Application for Revocation of Coverage of Parts of the Moomba to Sydney Pipeline System

Submission on the NCC Draft Recommendation

SUMMARY

Monopoly means prices are raised above, and supply is lowered below, the levels that would prevail in a competitive market.  Regulation of monopoly is one means of countering this.  All modern regulatory bodies have the goal of seeking to replicate outcomes that would occur in a competitive market.  This requires them to have a clear understanding of the commercial drivers and value adding processes that encourage firms to invest.

By the same token regulation involves losses.  Regulations inevitably fail, to a greater or lesser degree, to bring market mirroring behaviour.  Moreover, the incentives and disincentives they put in place will often bring about an inferior outcome to that which would prevail in their absence.  In addition, regulation involves "paperburden" costs both to the regulators and to the regulated firms and their customers.  Nowhere is the existence of such paperburden costs more apparent than in the issues of access that are currently before the NCC, the ACCC and state regulatory bodies.

These regulatory interventions entail costs that must be recouped from customers and, in the case of some regulators' costs, from taxpayers.  Market failure (generally involving some form of monopoly) has its counterpart in regulatory failure (usually involving forcing resource misallocations or deadweight paperburden costs).

While perfect competition is a chimera, where there is a level of rivalry, often referred to as "workable competition", it is generally considered regulation should be avoided.  In the case of the Moomba to Sydney Pipeline (MSP) and Eastern Gas Pipeline (EGP) with ample capacity serving the NSW market, we have the conditions of workable competition.  This is especially so since the two pipelines are not beholden to affiliates (AGL's partial ownership of MSP through its 30% holding in the Australian Pipeline Trust could not force the pipeline to offer favours without defrauding the other shareholders).

The NCC's recommendations on the MSP and EGP show a poor understanding of cost and benefits from regulation.  Indeed, its recommendations appear to be contriving rationales for it to retain control, even though market forces are sufficiently robust and would give a much better outcome than regulation.  At this shows a fundamental misunderstanding of the process whereby competition brings the very benefits sought by National Competition Policy.

These deficiencies are serious in themselves in view of the important role the NCC plays on access matters;  but they are doubly so since they reflect on the institution's credibility.  As such, they threaten to undermine the work the NCC is undertaking in freeing up markets from costly government interference.

For some time now, there has been discussion of a reference by the Government to the Productivity Commission for an inquiry on Part IIIA of the Trade Practices Act.  Expediting this reference is important if Australia is to avoid having access provisions re-regulate the infrastructure businesses.  We now have experience in the operations of Part IIIA and the Gas Code and these are detracting from national economic welfare rather than adding to it.

In part, this is because the NCC does not have the necessary skills and economics capability to determine the appropriate regulatory regimes for the infrastructure industries;  moreover, it (and perhaps the ACCC) is compromised in having both a regulatory responsibility and an analytical role.  To provide advice on particular access issues, the Productivity Commission, the country's most expert economic institution, should be given a prominent advisory role.

ISSUES RAISED IN THE DRAFT SUBMISSION ON REVOCATION OF MSP COVERAGE

The NCC makes its case for regulation of the MSP and the EGP on several broad grounds.  These are couched within the framework of the four formal tests for coverage:

• increased access would promote competition in at least one market other than the market for services provided by the pipeline
• that it would be uneconomic for anyone to develop another pipeline to provide the services due to the high construction costs
• risk to human safety from access
• that access or increased access would not be contrary to the public interest.

In marshalling its case for regulation, the NCC raises the following issues:

1. The two pipelines (MSP and EGP) are in different markets (because they tap different supply sources) and there can be no assumed competition between them.
2. The existence of two pipelines and the slow market growth means there is little risk of competition from new pipelines
1. sunk assets mean the two pipelines will be likely to form a market accommodation;
2. both parties will have significant bargaining power in negotiations with producers;  monitoring of each other's prices should be easy, and the consequences of prices being driven to marginal cost would be financially disastrous.
3. Gas contracts mean that retailers could not readily switch pipeline because this would necessitate also switching gas source.
4. Capacity of the pipelines is likely to be absorbed between 2005 and 2010 bringing a greater possibility of price increases.
5. MSP's shareholder, AGL, may impact on the availability of surplus capacity.
6. The MSP and EGP's goals are profit maximisation.  As they would appear to lose profits by increasing production given the demand elasticities, this together with the high costs of additional pipeline competition makes it likely that the pipelines will engage in informal price collusion.
7. The LECG Submission (on behalf of Duke) has said Coverage might eliminate allocative costs associated with parallel pricing of $9.8 million.
8. It is best to use the National Code for all pipelines since this gives greater consistency and actually facilitates pipeline owners' commercial objectives.

ASSESSING THE ISSUES RAISED BY THE NCC'S DRAFT RECOMMENDATION

THE NCC's APPROACH

In addressing some of these matters, the Chairman of the NCC, Mr Graham Samuels has said ⁽¹⁾

"In spite of -- or maybe because of -- the gas access regime, investment in gas infrastructure is accelerating.

"Furthermore, it is important to remember that not all investment is good investment.  Critics ignore the effects of NOT granting access -- what happens to investment in other markets if access is denied?  More broadly, investment is not desirable for its own sake, but rather for the benefits it brings in increasing living standards.  Does anyone want or need two electricity distribution networks running down their streets?  Does anyone argue in favour of such investment, regardless of whether it is public or private?  Society is best served by investment that involves the most productive use of its resources."

The Chairman goes on to say that the Commission's view is that it should prevent unnecessary duplication of infrastructure and employ a wide public benefit test rather than one that examines the issue from the private perspective.  He claims a recent Trade Practices Tribunal decision and advice from Professor Phillip Williams supports his view.

This approach underpins the Draft Recommendation, yet calculating such benefits to determine whether an investment should go ahead and the terms of that permission to go ahead is immensely ambitious.  It requires considerable knowledge of possible new investments and the constellation of consumer demands and alternatives to those demands.  Few would consider a government body either sufficiently well-equipped to make such decisions or appropriately motivated to make them correctly.

In fact, the NCC may have misunderstood the decision of the Trade Practices Tribunal that it draws upon.  Thus, the Tribunal is quoted as saying,

The Tribunal is concerned with furthering competition in a forward looking way, not furthering a particular type or number of competitors.  In this matter, therefore, the Tribunal must be reasonably satisfied that declaration would, looking forward, improve on the competitive conditions in the relevant markets that are likely to exist as a result of the SACL tender process as compared with a situation where there was no declaration. ⁽²⁾

These sentiments illustrate an awareness by the Tribunal of the capacity of regulation to undermine efficiency, an awareness that is not strongly present in the NCC.  The NCC, rather than making determinations of what the competitive conditions should be, ought to be concerned with ensuring that such conditions prevail without its intercession, since any such intervention is likely to undermine investor confidence to the detriment of market efficiency.

