was formerly Secretary, Department of Finance and Secretary, Prime Minister and Cabinet. He was the joint editor of the policy series ‘Fairness, Opportunity and Security’ which was posted on this blog and published as a book by ATF.

  • John Menadue. More on second-hand car rent-seekers.

    In my recent blog ‘Rent-seekers in the motor industry‘ I drew attention to the successful lobbying by the motor industry to retain the $12,000 excise duty on used-car imports into Australia and the restriction that imports must be limited to a single second-hand vehicle.

    To defend its position, the Chief Executive of the Federal Chamber of Automotive Industries has said that there have been instances in New Zealand where used-car imports were linked to the Japanese mafia, the Yakuza, and instances where radioactive cars from the Fukushima nuclear disaster found their way to Russia.

    This type of scare-mongering really exposes the weakness of the case which is designed to protect business interests rather than give consumers lower prices and more choice in second-hand vehicles. The case espoused by the motor industry has descended into farce,

  • Turkey and Daesh

    In this blog on 6 December 2015 ‘Turkey’s new neighbour – Daesh (Islamic State)‘  John Tulloh referred to an article by David Graeber in The Guardian on how Turkey is obstructing Kurdish forces that are the most effective opponents of Daesh.

    In that article, David Graeber asserts that ‘Western leaders could destroy Islamic State by calling on [President] Erdogan to end his attacks on Kurdish forces in Syria and Turkey and allow them to fight ISIS on the ground‘.

    David Graeber is an American anthropologist, political activist and author. He is currently a Professor at the London School of Economics and was formerly an Associate Professor of Anthropology at Yale University.

    John Menadue

    David Graeber’s  article ‘Turkey could cut off Islamic State’s supply lines. So why doesn’t it?’ is linked below. This article first appeared in The Guardian on 19 November 2015.

    http://gu.com/p/4ebvc/sbl

  • Robyn Eckersley. Australia’s climate diplomacy is like a doughnut: empty in the middle.

    There is a profound disconnect between Australia’s international climate diplomacy and its national climate and energy policies.

    The diplomacy could be cast in positive terms, on the surface at least.

    During the first week of the climate negotiations in Paris, Australia displayed a preparedness to be flexible and serve as a broker of compromises in the negotiations over the draft Paris Agreement.

    Australia has also agreed to support the inclusion of a temperature goal to limit global warming to 1.5℃, which is a matter very dear to the hearts of Pacific Island nations for whom climate change is a fundamental existential threat.

    Australia will serve as co-chair (with South Africa) of the Green Climate Fund in 2016, which will be channelling money to the most vulnerable countries in the Pacific and elsewhere to enhance their preparedness for the harmful impacts arising from a much warmer world.

    In his address on the opening day of the conference, Prime Minister Malcolm Turnbull announced that Australia would ratify the second commitment period of the Kyoto Protocol (Kyoto II) and commit A$200 million a year in climate finance going forward to 2020.

    And on the sidelines of the negotiations, environment minister Greg Hunt announced that Australia would provide A$1.2 million towards the Coral Triangle Initiative for Coral Reefs, Fisheries and Security.

    He also unveiled the Blue Carbon research project to explore how the protection of marine and coastal habitats could reduce emissions by storing carbon while also protecting biodiversity and fisheries.

    Yet appearances can be deceiving. The A$200 million in annual climate finance comes from the aid budget and is not new or additional. Nor does it represent an enhanced commitment relative to previous contributions.

    And it is widely acknowledged that an enhanced commitment to climate finance by rich countries to assist poor countries to develop clean energy and adapt to climate change will be central to garnering the support of developing countries to a Paris agreement.

    Australia had every reason to ratify Kyoto II, since it had one of the lowest emissions targets in the developed world for 2020 (5% below 2000 levels).

    Australia has also been able to benefit from greenhouse gas accounting rules (including a carry over of surplus emissions allowances from the first commitment period) that will enable achievement of this target at the same time as greenhouse emissions outside the land sector are set to increase by around 11% by 2020.

    Contrast this with Germany, the UK and Denmark, which announced that they will cancel their surplus emission allowances and not carry them over for Kyoto II.

    Australia’s climate diplomacy is therefore like a doughnut: a few some promising initiatives around the edges but nothing in the middle.

    The missing middle, of course, is robust domestic targets and policies for 2020 and the post-2020 period.

    Get serious

    If Australia was really serious about aiming for a more ambitious temperature target to stand firm with its neighbours in the Pacific, then it would have domestic politics that were commensurate with this ambition.

    As the strong contingent of civil society organisations from Australia at COP21 have been quick to point out, Australia’s domestic policy settings, including significant fossil fuel subsidies, actively encourage fossil fuel production and use.

    These subsidies, along with the government’s Emissions Reduction Fund, cast the burden on the public to pay for the cost of carbon pollution, rather than the polluters.

    The first week of the negotiations included a string of announcements of new initiatives on divestment from fossil fuels and efforts to promote the phase out of fossil fuel subsidies. This included a communiqué on fossil fuel subsidy reform, signed by eight non-G20 countries (including New Zealand and Norway) and supported by France and the United States.

    Australia declined to give its support to the communiqué. Turnbull said Australia would have supported it if it had been restricted to “inefficient” fossil fuel subsidies.

    Yet economists describe fossil fuel subsides as perverse because they harm the economy (by propping up inefficient industries) and the environment, and soak up scarce public money that could be better spent elsewhere.