In November 1999, Duke approached the ACCC with a proposed undertaking on the EGP.  In doing so, it sought assurances that its investment, which is expects to be productive for two decades or more and which, like any such long lived investments, is subject to considerable risk, would not also be subject to the "sovereign risk" of regulatory expropriation.  In July 2000, the ACCC rejected the proposal claiming to have been given inadequate information.  It is likely that information will rarely be adequate for a risk-averse institution and the decision seems to close off such approaches, which were integral to the Gas Code's efficient operations.

In general, it is difficult to agree with the NCC Chairman that investment in gas is accelerating (even if there was the sort of pipeline duplication that the NCC says it wishes to prevent).  The statistical evidence ⁽³⁾ is that capital expenditure is declining, especially on transmission pipelines.  And much of the recently recorded expenditure has been incurred, for example on the EGP, prior to the current regulatory uncertainty.

MSP AND EGP TAP DIFFERENT SUPPLY SOURCES AND THEREFORE ARE NOT SUBSTITUTES

The pipelines operate in different markets

NCC draws on decisions, for example on ports, to argue that the availability of alternate transport routes is vital to a definition of competition in a market.  It argues that the Interconnect (between the Victorian and NSW gas transmission networks) is an inadequate alternative to the direct route to Sydney.  Others have argued that the indirect route through the Interconnect is important for competition in that its capacity at the margin forces EGP to behave competitively since some of its revenues are at risk.

The NCC quotes users as preferring to have the greater certainty of access at regulated prices.  To most users, it is likely that a regulated price and other access conditions would be preferable.  A regulated price is a one way bet–the customer cannot be forced to pay the price, while the suppliers are forced to offer it.  All firms would prefer such certainty from their suppliers but seldom do governments grant it, since to do so can amount to a regulatory taking with the deterrence to risk taking and flexible operations this entails.

While the MSP and EGP can never be perfect substitutes for each other, this has analogies with other markets, most of which are characterised by what we sometimes call "imperfect competition".  The issue is whether the two pipelines have either the ability or the motivation to discriminate against particular users.  As each has large amounts of excess capacity and a strong incentive to increase throughput, and since neither has an affiliate which would gain from behaviour discriminating against a rival, there is workable competition.

The pipelines will display inadequate rivalry

The NCC appears to doubt the existence of satisfactory levels of competition unless prices are reduced to marginal costs.  Marginal cost pricing signifies a distressed market situation caused by inadvertent excess supply or unanticipated market contraction.

Marginal cost based prices are rare events even in markets where there are high fixed costs, lumpy investment needs and demand swings.  Thus, the motor industry has considerable fixed costs but rarely sells cars at marginal price.  Instead the vehicle assemblers involve themselves in product differentiation, branding and forward linkages (with retailers).  Similar behaviour is seen with airlines, owners of office buildings and virtually all goods and services with high fixed costs.  A recent paper by Moran and Hartley "Marginal Costs and Prices in the Electricity Industry" ⁽⁴⁾ addressed these issues of price and market power and examines them in greater detail than is possible in this submission.

Both the two pipelines are seeking contractual solutions to the overcapacity that will prevail for some years in supplying the Sydney market.  Pricing action is also inevitable and MSP has responded to the new competition prior to its inauguration by reducing its prices by about 7%.

Collusion to ramp up prices is difficult to envisage without (illegal) agreements.  Unlike the England and Wales electricity market, the existence of line-pack in gas offers flexibility to respond to short term high demand elasticity.  It is difficult to envisage a situation where one pipeline would acquiesce in lost market because of an innovation by its rival or would refrain from price chiselling or other strategies to win a potentially profitable new customer.

In this respect, the Draft Determination is mischievous in its assertion that the NECG submission ⁽⁵⁾ says, "while collusion appears unlikely, it cannot be ruled out as a future possibility in the absence of some of price regulation."  In fact the NECG submission simply expresses the normal hypothesis that nothing is impossible.  Indeed, it goes on to say that such collusion is more likely with Coverage, and its associated comprehensive publication of price information, than without it.

No market is solely reliant on auction price as its clearing mechanism.  Upward and downward linkages and contracts, contrary to the NCC view, are normal and healthy means of markets responding to risk and seeking to share it.  These contracts are by mutual agreement.  Both the pipeliner and the field owner have some market power.  The latter can shut in gas if the transport price is too high or divert its gas to some other market.  Moreover, as the development of the EGP demonstrates it is difficult to predict when an entrepreneur will see merit in a new development.  Certainly in that particular case, the NCC approach of ensuring, "Society is best served by investment that involves the most productive use of its resources", would have meant some deferment of the pipeline given the surplus capacity prevailing.  It is unclear whether or not that would be proven wise but it is clear that a government entity is ill-placed to make the decision.

The NCC also argues that the part ownership of MSP by AGL means discriminatory behaviour cannot be ruled out.  Such discrimination seems to be unlikely.  In the fearsomely competitive electricity market, ring fencing even with co-owned distributors and retailers has given rise to no claims of discrimination.  Where there is a part owner of a totally separate firm there are even greater assurances against this.  Discrimination may offer advantages to one firm but this would be at the expense of other customers.  The net effect can be shown to be negative for the supplying firm.  Shareholders unrelated to the favoured firm would therefore have their interests prejudiced and Directors would, in their own interests and under company law, be obliged to combat any such activity.

HIGHER PRICES ARE LIKELY AFTER SURPLUS CAPACITY IS ABSORBED

In a pure price market where supply and demand responded to changes without any ability to forecast them, and investment was lumpy we would see prices characterised by saw-tooth movements.  We would see prices falling to marginal costs until demand caught up, then rising to very high levels until new capacity was introduced, then again falling abruptly to marginal costs.

Such a situation is in fact highly stylised and it is unclear how any new investor would ever recoup costs.  The ability to forecast means parties contract in advance, thus giving buyers insurance against abrupt price increases and the incentive to sellers to bring in new capacity.

Higher prices are, however, the trigger for new investment.  The tight market conditions these higher prices imply are part of the market process.  Trying to mute the prices will reduce investment below the optimum level.

THE LECG ESTIMATE THAT COVERAGE MAY ELIMINATE ALLOCATIVE COSTS

The NCC makes much of the estimate by LECG that anti-collusive prices could lead to a benefit (which LECG calls allocative inefficiency) of $21 million.  NCC interprets this to mean a net benefit of $9.8 million after regulatory costs are factored in.

Several points must be made about this NCC seizing on this figure to justify its on-going role.

• First, the estimate was made on a premise that the duopoly would in fact be able to ramp up the price, a view that is confounded by the surplus capacity and the fact that both pipelines are non vertically integrated merchant carriers.

• Secondly, the cost and benefits were based solely on the paperburden costs.  As NCC officials should be aware, these costs are only a small part of total (dynamic) costs resulting from regulation.  Such dynamic costs include the uncertainty that imposing a regulated regime and a regulated price brings to potential gas pipeline entrepreneurs contemplating other developments.  Estimates of these dynamic costs from a specific are impossible, but work undertaken on them has indicated that they are, on average, at least fivefold the paperburden costs

• Thirdly, LECG employ very conservative assumptions in their estimates.  Thus, they used 20% of delivered price as the cost of transporting gas.  If the NCC estimated transport cost figure (10 %) were used, there would be a negative benefit even in the very restrictive terms used.

• Finally, the LECG allocative inefficiency notion is different from the welfare gains concept that the NCC employs.  Instead of the gain of $21 million in the example offered by LECG, the actual welfare gained from the NCC setting a reference price below the level assumed to prevail under collusive pricing is $1.12 million.  This represents the benefit from the regulator accurately correcting the monopoly price.  The loss from regulation is therefore $10 million even excluding the overwhelmingly important dynamic costs.  This is because the diagram on p 56 of the LECG submission includes as costs the area above the long run marginal cost curve.

  In fact, long run marginal cost is a highly flexible concept.  The regulator's reference price should be set at that rate to the extent the regulator meets its claimed goal of replicating the price that would emerge from a competitive market.  Hence the shaded area under the demand curve on p. 56 overstates the impact of the regulator.  The welfare loss is more accurately defined as the (Harberger) triangle between "Collusion Price" and "Reference Price".  This works out to be $1.12 million.  In other words, the welfare loss is defined by the difference between the perfect regulator's market price and the monopoly price;  this excludes the shaded rectangle (R) between SRMC and Reference Price in the diagram, reproduced below.

CONCLUDING COMMENTS

We now have experience with the operation of the present regulatory arrangements for gas.  They are not achieving the benefits that governments hoped to achieve.  Instead of facilitating building of new pipelines, the regulations are providing an opportunity for vested interests to obtain advantages on a particular pipeline rather than a means for encouraging an efficient expansion of the pipeline network.

The reasons for this outcome may reflect issues concerning the regulatory framework itself, Part IIIA of the Trade Practices Act and the Gas Code, as well as the regulatory institutions charged with administering them.

The gestation period prior to coverage being approved is averaging 16 months (AGA Gas Statistics, 2000).  This, Duke's unhappy experience in seeking an undertaking for the EGP and the propensity for the ACCC to require a proposer to reduce the price below that which it and willing buyers are ready to accept (e.g. with the Central West Pipeline) offers little confidence in the processes whereby prior approval may be granted by the ACCC.

Access regulation involves an incursion on an owner's property rights.  As such it should be carefully limited if we are not to seriously impair the incentives that are afforded by private property rights.  While it is desirable that businesses formerly owned by governments or established on the basis of some form of exclusive franchise should be subjected to access and price regulation, in the case of new pipelines which enjoy no government favours, such regulations will reduce entrepreneurial activity.  This will be to the detriment of the economy as a whole and particularly to the parties directly affected.  No major commercially based pipeline can proceed in the face of uncertainty about how the regulators will require its capacity to be priced.

The MSA and EGP pipelines illustrate a further form of risk-aversion on the part of the regulatory authorities.  The NCC's determination to require regulatory coverage of pipelines that compete for particular markets, even if they are parallel, leaves scant scope for the sort of light handed regulation that the Hilmer report foreshadowed.

Accordingly, we call for a review, preferably by the Productivity Commission into the operations of Part IIA of the Trade Practices Act and associated regulations in the Gas Code

---

ENDNOTES

1.  Address to Utilicon 2000 Melbourne 7 August 2000

2.  Application for Review of the Declaration by the Commonwealth Treasurer Published on 30 June 1997 of Certain Freight Handling Services Provided by the Federal Airports Corporation at Sydney International Airport (2000) ATPR 41-754 at 40,775)

3.  See Australian Gas Association Gas Statistics Australia 2000, p58.

4.  http://richardjwood.blogspot.com/2000/06/marginal-costs-and-prices-in.html

5.  http://www.ncc.gov.au/nationalcompet/part iiia/gas/Gas Folders/Coverage/Eastern Application/2nd Round Submissions/NECG submission for Duke & EAPL (non-CIC version).doc

Aboriginal Treaty

Former Liberal Prime Minister Malcolm Fraser has criticised the Coalition for its policies in Aboriginal affairs.  He has suggested the adoption of a bill of rights to compensate for inadequacies in the common law treatment of Aborigines.  He forgets the power of statute law and the power of the purse.  His government passed the Aboriginal Land Rights (Northern Territory) Act 1976 and maintained the Racial Discrimination Act 1975.  During the life of his governments, expenditure on Aboriginal affairs doubled, to $240M per annum.  Today it stands at $2B per annum.  It seems that the efforts of the last 25 years have not been enough.  So what is enough?

Perhaps the one other thing that Malcolm Fraser mentioned, a Treaty between all Aboriginal people and the Australian nation.  As expressed by some Aboriginal leaders the treaty strategy consists of claims to self-determination, the recognition of unspecified inherent rights, the recognition of traditional law and custom and even an Aboriginal state.  Two models of Treaty are on offer -- a final settlement or a contract with on-going obligations.  A settlement is attractive in some ways because it promises an end to the matter.  This option will disarm the Aboriginal leadership.

Treaty as contract would replace the implied contract between each citizen and the state, based on a formal equality before the law, and public power resting in accountable and impartial institutions.  The new racial relationship would be that of landlord and tenant, vanquished and conqueror, victim and perpetrator, First People and latecomer.  In fact each of these already exists.  Some Aborigines are landowners and receive royalties from their tenants, usually miners.  Some Aborigines feel, as a result of the European invasion of 1788 that they are vanquished.  Some are victims of prejudice and government policy like the removal of children from their parents.  They are all descendants of First People.  At present these roles can be transcended.  People can change their circumstances.  A Treaty will lock in a permanent and unequal status -- if you are one, you cannot be the other.

Almost certainly a Treaty will not help Aboriginal people come to terms with their condition.  For example, policies aimed at economic integration will in time ensure that Aboriginal people have the same class-health-demographic profile as the rest of the nation.  How will a tenant-landlord contract look when the landlord is doing well?