    To make matters worse, the government’s decision to approve the giant Carmichael coal mine in Queensland will completely cancel out any of the modest goodwill provided by Australia’s diplomacy.

    Germanwatch’s Climate Change Performance Index for 2015 ranked Australia 60th out of the 61 countries surveyed – second last to Saudi Arabia. This is down from 57th last year.

    No amount of flexible and constructive climate diplomacy, or negotiating support for Pacific Island nations, can hide the fact that Australia’s domestic policies are part of the problem, rather than part of the solution.

    Robyn Eckersley is Professor of Political Science, School of Social and Political Sciences, University of Melbourne. Robyn Eckersley is attending COP21 in Paris as an accredited observer. 

  • John Menadue. Malcolm Turnbull on climate change.

    Since he became Prime Minister, Malcolm Turnbull has committed himself to Tony Abbott’s policies on climate change. He supports Direct Action. He supports the Abbott government’s carbon reduction targets. At the Paris Conference, the Turnbull government reaffirmed its commitment to the fuel rebate subsidy for miners. It plans to double coal exports.

    In his blog on 7 December 2009, after he was dumped as Leader of the Liberal Party, Malcolm Turnbull said:

    ‘So, as a humble back-bencher I am sure he [Tony Abbott] won’t complain if I tell a few home truths about the farce that the Coalition’s policy, or lack of policy, on climate change has descended into. 

    To replace dirty coal-fired power stations with cleaner gas-fired ones, or renewables like wind, let alone nuclear power or even coal-fired power with carbon capture and storage is all going to cost money. 

    To get farmers to change the way they manage their land, or plant trees and vegetation all costs money. Somebody has to pay. 

    So any suggestion that you can dramatically cut emissions without cost is, to use a favourite term of Mr Abbott “bullshit”. Moreover he knows it. 

    It is not possible to criticise the new Coalition policy on climate change because it does not exist. 

    As we are being blunt, the fact is that Tony and the people who put him in his job, do not want to do anything about climate change. They do not believe in human-caused global warning. 

    As Tony observed on one occasion “Climate change is crap”, or if you consider his mentor, Senator Minchin, the world is not warming, it’s cooling, and the climate change issue is part of a vast left-wing conspiracy to deindustrialise the world. 

    The Liberal Party is currently led by people whose conviction on climate change is that it is “crap” and you don’t need to do anything about it. Any policy that is announced will simply be a con, an environmental fig leave to cover a determination to do nothing. 

    Tony himself has in just four or five months publicly advocated the blocking of the Emissions Trading System, the passing of the ETS, the amending of the ETS, and if the amendments were satisfactory, passing it, and now the blocking of it. … 

    We have given our opponents the irrefutable, undeniable evidence that we cannot be trusted. ‘ 

    Malcolm Turnbull is now taking to the Paris Conference, a policy on climate change that a few years ago he described as ‘crap’ and ‘a fraud’!

     

  • John Tulloh. Turkey’s new neighbour – DAESH (Islamic State)

    President Tayyip Erdogan of Turkey must feel like a chess grand master playing several games simultaneously. He has far more neighbours and different cultures to contend with than most leaders: eight in all. They are a mixed bag across more than 2600 kms of borders – Iran, Iraq, Syria, Armenia, an Azerbaijan enclave, Georgia, Bulgaria and Greece. And across the Black Sea he has Russia. Now he has an unofficial neighbour: Daesh, also known as Islamic State. It has been active along Turkey’s frontier inside Syria and regards territory it has seized as part of its self-styled caliphate.

    It poses a dilemma for President Erdogan. He has 1.5 million refugees on his hands, mainly from Syria as a result of barbaric actions by Daesh. The EU has offered him what some see as a generous bribe to deter the refugees from heading west to Europe. He has joined the U.S.-led coalition fighting the Daesh, but is his heart really in it even though he has blamed it for killing 100 people at a peace rally in Turkey in October? His air force by all accounts prefers to attack Kurdish targets. His critics say he tolerates Daesh as being good for business and helping deal with what he sees as his real enemy, the Kurds. But for the U.S.-led coalition fighting Daesh, it is the Kurds who have done more than any other force on the ground in repelling its advances.

    David Graeber, a professor at the London School of Economics, thinks he has the answer to eliminate Daesh. Writing in the Guardian, he says:

    ‘All it would really take would be to unleash the largely Kurdish forces of the YPG (Democratic Union party) in Syria and PKK (Kurdistan Workers’ Party) guerrillas in Iraq and Turkey. But instead the YPG-controlled territory in Syria finds itself placed under a total embargo by Turkey and the PKK forces are under continual bombardment by the Turkish air force. Not only has Erdogan done almost everything he can to cripple the forces actually fighting (Daesh); there is considerable evidence that his government has been at least tacitly aiding (Daesh) itself’. 

         That aid concerns oil which Daesh has looted from Syria and Iraq and sells on the black market. Russia’s President Vladimir Putin said it enters Turkey on ‘an industrial scale’. Russia a few days ago released satellite images they claim show columns of tanker trucks loading with oil at an installation controlled by Daesh in Syria, before crossing the border into Turkey.

    Last year, a member of the Turkish parliamentary opposition, Ali Edibogluan, claimed Daesh had smuggled $800 million worth of oil into Turkey from Syria and Iraq. Now a former Iraqi MP, Mowaffak al-Rubaie, has backed up that claim, saying ‘Money and dollars generated by selling Iraqi and Syrian oil on the Turkish black market is like the oxygen supply to (Daesh) and its operation’.