Policies aimed at separate development will ghettoise Aboriginal people, substituting their theoretical oppressors with real ones.  The new oppression will result from petty feuding and retribution between local leaders, part of any society where authority is embedded in persons and not impersonal institutions.  The disciplines and lines of authority of pre 1788 are well and truly gone.  Aboriginal society may well become the most inegalitarian on the continent.

Different laws will apply to the signatories.  For example, Aborigines will take Aboriginal children at risk.  Such a system may work if it occurs in wholly Aboriginal families and in wholly Aboriginal areas.  However, as few exclusively Aboriginal families or areas exist, which law, Aboriginal or Australian, will apply when the authorities come to claim the child of a mixed marriage?

What is the great moral principle on which Aboriginal claims are made?  "We were here first!"  This has all of the weight of an original sin.  It can never be overcome -- all ills are placed at its feet.  It is also a very useful tool to update claims, which is why some Aboriginal leaders prefer it as the basis of a Treaty.  Of course, Western civilisation could offer a modest contrary principle -- that all are created equal, a morality that has freed white and black people the world over.  A foundation for a civilisation whose brilliance offers the longest, most comfortable, free and artistically and intellectually productive and stimulating life ever produced.

Individuals may choose to practise their beliefs and live in an Aboriginal culture, but those who want something more must not be abandoned.  Aboriginal and non-Aboriginal people recognise successful Aborigines as those who are successful in the wider society.  The only "authentic" Aboriginal successes are the artists, painters, dancers and storytellers who keep alive ancient artistic traditions.  Aboriginal culture grew out of the specific living conditions prior to invasion.  They have not been the same since, they are adaptations and remnants.  They can be revered or abandoned, but that is a matter for each person.

The worst thing the nation can do for Aboriginal people is to make credible that which is not.  A contract that imposes separate terms is a dangerous fantasy.  Every measure of success and piece of recovery demanded by Aboriginal leaders points to the further integration of Aborigines into the broader society.  A Treaty of dubious moral principle may be good for a new class of Aboriginal leaders.  It is bad for Aboriginal people.

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The Rules of the Party

Karen Ehrmann was gaoled for electoral fraud in very special circumstances.  She wanted to win Labor Party endorsement.  It was a fraud on a political party.  The preliminary investigation by the Criminal Justice Commission of allegations by Ehrmann of further fraud will presumably only look at public offences, such as falsifying electoral enrolments or forging signatures of party members.  It will not investigate party matters such as paying for memberships or collecting ballot papers.  Political parties are associations of private individuals, but they play a very public role.  Democracy would be the poorer without them.  But can they be relied on to be the first defence against electoral fraud?  Do they permit fraud on themselves with poor rules and procedures?

Public confidence in political parties and politicians has been declining across the advanced democracies since the 1960's.  The Karen Ehrmann's are the ugly side of a deeper issue.  Why is the electorate so apparently grumpy with our politicians and parties?

Citizens are more confident and more assertive.  This is especially true of previously silent groups, women, greens, gays and so on.  With this confidence and concentration on identity come new forms of political organisation and activism.  Non-government organisations are competing with political parties for influence and members, and the NGOs are winning.  Parties as vehicles for activism are not fashionable.

Citizens are also better informed than was once the case, the media have played a critical role here.  Public demands on government are greater and more divergent.  It is difficult for parties in government to satisfy these demands responsibly.  Parties are lumbered with the burden of governing, non-party activists are not.

Parties are basically electoral colleges, their job is to elect candidates for public office.  They have won this privilege through a century or more of organising elections and maintaining loyalties based on class, religion and ideology.  These divisions are now much weaker, old loyalties can no longer be relied on.  Jim Soorley addressed a party rally at the last election, boasting about downsizing the Council staff, but bagging the Liberals as "economic rationalists"!  Parties do not make policy, politicians do, often at the behest of interest groups and experts, and always with an eye to the electorate.  The parties barely exist without public funding and politicians and their staff.

The test of party integrity comes when parties fail to detect and/or respond to fraud or breaches of party rules, or when the rules or the dispute hearings are inadequate.  If the parties can't mind their own business, who should?  The Democrats argue that the Australian Electoral Commission should conduct internal ballots, as they do for unions and employer associations.  Will this destroy the parties, or make them stronger?  Will it transfer power from the leaders to the members?  Would that be wise given the need for discipline in parties?

It depends on what benefits parties bring to politics.  Only parties can create a broad set of policies and implement them on gaining a majority.  That's the peculiar part of electoral politics.  The contrary interests of the electorate can cancel out rather than add up.  Parties' know that operating collectively, with discipline, is more likely to deliver policy and the rewards of government.  Parties have to broker the internal competition for these rewards in a way that keeps "humpty dumpty" together.  The reward for the voter is responsible government.

Competition for the party label is fierce, but should it be fair and, if so, who is to judge?  What if preselectors are people recruited the day before the ballot, or have their tickets paid for by a sponsor?  What if party records are tampered to prove eligibility, or ballot papers are collected, even with the consent of the voter?  Collectively, the standards of behaviour and their scrutiny are central to the continued health of the party system.

Democracy needs activists, but do some cheat and others turn a blind eye to questionable practices?  What is a questionable practice?  Noel Crichton-Browne, former Liberal Senator in Western Australia, claims to have signed 10,000 members to the party over 15 years, and did not pay for one of them.  I believe him.  His competitors in the Liberal Party have accused him of all kinds of tricks.  His claim is that he was a better recruiter than anyone else!  So is Michael Johnston in Ryan.  The fact that he recruits outside Ryan and almost exclusively in the Chinese community is not illegal or against party rules.  He tells me that he has been heavied to back off recruiting, but that is tough competition, not wrongful behaviour.

On Australia Day 1999, 2,000 people joined the South Australian branch of the ALP.  Their memberships were paid for at a cost of $42,000.  One estimate suggests that the entire party could have been purchased for $100,000!  The Supreme Court found that the party had not abided by the rules in accepting the members.  It did not find that it was wrong to pay for the memberships because the rules did not forbid it.  Almost all parties around Australia condone the buying of memberships.  The ALP National Conference last month endorsed a rule, "it is an abuse of Party rules ... to fund Party membership for other[s] ... who would otherwise be unwilling to pay their own subscriptions".  Does this mean that it would be okay to pay for someone who claimed they were willing to pay?

The courts may supervise the rules of the parties and ensure that they have proper dispute and appeal processes, they cannot establish rules for the parties.  Therein lie two problems.  Some party rules are inadequate, and enforcement of the current rules is sometimes inadequate.

Parties have a virtual monopoly over the election of members of parliament.  They are the gatekeepers.  They could reprivatise, go back to traditional sources of funding and support, and remain master of their own destinies, or they could acknowledge that they are public property and run their organisations according to public rules.  They must ensure the integrity of their membership and processes.  If they don't, then someone will do it for them.

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What Works for the Workers

Many people think that unions are more enthusiastic about ruthless power plays than advancing the interests of workers.  Recent allegations that the Australian Workers Union has long been at the forefront of branch stacking in the Labor Party in Queensland will only serve to confirm such distrust.

But while unions have their fair share of cynical apparatchiks, they also contain many committed activists who are convinced that without their efforts, workers' pay and conditions would be forced down to unacceptable levels by unscrupulous bosses.

So when these true believers in class struggle contemplate the precipitous decline in union membership in recent years -- from 38 per cent of all Australian employees in 1993 to 26 per cent last year -- it is fair to assume that it is not only their own positions they are worried about.  They genuinely fear that without union muscle to protect them, many workers will be vulnerable to exploitation, particularly in industries where the demand for labour is cyclical or weak.

The decline in union membership has a number of causes -- structural changes in the economy and the composition of the labour force, legislative reforms aimed at freeing up the workplace, and shifts in employee attitudes.

While many union leaders realise the importance of adjusting to make their organisations more attractive to potential members in these changed conditions, they are even more eager to wind back much of the recent labour market deregulation.  The same people who criticise John Howard for supposedly wanting to take Australia back to the 1950s in social terms, would be happy to take us back just as far in industrial relations.

One of the developments that has most upset the unions has been the success of labour hire firms that arrange for individuals to work as independent contractors rather than as employees.  Although independent contracting has long been possible in Australia, in the past decade it has become increasingly popular and now involves over 10 per cent of the workforce, including people in traditional industries such as housing construction and the pastoral industry, as well as new sectors such as information technology.

People working under such contracts for services are free to negotiate their own pay, conditions and times of work with those who engage them, and are also responsible for their own leave and other matters that are normally the province of employers.  In some industries, most contractors also belong to unions, but in many other industries few bother to take up a union ticket.

The unions argue that because these arrangements enable people to work outside award provisions, they drive down pay and conditions for everyone, although the evidence does not support this claim.  They say that ultimately, all workers in affected industries will be forced to be contractors, irrespective of their own wishes, and that such a coercive situation would not be in the public interest.

In response to union demands, last year the Beattie government passed the Queensland Industrial Relations Act, which establishes new heights -- or depths, depending on your perspective -- for regulatory intervention.  Amongst the many provisions of the Act designed to gladden the hearts of class struggling shop stewards is section 275.

This gives the Queensland Industrial Relations Commission the power to declare that any group of contractors are employees, thus placing them under award regulations.  In other words, a coercive situation indifferent to the wishes of the individuals concerned.

Last March, the AWU launched a test case under section 275 against Charleville contractor Barry and Moera Hammond, whose company, Troubleshooters Available, brought the labour-hire contracting system to the Queensland wool industry in 1992.  This case is still being heard by the commission, but if it succeeds, contracting arrangements in a wide range of other industries will be under grave threat.

The Hammonds, whose clashes with the AWU go back to the "wide combs" dispute in the 1980s, have long regarded the Queensland Shearing Award as perpetuating inefficient work practices and as detrimental to the interests of shearers themselves.  Barry has served a couple of brief jail sentences for failing to comply with outdated restrictions in the award and refusing, as a matter of principle, to pay the resulting fines.  A lot of workers obviously agree with his stance, as he has over 300 shearers, wool classers and other pastoral contractors on his books.

Rather than driving down wages as the unions claim, the improved efficiency that can result from contracting enables higher rates of remuneration.  And in any case, there are longstanding protections in common law to ensure that contracting arrangements cannot be used as a ruse to underpay workers, and to prevent people from being forced into such arrangements against their will.

But the battle between the unions and contractors does not just encompass narrow matters of industrial relations and rates of pay.  It involves important cultural considerations about the nature of work, freedom and control in a modern economy.

Contractors are embracing a situation in which they are not bound by the constraints inherent in the master-servant model that governs the usual relations between employers and employees.  They are asserting their right to negotiate conditions of work that suit their own individual needs, and to take the greater degree of personal responsibility that comes with being self-employed.  If the notions of cultural diversity so beloved by the Labor Party and the unions are to have any meaning, they must also allow for diversity in the circumstances under which people work.

So despite their oft-stated commitment to egalitarianism and workers' rights, the unions would prefer to perpetuate an unequal system that enhances their own powers while making it more difficult for individuals to take real control over their working conditions.  Just like the bosses they claim to oppose.

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Submission to Productivity Commission's Review of Telecommunications Specific Competition Regulation

Submission

THE MARKET

Much has been written on the telecommunications market and this inquiry will generate more commentary.  For the purposes of this submission the important features of the market are:

• It is very large (about 4 per cent of GDP).
• It is growing very fast (about 11 per cent per annum).
• It is extremely diverse in all aspects and has avenues for further diversification as more cable and radio spectrum capacity become available to the industry.
• It is very rapidly changing in the range and complexity of its products, its means of production and delivery and its demand patterns.
• It is only partially substitutable by hard copy communications media such as post, courier and document exchanges.
• There are few direct regulatory restrictions on entry (there are now 40 plus carriers).
• It is strategically crucial to the rest of the economy and also socially very significant.
• There are monopoly elements, particularly in the local telephone loop.

These features imply that, although demand for telecommunications services is relatively or even absolutely inelastic, the possibilities for substitution within the market are large and growing.  Rapid advances in technology and the sheer range of available media are driving prices down.  Consumers have shown a strong willingness both to try and to pay for new technology even where the old technology is substantially cheaper, for example, in the use of mobile phones.

So monopolies are not stable.  Networks are being duplicated and even the local loop monopoly is being eroded by substitutes.

These features also imply a market that is highly politically sensitive and thus susceptible to complex and vigorous political bargaining and detailed regulatory interference.

GENERAL PRINCIPLES

Regulation is not good in itself.  It limits individual freedom and innovation.  It encourages behaviour that results in special deals for those favoured by the politicians and officials who themselves feed off the process.  Wealth and income transfers can be effected by the generally deadweight activity of lobbying and regulatory game playing.

Regulation begets more regulation as special interest groups and officials seek more power to impose "perfect" solutions and to enjoy power without direct responsibility for the consequences of their interventions.

Paradoxically, the more rules there are the easier it is to defend them.  It becomes more and more difficult to alter an interlocking maze of regulations where a multitude of vested interests are involved.

Regulations are inevitably clumsy.  They apply standard rules to diverse transactions.  They apply rules that are fixed in time so, even where government knows best, this only applies at the time when the rule is made.  The world changes and the rules don't.