    But President Erdogan was indignant about such claims as well as a Russian one that he and his family were profiting from it. He said that, if there were proof Turkey was cooperating with Daesh, he would resign.

    He presides over a powerful country which possibly has the most strategic location of any nation in the world with its Eurasia presence. His ruling party now has a parliamentary majority which may give him the temptation to broaden his own powers. Since 2011, he has encouraged the Islamisation of Turkey which for nearly a century prided itself on its secular outlook. But he knows he cannot push his luck too far when EU membership remains a goal.

    It is a conundrum when Daesh is, according to Time, ‘a fibroid of territory enmeshed in a cat’s cradle of ethnic, tribal, religious and geopolitical strands so densely tangled as to defy solution’.

    Just as Turkey has a foot in both Europe and Asia, President Erdogan will need all his political wiles to maintain a balance between being seen to be supporting the action against Daesh while stopping its influence spilling over into Turkey and yet maintaining business as usual.

    Whatever happens, you can be certain that the restless Kurds, who make up 20% of Turkey’s population, will remain President Erdogan’s biggest concern, especially the PKK with its territorial ambitions.

    John Tulloh had a 40-year career in foreign news.

  • Tony Smith. There is a hole in my heart where NITV News used to be

    There are times when the rhetoric about ‘closing the gap’ between
    Indigenous Australians and the rest of the population sticks in the
    throat. This week I turned on my preferred television news source – the
    5.30 bulletin on National Indigenous TeleVision (SBS4) – and found that it
    had disappeared.

    The ‘gap’ refers to the statistics showing the disadvantages suffered by
    the Indigenous peoples relative to other Australians. In fact, there are
    numerous gaps, in almost every social indicator: employment, income,
    housing, incarceration, violence, kidney and heart disease, literacy,
    education, infant mortality and life expectancy. At times, governments
    seem committed to finding solutions to these problems. At others, they
    seem to do little more than go through the motions while tacitly endorsing
    processes of assimilation. But any realistic solutions must acknowledge
    the ravages of dispossession and make urgent attempts to allow Indigenous
    people to regain their unique identities, something they will surely do if
    the broader Australian society avoids the kind of discrimination we have
    hitherto practised.

    NITV News had the motto ‘our stories, our way’ and was faithful to this
    aim. Here were stories that were not reported on mainstream channels and
    were generally ignored by media with a few exceptions. There were reports
    about threats to sacred sites, potential damage to fragile environment,
    overt and covert racism, government policies, bureaucratic bungling and
    proposed legislation. But the reports were always presented in a humble
    fashion without the pontification customary on other news sources.
    Relevant Ministers were approached often and whenever they appeared, were
    given generous time to put the government side. Again, this is unusual in
    television today when reporters seek to provide their own context, so
    skewing stories to their own views.

    Very importantly, NITV News carried positive stories about Indigenous
    people and their achievements: positive developments in health, justice
    and employment and stories about members of the community supporting one
    another.

    NITV News provided many positive spinoffs. As a result of turning to NITV,
    I discovered programs about Indigenous cooking, traditional culture,
    dancing and music among the young, grassroots sports action, classic
    movies and even found the Maori news report on weekends.

    Successive governments have found Aboriginal affairs a difficult policy
    area. They have thrown money at Indigenous ‘problems’ but the problems
    remain. They have devised slogans such as Reconciliation. They have
    advanced a woolly idea about Constitutional recognition. But they have
    failed to create mechanisms whereby diverse Indigenous voices could be
    heard. Indigenous leaders have continually appealed for genuine
    consultation but these appeals have not been heard.

    Perhaps we really do not want to listen to what Indigenous people have to
    say. Apparently we doubt that the people who preserved the fragile
    Australian ecosystem for hundreds of bicentenaries have anything to teach
    us. Perhaps it is part of a broader re-focussing of our listening away
    from small, local communities on the ground towards what big business says
    through its mouthpieces in politics. Generally, the propaganda is about
    job creation and being able to ‘afford’ environmental concerns. We can’t
    dig up the Hunter Valley, the Liverpool Plains, the Pillaga Scrub to
    export if we listen to grassroots voices like those on NITV News, can we?

    Tony Smith is a former academic living in Wiradjuri country.

  • Why we don’t want private health insurance for primary care

    The worst possible outcome from the current review of Private Health Insurance would be changes that resulted in the best-resourced Primary Care being only available to those who have such insurance.

    (more…)

  • Richard Butler. Bombing Syria: Where’s our Debate?

    On December 2nd, the UK House of Commons debated for 10 hours, a motion moved by the Government, that it should authorise bombing of DAESH targets in Syria by UK airforces. (Prime Minister Cameron announced early in his statement that, henceforth, ISIL should be referred to as DAESH: the acronym of its name in Arabic).

    Some 150 members of the House took part in the debate. The motion was approved by a vote of 397 for, 223 against. Leader of the Opposition, Jeremy Corbyn had approved a “free vote” for members of his party. 66 Labour members exercised that right and voted with the Government.

    The debate saw repeated interventions on points of order and points of detail from both sides. More significantly, it was somewhat overshadowed by repeated opposition demands that the Prime Minister withdraw and apologize for remarks he was heard to have made, the previous day, that those who would vote against his motion would do so because they were “terrorist sympathizers”. He refused to do this.