Regulations are thus a necessary evil at best.  They are required to correct gross imperfections in private decision making where these have seriously adverse effects on other parties, in this case the effects of serious anti-competitive conduct.  The onus should always be on the proponents of regulations to justify their retention rather than on the opponents to justify removal.  We think this should apply in this review This applies even to sacred cows such as fixed price local calls (which do not seem to be included in this review).  The sacred cows graze off the herbage of more useful animals.

With all this in mind we maintain that the best approach to competition regulation for telecommunications is to have:

• Generic rather than industry specific regulation -- this will tend to be more equitable for the industry and more stable over time.
• A single competition regulator -- this will reduce the cost of the bureaucratic processes and should lead to greater consistency in decisions.

Nor should regulation try to compensate everyone for changes.  Uncompensated changes take place daily in the private sector as product lines and prices change and services adapt to new demands.

CURRENT REGULATION

The best that can be said of the current array of telecommunications competition regulation is that it is a mess.

There are numerous legislative provisions, regulations, guidelines and codes regulating or impinging upon competitive behaviour.  There is substantial duplication and overlap in these instruments and, presumably, in the relevant bureaucracies.

The language used is complicated and, at times, impenetrable.

There are up to a dozen entities involved in the numerous processes generated by the regulation.  Big regulation requires big bureaucratic apparatus.

This is the sort of regulation that provokes frustration and rage in those who have to comply with it.  It cries out for simplification.

The best that can be said about the intentions of government for regulation is that they are ambivalent.

Section 4 of the Telecommunications Act states Parliament's intention to promote self regulation.  But it is preceded by Section 3 which reads like a the preamble to a state plan for the industry.

The Reference to the Commission provides similarly mixed signals, although Section 151CN of the Trade Practices Act does specifically raise the question whether Part XIC of the Act should be repealed or amended and paragraph 4(c) of the reference raises that question more broadly.

The injunction against considering structural separation of Telstra eliminates one possible line of market reform.

The case for simplification at least seems indisputable and we would argue that the case for removing some of the burden of regulation is equally strong.  In the following sections of this submission we make a number of proposals, both general and specific.  Some of the former may subsume some of the latter.

We believe that the objective of the regulation should be to counter major and enduring abuse of market power as opposed to detailed supervision of competitive behaviour in this industry.

ANTI-COMPETITIVE CONDUCT

Consistent with the reasoning above we recommend the repeal of Part XIB of the TPA.

We accept that there is still a dominant firm in Australian telecommunications and that it controls crucial parts of the "any to any" network.  Telstra was a monopolist and regulation was required to require access to some of its facilities.  As is the case with all industries, there will be occasions where anti-competitive conduct takes place and the government will need to intervene.  But the case for repeal of this Part is strong:

• The general principles outlined above regarding the need to be highly critical and selective in the application of regulation apply here as anywhere else.
• They apply with added force to complex industries undergoing rapid technological change such as telecommunications.  In such cases the industry needs freedom to innovate.  It needs maximum certainty about the level of government interference so that it can take large and risky investment decisions on a very uncertain future.  Detailed regulation and direction by officials at the micro level carries considerable regulatory risk as that future unfolds in unpredictable ways.
• In particular, the criterion that action need only have the "likely" effect of substantially lessening competition introduces an element of speculation and subjectivity that increases bureaucratic power and business uncertainty.
• This implies that society and government needs to accept a few bumps along the way as rapid change takes place and some mistakes are made.  They should not try to fix everything through more rules.
• Nevertheless, consumers in this industry will have a growing range of substitutes for given media, products and suppliers.  There is convergence between telecommunications and broadcasting.  The same medium may deliver several products and each product may have several delivery options.  Customers for services are increasingly powerful both in terms of size and options available to them.  While future technology cannot be predicted with confidence, the intensity of future competition can be inferred from the market structure and past behaviour.
• It is an industry with no lack of new entrants and some of these are of a comparable or greater scale and technological sophistication than the principal incumbent.
• There seems little evidence of unwillingness on the part of the industry to make the large lumpy investments required to compete in this market.  Indeed the roll-out of duplicated cable in the race for pay television indicates a willingness and capacity to take substantial competitive risks.  In part this may reflect the high level of confidence in the growth prospects and flexibility of the industry to absorb or take advantage of apparent over-investment.  It may also reflect the expectation of the competing firms that they will all be successful, which is collectively irrational but quite normal behaviour in fast growing industries.  Some waste is possible but is not a cause for regulation.  Again, in pay television, the value of the large investment in the microwave spectrum, which was substantially downgraded after the demise of Australis Media, is being upgraded again in use for data transmission.  This sort of thing may not be a micro-economically efficient way to make and recover investments but it may well best fit the circumstances of businesses and the industry at this stage of its development.
• The relative complexity of the two competition notices approach and the infrequency of its use suggest a return to more generic approach.
• The general provisions for anti-competitive conduct and other trade practices legislation would remain in place and should be sufficient to deal with the dominant firm.  They are more than just a safety net.  These provisions have proved very powerful in detecting, restraining and punishing anti-competitive conduct.
• This industry does not present risks of such conduct that are sufficiently different in nature and scale to warrant special legislation.  Competition trends in the industry suggest that it will be more and more open as time goes on.

We realise that this part of the Act has only recently been amended and that Telstra retains market power but the generic provisions appear sufficient to protect competition.

ACCESS REGULATION

Given the dominance of Telstra conferred by its ownership of the most extensive telecommunications network in Australia there is potentially a case for continued access regulation.  We believe that this case is weakening over time.

Having said that, we do not see a case for continuation of Part XIC of the TPA.  The main reasons are:

• The rapid and continuing development of substitutes for all forms of communications and communications networks places constraints on monopoly behaviour over the medium term.  For example, the first trial for interactive television is due to take place soon and could be the harbinger of an entirely new medium of communications – a possible whole new network with video, data and voice capacity.
• The Commission has itself, in an earlier report on international bench marking, noted the likelihood that network capacity will be abundant with the adoption of new technologies.  This is a judgement that implicitly includes an assessment of future demand but seems consistent with current trends.  It suggests that carriers will be competing for content.  As in broadcasting, "content will be king".
• The access pricing regulation seems to rest on very shaky ground.  Apart from inherent inflexibility in prices determined by government agencies there will always be a tendency towards arbitrariness and to be seen to be doing something with its powers.  Moreover, getting the price "right" in economic terms may not imply use of standards such as world best practice if that leads to a price that is commercially unviable or discourages competitive investment.
• There is no suggestion that Part IIIA of the TPA be repealed as a result of this review.  While this might be a good thing in itself, the fact is that this power for regulation of access will remain in the TPA and serve as a "safety net" should there be abuses of Telstra's control of the network.  And the ACCC now has considerable experience and knowledge of the industry to back up its action.  Beyond that the provisions of Section 46 of the TPA, relating to misuse of market power are also available.

The Commission intends that this review be future-looking and this lends force to our conclusion.  This industry has shown great capacity to adapt and innovate and this will clearly continue.  At the same time, prices are being driven down so the products are becoming available to more of the population.  The currently dominant firm will become less able to exert leverage through the network and more concerned to attract and retain loyal customers to use its growing capacity.

Access rules should always be applied very sparingly.  They are highly interventionist and likely to create inequities and distortions.  There is probably no more need for specific legislation in telecommunications than in several other industries.

We recommend that Part XIC of the Act be repealed.

SPECIFIC ISSUES

The regulatory structure applies a number of seemingly innocuous but significant obligations on the industry.  These could be scaled back or abandoned without serious public detriment.

Also, consistent with simplification of the regulatory arrangements, we believe that some of the duties of the agencies could be rationalised.  As noted, we recommend repeal of parts XIB and XIC of the TPA and reliance on the more general provisions.

In addition we recommend that:

• The extensive reporting requirements of the two agencies be abandoned or at least scaled back and rationalised into one agency (preferably the ACA). The burdens imposed by these requirements can be very considerable and the information gathering activities of officials have a tendency to expand year by year with no real test of need.  The corporations are often powerless to resist, given the sweeping nature of regulation.  If there is a requirement for information-gathering and reporting to pursue a case of anti-competitive behaviour, there are general powers in the relevant rules.
• The monitoring of service performance be left to consumers backed up by the powers in Part V of the TPA. This is an extension of the previous point but has implications also for co-regulatory arrangements and standards.  These latter become more numerous over time and can become a form of backdoor regulation.  If governments believe that behaviour of a firm needs to be regulated then they should not use this weasel approach but do so up front.  In practice, this form of regulation can involve the transfer of considerable powers to the level of officials with minimal public scrutiny.
• The requirement for industry plans be repealed. This requirement has a long history in industry policy both at State and Commonwealth levels.  It is a form of state planning and industry protection so far as it is successful (which it generally isn't).  It is likely to distort decisions and impose extra costs both in devising the plan and in complying with the wishes of officials in respect of encouraging local suppliers.  Insofar as the plan prescribes equality of treatment to Australian suppliers the plan is redundant.
• The tariff filing and record keeping requirements be repealed. The rights of private business need to be balanced here against making life easier for the regulator.  The normal record keeping and reporting requirements for major corporations in Australia are very detailed and the large accounting/auditing firms protect their reputation by further checks and prescription of accounting practices.  These should be adequate for the purposes of regulating this industry.  Furthermore, the ACCC has extensive powers to demand information in cases where it is pursuing an investigation.  Similarly, the tariff filing requirement can be substituted by the powers of the ACCC to demand information (but only when it has cause to believe that observance of the law is at stake).
• The setting of standards be left to the industry. It is hard to see any justification for any involvement of the ACCC in the setting of technical standards.  Beyond this there seems no overriding reason for government involvement at all.  The industry can, if it wishes, enlist the services of Standards Australia in devising technical standards though their involvement should not be compulsory.  The development of the industry suggests that participants will have a strong competitive interest in efficient standards and it is difficult to envisage what public interest angle would be protected by the presence or veto of government.
• Licence conditions should be confined to requirements not specified in legislation. The inclusion of licence conditions such as the granting of access is not only superfluous but imposes double jeopardy on the licensee.  It can be penalised twice (or possibly more) for the same offence.  This is very comforting "belt and braces" for government but is grossly unfair to corporations or individuals and totally inconsistent with the notion that Australians be given a "fair go".

OVERSEAS EXPERIENCE

International comparisons are hazardous.  Differences in history, market characteristics, cross subsidies and many other features make it difficult to draw firm conclusions.

Most overseas regulatory regimes apply some form of competition regulation, in particular, they mandate interconnection by the dominant supplier.  In addition they may apply other forms of regulation such as price (see below) or operational performance or technical standards that affect overall performance and complicate results comparisons.

On the face of it, some regulatory regimes are more liberal than that of Australia, such as those of Finland, Sweden and New Zealand.  On one test, that of prices, the first two at least, do not seem to be suffering on that account.  It would be useful to conduct a thorough examination of a few of such cases (not just New Zealand) to test whether lighter-handed regulation actually exists and has worked as well as the more detailed interventions in Australia.

The intention of such a comparison should be to find means to achieve minimal regulation.

CODA

Everything is connected to everything else.  It is an incomplete discussion of competition regulation that ignores price controls.  Such controls affect costs, prices in the uncontrolled areas and the behaviour of telecommunications providers and users at all levels.

Although this review will not make recommendations on price controls, such as those for local calls and other price caps, we feel that these should be aired as an aspect of competition and the development of a world class Australian telecommunications industry.

The Australian set of price controls appear to be more extensive than applied in those countries studied in the Commission's recent benchmarking study.  Their justification on public interest grounds appears weak and is almost certainly becoming obsolete.  Their economic costs remain substantial.  There appears to be a willingness of consumers to pay the full price for some substitute services, for example, local calls on the mobile network.

It is always possible to generate a campaign to retain price controls, especially where they are long standing.  However, because justification becomes a mantra., we have tendency to hang on to vestigial regulation when its useful life is past and when the public would accept bold change

A perspective by the Commission on price controls would be illuminating.

The Alleged Stolen Generations?

I am sorry that Lorna Cubillo and Peter Gunner, two members of the "Stolen Generations," left the Federal Court in Darwin empty-handed.  Their hopes were raised and dashed.  They should never have been raised.  They did not fail, as the plaintiff's lawyers claimed, because of a mere technicality.  Justice O'Loughlin comprehensively dismissed their cases because they lacked merit.  He stated in his reasons for judgement, "I do not think that the evidence of either Mrs Cubillo or Mr Gunner was deliberately untruthful but ... I am concerned that they have unconsciously engaged in exercises of reconstruction, based, not on what they knew at the time, but on what they have convinced themselves must have happened or what others may have told them".

The Stolen Generations Legal Unit and the Commonwealth consented to these two unrelated cases being run together.  Both sides knew that these were test cases for the Stolen Generations.  Although the judge was at pains to point out he was deciding only the matters before him, there is no doubt Aboriginal interests would have claimed a victory on behalf of the Stolen Generations had the cases succeeded.  Does the defeat mean that future reference should be to the "alleged" stolen generations?