    The debate was certainly lively, if not always edifying. It served to justify the notion of a house of elected representatives of the people as the key place in which matters of undoubted public importance and policy should be aired.

    That airing included the reliance, by both sides, on their gut political credo, rather than on hard evidence for any particular point of view. Prime Minister Cameron, was particularly light on evidence for his views.

    On the Conservative side, the main elements of that credo, were the beliefs in: the efficacy of military action in bringing about political outcomes; fighting the enemy abroad would keep the homeland safe; and, the notion that Britain had an indispensable role in maintaining a civilized world. This last idea seems not dissimilar from the US’ notion that it is the “exceptional country”, or indeed former Prime Minister Abbott’s now revealed notion that the current crises in the Arab and Russian worlds meant that history had, once again, handed to the “Anglosphere” the unique duty to put things to rights

    On the Labour side, the fundamental concerns expressed were: that military action was not the solution to the problem of DAESH; what was needed was concerted political/diplomatic action to bring about an end to the Syrian war, and extreme doubt that expanded military action would be effective in both curtailing DAESH or preventing further terrorist acts outside the Middle East, indeed, it might fuel them.

    The undoubtedly remarkable feature of the debate was that it took place. It was never going to fully satisfy the evident need for an improved public and revealed official understanding of the dreadful complexity of the situation in the region extending from Turkey in the North West to Yemen and the Gulf States and Saudi Arabia, in the South East. The same would appear to be true of the extent to which the turmoil in that region is authoring a post-Cold War competition, by proxy, between the US and Russia.

    But, the debate will surely prove to be an important marker in the passage towards resolution of the challenges now posed by the disorder in the post colonial Arab world, the need for what could be termed a post Cold War settlement, and the challenges posed to international law and order posed by non-State actors such as DAESH.

    Where is the debate in the Australian Parliament? The Abbott government committed Australian military assets to action in both Iraq and Syria without any such debate. Labor acquiesced, for reasons unstated.

    Infamously, Prime Minister Howard committed Australia to the 2003 invasion of Iraq, ignoring massive public demonstrations against it and without Parliamentary debate. That invasion is now widely regarded as having stimulated the formation of DAESH.

    We now learn from Peter Hartcher’s series, “Shirtfronted” (SMH), that the basis of Abbott’s decisions on these matters was gut instinct.

    We have not yet heard from Prime Minister Turnbull on how he might arrive at decisions on matters which might involve Australian forces, although we also learn from Hartcher that Abbott exclude him from membership of the National Security Committee of Cabinet because he knew Turnbull would not support his gut instincts.

    In the new circumstances of a growing international coalition against DAESH and the UN Security Council resolution following the Paris attacks, authorizing states to “take all necessary measures”, the Australian people have a right to know what it is the Government proposes to do, why, and what it hopes to achieve. A debate in Parliament would serve that purpose.

     

     

    Richard Butler AC, is former Ambassador to the United Nations and Head of the UN Special Commission to disarm Iraq

  • NBN and the high cost of copper.

    Lauraine McDonald in ‘itwire’ has just reported that ‘An NBN cost scandal has erupted with a new document revealing that copper for the Turnbull government’s hybrid MTM broadband network is going to cost ten times as much as the original estimate.’ 

    John Menadue

    See link to full article below.

    http://www.itwire.com/it-industry-news/telecoms-and-nbn/70623-nbn-copper-cost-blowout-exposes-government-short-sightedness

  • Travers McLeod. Relaxing airstrike rules is a recipe for disaster.

    Tony Abbott has argued Australia and her allies should relax targeting rules for airstrikes to destroy the Islamic State.

    At best, he is ignorant of the lessons of the military campaigns waged in Iraq and Afghanistan since 2001. At worst, he is willing to repeat mistakes to differentiate himself on national security and open a pathway to take his job back.

    Let’s assume, for the sake of argument, that Abbott isn’t as narcissistic as the latter reading suggests. Let’s assume he was insufficiently briefed on recent military campaigns or has forgotten the lessons of our longest wars.

    The battle of ideas, not body counts, will determine this war. Disproportionate use of force will only inflame and grow the Daesh insurgency. There is no military solution to destroy IS.

    “A military force, culturally programmed to respond conventionally (and predictably) to insurgent attacks,”wrote General Stanley McChrystal in November 2009, “is akin to the bull that repeatedly charges a matador’s cape – only to tire and eventually be defeated by a much weaker opponent.”

    McChrystal should know. He was commander of the United States-led coalition of forces in Afghanistan from 2009-2010 and headed up US Special Forces in Iraq and Afghanistan from September 2003 until February 2006.

    When McChrystal took over as commander he told his troops to “get rid of the conventional mindset”.

    We know the prequel. In 2005 the US was accused of being a “lawless hegemon”, one that avoided the laws of war or sought to exploit gaps within it. Commanders misunderstood the battlespace in Iraq and Afghanistan. Their “enemy-centric” mindset harmed civilians and alienated the people. David Kilcullen described US forces as “chasing their tails”.

    From late 2006 military doctrine, strategy, tactics and rules of engagement began to shift decisively. Australian military advisers and judge advocates were pivotal in this change of mindset.

    Phillip Bobbitt put the new position best in 2010: “The war aim in a war against terror is not territory, or access to resources, or conversion to our way of political life,” Bobbitt wrote. “It is protection of civilians within the rule of law.”

    McChrystal’s tactical directive to troops in July 2009 made this explicit. “We must avoid the trap of winning tactical victories – but suffering strategic defeats – by causing civilian casualties or excessive damage and thus alienating the people.”

    Losing popular support would “translate into more insurgent recruits, more IEDs, and a prolonged conflict with an uncertain outcome.”

    McChrystal prohibited the use of air-to-ground or indirect fire against residential compounds with three tightly-specified exceptions, installed new battle damage assessment requirements, denied capacity for unilateral missions without regional command approval, raised the approval level for night raids, tightened escalation of force procedures and mandated civilian casualty investigations and reporting up the chain of command within 24 hours from any given incident.

    McChrystal was clear: “Our success depends on our ability to escalate force proportionally, in a manner that the average Afghan civilian can understand, and respects the fact that this is their country.”

    Successive studies of countering insurgencies reveal that if one loses legitimacy they lose the war. This means one cannot separate the conduct of operations from the broader, contested narrative of a war.

    Securing the population and killing the enemy is a necessary condition to countering Daesh. But the chief lesson of the Iraq and Afghanistan campaigns is that the legality of the conduct of those operations is central to their legitimacy.

    This is why proportionality has become a watchword for countering insurgencies successfully. It requires a delicate but appropriate balance to be struck between military necessity and collateral damage, in an age when allegations of disproportionality can be uploaded to YouTube and viewed across the world in seconds.

    US military doctrine now asserts that “all interactions between security forces and the population directly impact legitimacy”. Complying with the law of war helps to gain local trust – violations “have a direct and significant negative impact on the ability to conduct successful counterinsurgency operations”.

    Abbott now advocates “less restrictive targeting rules for airstrikes”. His position may be more nuanced. He may dispute current distinctions between civilians and combatants, including what it means for civilians to participate directly in hostilities. As stated, his position is pregnant with ambiguity.

    Such hawkish ambiguity is exactly what Prime Minister Malcolm Turnbull ruled out last Tuesday in his National Security Statement to Parliament. Turnbull called for “calm, clinical, professional, effective” conduct to defeat IS, not “gestures or machismo”. He said “the strongest weapons we bring to this battle are ourselves, our values, our way of life”.

    In war the most significant distinction is between civilians and combatants. The latter are lawful targets who can be killed. We water down the distinction at our peril. This is but one way in which our military forces live our (and their) values.

    Countering insurgencies, former US Central Command head General James Mattis once said, is only new if “we don’t read our own history”.

    Given our focus these past weeks on France, it’s worth recalling that the best-known military theorist and practitioner of counterinsurgency was French. Lieutenant Colonel David Galula’s formula was simple: win the support of the people. “Antagonising the population will not help,” he wrote in 1964, “rash actions on the part of the forces should be kept to a minimum.”

    An ad-hoc legal approach to fighting terrorism would return us to the fog of law within the fog of war. It is a recipe ripe for disaster.

    Travers McLeod is chief executive of the Centre for Policy Development and the author of “Rule of Law in War: International Law and United States Counterinsurgency in Iraq and Afghanistan” (Oxford University Press, 2015).

  • John Menadue. Australia’s Comparative Advantage and Policy Reform

    In May and June of this year, Michael Keating and I edited a policy series ‘Fairness, Opportunity and Security’. This policy series has now been published in book form.

    We were and remain concerned about the policy vacuum in Australia.  We are anxious that the debate on policy reform continue.

    An important contribution to this debate has now been made by a report ‘Australia’s Comparative Advantage’. This report was sponsored by the Australian Academy of the Humanities, The Australian Academy of Science, the Academy of Social Sciences in Australia, and the Australian Academy of Technological Sciences and Engineering. The authors of the report were Professor Glenn Withers, Dr Nitin Gupta, Ms Lyndal Curtis and Ms Natalie Larkins. In releasing the report, Professor Glenn Withers said ‘Australia has achieved much over recent decades but there are substantial challenges ahead, including the risk of economic slow-down with the ending of the mining investment boom.’

    The conclusions of this report were as follows:

    When considering what the future may
bring, this report has found that thinking that tomorrow will be more of the same as today is not good enough. All possibilities need to be contemplated. In choosing how we face that unknown, and in some cases, unknowable future, a broad approach is necessary to make sure that the foundations with which we will face the new challenges are enhanced for whatever may come.

    Australian progress faces challenges of great importance, but these are challenges that this project finds can be met. In the view of this report, building comparative advantage will require a commitment to ongoing institutional reform and to investing in our future capabilities as a nation. The report outlines packages of policies that are illustrative of what is required.

    Natural advantage sectors will still contribute mightily, but they can usefully be matched by the equally promising created advantage in the traditional areas of economic advantage and emerging advantage opportunities in advanced manufacturing and service industries.

    The report also concludes that institutions and culture must be configured to support this process, including through Australia’s rather distinctive deployment of major public-private partnership systems, and that better leadership, management and the encouragement of innovation and entrepreneurship will be a key to

    success. In all the above-mentioned illustrations the importance and centrality of knowledge/ ideas would be explicitly recognised in the associated structures and policies.

    The project has found evidence that the Australian public is increasingly willing to commit to and support such ways forward. Explanation and leadership is needed for this vision to realise its potential, but the Australian community has the level of sophistication to understand what is needed to inform and support that process.

    Building comparative advantage is not simply addressing a list of policies or proposals but ensuring the framework of a broad-based foundational approach to the Australia of the future is understood and at the heart of decision- making and debate. Australia does well at many things but that is no guarantee of future success. If we want the country to be the best it can be, we will have to build that future.

    This report affirms that pursuing both institutional changes in political, legal, market and cultural arrangements alongside investment in skills, infrastructure and innovation would
see long-lasting benefits to growth and living standards. These initiatives would develop
the national capacity to realise comparative advantage and compete well in a changing global environment. They would also enhance our ability to do this equitably and sustainably.

    The full text of this report can be accessed from the link below:

    http://www.acola.org.au/index.php/projects/securing-australia-s-future/project-1

     

    John Menadue.

  • John Menadue. Rent-seekers in the motor industry.

    We see it almost every day in the media; rent-seekers extracting benefits for themselves through political influence and lobbying at the expense of a broader community. It has very little to do with markets. It is about political favours for the powerful.

    We have just learned that the Australian Motor Industry Federation and the Federal Chamber of Automotive Industries have successfully lobbied the Australian government to continue restrictions on the imports of second-hand vehicles.

    The Turnbull government accepted many of the recommendations of the Harper Review into competition policy, but it decided to continue Australia’s archaic system where there is a $12,000 specific customs duty on second-hand vehicles. Retailers are further restricted because they can only import a single second-hand vehicles at a time.

    The Productivity Commission recommended that Australia should progressively relax these ‘parallel import restrictions’ and scrap the $12,000 excise duty straight away. It pointed out that New Zealand abolished these sorts of restrictions on importation of second-hand cars 25 years ago.

    A large number of quality used cars could be imported for example from Japan where the ‘Sharken’ system stipulates that when the registration of a new car expires after five years, it must be rigorously tested at that time and every three years thereafter. To support their car manufacturers, Japanese governments encourage Japanese consumers to buy new cars and sell their old cars. That is what Sharken is designed to do. As a result there are a large number of quality second-hand cars on the market in Japan. But it is very hard for Australian retailers and consumers to access this market.

    Australia’s restrictions on used car imports might have been justified to some degree to support our motor vehicle production industry. But the closure of our car manufacturing industry in two years’ time makes a continued restriction on second-hand vehicles even more indefensible.

    The rent-seekers tell us that these import restrictions are necessary for safety and emission control reasons. But our own safety controls do address these issues. Furthermore, the emissions standards in many overseas vehicle manufacturing countries are more rigorous that ours.

    In short, the actions of the Australian Motor Industry Federation and the Federal Chamber of Automotive Industries in opposing liberalization of second-hand vehicle imports is a clear example of the power of rent-seekers to extract wealth from consumers. And they are getting away with it. As a result, consumers will have to continue to pay a lot more for used cars and with much less choice.

  • Rod Tucker. What will the NBN really cost?

    Cost is a central issue in the ongoing debate about the best approach to building Australia’s National Broadband Network (NBN).

    In 2013, the Coalition argued that Labor’s original all-fibre to the premises (FTTP) network could cost as much as A$94 billion. In the 2016 NBN Corporate plan the figure was revised down to A$74 billion to A$84 billion, while NBN Co’s multi technology mix (MTM), incorporating fibre to the node (FTTN) and upgraded hybrid fibre coax (HFC) was less costly, with a price tag of A$46 billion to A$56 billion.

    Since the Coalition announced these numbers, Labor has said that, if elected, it will not go back to an all-FTTP network, but instead pursue a half-way option, in which the HFC component of the MTM is retained but FTTN, the slowest and most limited technology, is phased out.

    It’s worth looking more closely at cost difference between FTTP and FTTN to see if the claimed A$84 billion to A$56 billion maximum cost comparison stacks up, and see where Labor’s new half-way solution sits.

    Capital costs

    The NBN 2016 Corporate Plan states that the average capital cost (capex) to connect a home or business to the NBN using FTTP is A$3,700. But the real cost for a FTTP connection is probably less than this.

    The A$3,700 figure quoted by nbn co is based on old construction techniques that have been superseded in other parts of the world. The costs of rolling-out FTTP in New Zealand, for example, have been dropping steadily in recent years and will soon be A$2,900 per premises. For some reason, NBN Co has yet to acknowledge the lessons learned in New Zealand.

    Let’s give NBN Co the benefit of the doubt and assume that the A$3,700 cost per premises for FTTP is correct. In comparison, the 2016 Corporate Plan states that the average capital cost for a FTTN connection is A$1,600, or A$2,100 less than FTTP.

    For an upgraded hybrid-fibre-coax (HFC) connection the capital cost is A$1,100, or A$2,600 less. However, in light of recent revelations in a leaked document from NBN Co published by Fairfax indicating that it may be necessary to overbuild Optus’ HFC network, the savings offered by HFC will not be as good.

    Using these numbers, it is easy to compare the capital costs of different networks.

    At the end of construction, the MTM network will provide FTTN to 4.5 million premises and HFC to 4 million premises. Labor’s new approach is to replace as many as possible of these 4.5 million FTTN connections by FTTP. The maximum additional capital cost to do this would be 4.5 million times A$2,100, or A$9.5 billion. This figure corresponds to A$790 per premises averaged across all 12 million premises in Australia.

    An all-FTTP network could be achieved by also replacing the HFC connections were by FTTP, the total additional capital cost of this hypothetical all-FTTP network would be A$19.9 billion, or A$1,658 per premises averaged across all premises.

    Peak funding

    Of course, it is necessary to also consider operational expenditure (opex) – the cost of running the network – and revenues from the network. These factors all contribute to the peak funding figures in the 2016 Corporate Plan.

    Peak funding is the maximum cash outlay required before cash flow becomes positive. Peak funding is a useful measure of cost because it is a direct measure of the cash outlay required. But it is not necessarily a good measure of the cost of the network infrastructure or a good measure of the net financial cost/benefit to the Australian taxpayer.

    Operational expenditure is a major issue for the MTM network because of factors including the need for new software management systems, the additional costs of maintaining the degrading copper wires in the FTTN network, and the cost of the electricity required to power the FTTN nodes located in suburban streets. Importantly, an FTTP network would incur none of these costs.

    In fact, the leaked nbn co document mentioned earlier shows that the operational costs of FTTN network are 67% more than for FTTP, and the operational costs of HFC are 25% more. Over the lifetime of the network, this difference could amount to billions of dollars, greatly reducing the overall difference in costs between FTTN and FTTP.

    Another factor that reduces the cost difference between the Coalition’s network and Labor’s new alternative is that a Labor’s FTTP/HFC network would be capable of generating higher revenues through the delivery of premium services that would not be achievable with a slower-speed FTTN network.

    This is well documented by high-profile companies such as Ovum, which predicts FTTP services will drive the highest global growth rates for broadband revenues over the next five years, based on premium speeds of 100 Mbps and higher.

    Timeframes

    In light of all these factors, why is NBN Co’s cost estimate for a hypothetical FTTP network so large? The NBN Corporate plan provides no detailed information on its financial modelling, but it states that an all-FTTP network would take until 2026 to 2028 to complete.

    If the timeframe was indeed as long as this, the revenue stream would be delayed. This could indeed lead to unrealistically large numbers for the peak funding cost of FTTP.

    So where does the 2026 to 2028 timeframe come from? My guess is that NBN Co has simply extrapolated from the present rollout rate for FTTP, which has not increased much since 2013. One piece of supporting information comes from a Senate Estimates meeting, where NBN Co confirmed that its A$74-84 billion number was not for a “continued” FTTP network but for a “restart” from the current plan.

    NBN Co waited until September this year to hire additional staff, increasing the number of employees from 3,400 to 4,500 to speed up the rollout of FTTN. If it had hired these additional staff in 2013 and focused on the FTTP rollout, the network could well have been completed by around 2020 or 2021.

    Rod Tucker is Laureate Emeritus Professor, University of Melbourne. This article was first posted in The Conversation on 1 December 2015.

  • Luke Fraser. What the Australian Treasurer can do for roads.

    or – How to stop pissing taxpayer money up against the wall!

     

    Australia’s Treasurer Scott Morrison has signalled his reform priority:

    “I’m interested in talking to people who have ideas how we can get spending under control. We have a spending problem, not a revenue problem.”

    There is plenty of money to be saved in roads. They cost Australians over $30 billion annually, but what does Australia see from all this spending? When major projects are independently assessed at all – which is infrequently – they often expose themselves as commercial and economic duds. As Dr Michael Keating and I explained in an earlier collaboration, this approach doesn’t add to national productivity – it creates conditions where it can drain away[i].

    It is too much to expect transport and infrastructure ministers to worry about this. They tend to see their brief as building things: shovels in the ground and memorial plaques bring their own reward. As Treasurer, Morrison is held to a higher standard: he is the one who must shoulder much criticism when national economic growth and productivity slumps. It is in his interest to implement structural spending improvements in the roads portfolio, where others will not.

    Doing so would save billions annually and drive renewed productivity in the sector.

    The Australian government recently accepted the Harper competition review recommendations for roads. The prescription was for cost-reflective pricing and an end to levying vast, lazy fuel taxes and high vehicle registration charges.

    Before Morrison implements this prospective but very complex work, he can make two important changes immediately to create a more fiscally-responsible and productive sector.

    1. Make the gold, make the rules: demand transparency from project proponents

    Morrison is the one doing the spending, so he should demand transparent business cases from major commercial road proposals seeking Commonwealth funds, to provide confidence that these projects represent responsible outlays of taxpayer gold. Economic benefit-cost ratios (BCRs) in the region of 1.5:1, for example, represent a perfectly fair basis for government to proceed upon – but only if that ratio is deemed solid.

    The only way to vouch for a BCR’s solidity is to subject all business case assumptions to objective scrutiny. To date, this has been almost impossible. A standard tactic of transport project proponents seeking taxpayer funding has been to ‘redact’ their business case – make it highly confidential – such that often governments, much less the public, cannot satisfactorily see and test the assumptions that shape the headline BCR. Proponents secure redactions by claiming their business case contains sensitive and valuable intellectual property. This claim is usually highly overstated if not completely unfounded, but governments desperate to announce icon projects tend to acquiesce.

    It is next to impossible to determine from a redacted business case what assumptions were brought to bear in developing a final BCR for the project. Most important are the revenue assumptions, where Morrison stands to waste the most taxpayer cash and bleed out economic productivity. After all, even for projects that are supposedly privately financed, the track record is that the government guarantees the risks, and the taxpayer is left holding the debt if the project fails.

    Let us look to track records: commercial Australian tollways have tended to overstate revenue, making BCRs appear better propositions than they become in practice. Below is an independent expert analysis of Australian toll roads: the top horizontal line (1.00) represents the traffic forecasts that the proponents presumably employed to arrive at their project BCRs. The coloured lines show the forlorn actual tollway traffic levels across time:[ii]

    tollroads

    Morrison would be buying a big fight by recommending that full project business case assumptions be published. Lobbyists might declare it will put the major project investment pipeline at risk. But only dud projects would truly have cause for concern: if the project has some merit anyway, Morrison would in effect be clearing out expensive undergrowth to let the better-conceived projects thrive. The market would soon adapt for the better.

    If sounder projects delivered a nominal ten percent efficiency gain across the roads budget, this would save over $3 billion annually and add very reliably to productivity yield from this infrastructure class.

    Future savings need not stop at $3 billion. Sydney’s Westconnex had an initial $10 billion budget which grew to over $14 billion and is supposedly now nearer $17 billion[iii]. Westconnex stated a BCR of 1.8:1[iv], which has presumably now dropped to only a very marginal 1.1:1, assuming that nothing else has changed except for the blow-out in costs. Unfortunately, however the assumptions have never been made public and in addition the appetite for tolls upon tolls has recently come under serious question[v]. How would this project have fared if subject to full business case transparency?

    2.  Incentivise a market for better road proposals

    Morrison can shape a genuine market for those projects which do indeed display very productive BCRs, but which to date struggle to attract much market or budgetary attention.

    He could instigate a ‘priority funding’ category for projects which displayed higher economic benefit-cost ratios (say, 4:1 and above).   Any project which could demonstrate robust assumptions at this hurdle rate should be afforded immediate access to limited taxpayer funding.

    Such projects exist. There are fine minds in the engineering and traffic planning sectors capable of produce extremely innovative and practical solutions:

    • Brisbane’s Gateway Motorway upgrade stated a BCR of over 5:1[vi]
    • Adelaide’s Northern Connector freeway exhibited 8.5:1[vii].
    • The ‘Managed Motorways’ projects retrofitted intelligent technology into existing congested roads, making them smarter, not necessarily bigger; one displayed a BCR of over 11:1[viii].

    Elsewhere, thousands of modest rural, regional and suburban road projects can prove enormously productive in BCR terms. In 2011 the author identified a business case for Infrastructure Australia to improve several hundred yards of road at Chullora in Sydney which cut off a national trucking route from Australia’s largest rail freight terminal: the overlooked problem was costing millions in additional freight costs every year – fixing it required less than a one-off cost of half a million dollars [ix]. Many such projects could be bundled together to form large, inherently productive and even commercial portfolios.

    Why don’t these projects win out for funding already? It’s because they are rarely advanced. Usually they aren’t the largest or most profitable to build – Managed Motorways projects are in the low hundreds of millions, not billions. So long as billions flow without molestation to dubious mega projects, there will be little market self-interest in outlaying the considerable time, cost and effort to identify and bundle small but high-yielding projects together.

    Bestowing priority funding status for high BCR projects would change this dynamic overnight and produce maximum bang for minimum bucks.

    Very few politicians appear willing to stand up to the major road project builders and their lobby cheerleaders to demand more productive solutions. Will this change? Prime Minister Turnbull has called for boldness and innovation. His Treasurer can facilitate this in roads with the stroke of a pen. If not, more and more of the $30 billion roads budget will be consumed by low-rent civil engineering free-for-alls.

    Taking bold but sound steps in roads can save billions. It will increase national productivity, rather than piss it up against the wall.

     

    Luke Fraser is founder and principal of Juturna, a public policy firm specialised in road and rail and infrastructure investment reform. With Dr Michael Keating AC he co-authored the infrastructure contribution to the recently-launched Fairness, Opportunity and Security essay collection (ATF press). He is also a former national trucking industry CEO who in 2012 was appointed to the COAG Road Reform Board. He was for a time a chief of staff in the Howard government.

    Notes

    [i] See https://publish.pearlsandirritations.com/blog/?p=3834 published in May and reproduced in the book Fairness, Opportunity and Security ATF Press (2015)

    [ii] http://www.robbain.com/Toll%20Roads.pdf site accessed 20 November 2015

    [iii] http://www.smh.com.au/nsw/westconnex-motorway-cost-blows-out-by-14-billion-20151119-gl3isl.html site accessed 20 November 2015

    [iv] http://infrastructureaustralia.gov.au/projects/files/NSW-WestConnex.pdf site accessed 20 November 2015.

    [v] http://www.smh.com.au/nsw/sydney-motorists-unwilling-to-pay-for-more-toll-roads-study-20151110-gkv5b3.html accessed 25 November 2015

    [vi] http://infrastructureaustralia.gov.au/projects/files/Qld-Gateway-Motorway-Upgrade-North.pdf site accessed 20 November 2015

    [vii] http://infrastructureaustralia.gov.au/projects/files/SA_Northern_Connector_Brief.pdf site accessed 21 November 2015

    [viii]http://infrastructureaustralia.gov.au/projects/files/VIC_Brief_National_Managed_Motorways_Program_VicProjects_2012.pdf site accessed 19 November 2015

    [ix] http://infrastructureaustralia.gov.au/policy-publications/publications/files/Competition_Reform_of_the_Road_Sector.pdf p. 19 site accessed 23 November 2015