To be fair, the loss does not mean that all cases are doomed to fail.  But if these were the best cases, what hope for the remainder?  Justice O'Loughlin provides the answers.  For cases to succeed:

There will have to be proof a child was forcibly removed -- Only eight witnesses came forth for the applicants, and four of them conceded in cross-examination that they had been placed in the institution at the request of their parents.  Speaking of the people at Retta Dixon Home where Lorna Cubillo had been taken, a contemporary, Mrs Harris said "Well, my mother didn't want me when I was born but afterwards -- well, she wanted to do away with me but my grandmother saved me".

There will have to be proof the actions of the Commonwealth were not in the best interests of the child -- Future cases would rely on evidence from a small and dwindling number of former officers of "exceptionally high calibre" of the Native Affairs Branch and the Welfare Branch of the Northern Territory.  "All of them denied the existence of a general or widespread policy of removal of part Aboriginal children and most of them insisted that no child was removed without the consent of the mother of that child".

Plaintiffs will have to prove absence of "best interest" in the light of the policy and custom of the day -- O'Loughlin J. quotes a fellow judge, "the events that I am being asked to judge and evaluate commenced in 1942 and finished in 1960.  Thus in 1999 I am asked to judge that which took place 39 to 57 years ago ... these are events that occurred in a different Australia, a society with different knowledge, and with different moral values and standards".

O'Loughlin J. noted the Bringing Them Home Report did not inquire into separations that were effected with the consent of a child's family.  "Nor did they require a consideration of cases where a neglected, destitute, sick or orphaned child might have been removed without the consent of the child's parents or guardian".  HREOC and the Federal Government that set terms of reference left out the crucial matter of the context within which children were removed.  O'Loughlin J. did not make that mistake, "After the part-aboriginal people achieved drinking rights, alcoholism and violence became larger social problems for them, which often had welfare implications for their children".

What options are now open to Aboriginal claimants?  How should the Commonwealth respond?  The matters could be left to the courts.  However, as the principal facts have been canvassed in Cubillo many of the remainder of the cases are likely to be struck out.  Aboriginal Legal Aid would have to seriously consider using scarce resources on further cases.  The call for a reparation tribunal is a transparent attempt to have matters heard by a sympathetic body, and for damages to be unlimited.

A compromise is to establish a no-fault compensation scheme.  An ex gratia payment could be awarded to a claimant who suffered some wrong and could prove they were removed by the Commonwealth from their family without explicit consent.  Opting in to such a scheme would foreclose court action.  The statutory amount could be set at a level equivalent to the average of the criminal compensation schemes in the states.

If the Stolen Generations seek more than mere monetary compensation, matters of a moral or political nature could be taken up separately.  An apology for example could be offered without the prospect of huge financial claims.

The problem with the whole sorry affair is that once people become compensation focused, little else matters.  "Mrs Cubillo has, understandably, built up a tremendous sense of grievance and the litigious process has turned that sense of grievance against the Commonwealth to the exclusion of all others".

Turning Tables on Monster Makers

You have to hand it to the greens.  They really know how to push the buttons that generate unnecessary public alarm.  Their latest triumph of misinformation has been with genetically modified crops, or "Frankenfoods" as they cunningly call them.

Last month an AC Nielson poll revealed that two thirds of Australians would not buy genetically modified food, and the Tasmanian government declared genetically modified organisms "forbidden pests", preventing field trials of GM crops for twelve months.

And last week, Australian and New Zealand health ministers decided to introduce what is said to be the world's strictest labelling laws for GM foods.  While consumers have every right to make an educated choice about their purchases, the push for labelling by environment groups has been driven far more by the desire to demonise GM foods than the urge to provide the public with accurate information.

But what is good for the goose should be good for the gander.  If it is okay for greens to exaggerate the dangers and ignore the potential benefits of things they dislike, it should be just as legitimate for their opponents to take an unkind look at things that environmentalists cherish.  So in the interests of creating a level playing field, let us consider organically grown foods.

For starters, given the power of language in influencing public perceptions, perhaps we should introduce a new name, one that could do as much to discredit organic produce as "Franken-foods" has done to genetically modified foods.  In recognition of the major role of animal excrement as a fertiliser for organically grown crops, "poo-foods" seems a good choice.  People with more profane inclinations might prefer a stronger word.

The term "poo-foods" will also help to draw attention to one of the health risks associated with organic crops, the danger that vegetables grown using animal wastes will be contaminated with the deadly E. coli O157 bacteria.

While "poo-food" advocates will probably counter that their industry standards require excrement to be composted before being applied to crops, they can give no firm guarantees that the composting process kills all the dangerous micro-organisms, nor that all growers scrupulously follow the standards.

No doubt most "poo-food" farmers are responsible people, but they are not running charitable enterprises.  In their desire to make a quick profit, it is a fair bet that some are cutting corners and putting public health at risk.  After all, greens always claim that this is what large corporations are doing.

Certainly, in both America and Europe, serious outbreaks of E. coli infection have been traced to organic produce.  And American data analysed by the agricultural scientist Dennis Avery showed that consumers of "poo-foods" were eight times more likely to be attacked by the most virulent form of E. coli than people who only consumed mainstream food.

But a heightened risk of bacterial attack is not the only potential health hazard posed by organically grown crops.  Although the word "goodness" almost inevitably follows the word "natural" in marketing campaigns, real nature -- as opposed to the Disneyfied versions favoured by advertising agencies and greens -- is far from benign.

Most edible plants contain natural substances which have been shown to be carcinogenic or otherwise dangerous in sufficiently large doses.  These toxic substances help to protect the plants against attacks from insects and other pests.

Indeed, the biochemist Professor Bruce Ames -- who became an environmentalists' hero when he developed the "Ames test" for identifying carcinogens -- has pointed out that the levels of natural pesticides in typical Western diets are about 10,000 times higher than the levels of "man-made" pesticide residues.  (Greens did not thank him for this observation, and he is now one of their hate objects).

Organic farmers tend to favour varieties which contain high concentrations of these natural pesticides.  In one unfortunate instance, a new insect-resistant strain of celery, bred with the organic market in mind, caused people who handled it to develop skin rashes.  This variety turned out to contain nearly eight times the amount of the skin cancer-causing substance psoralen than is found in ordinary celery.

That is not all.  Refusing to use synthetic chemicals to fight pests, organic farmers usually tolerate a greater degree of damage to their crops from insects and animals, which also makes them more vulnerable to fungal attack.  And of course, they can't use chemical fungicides either.  Not surprisingly, many organic crops have higher rates of infestation by moulds which produce aflatoxin, which is one of the most potent carcinogens known.

But if they don't do much for humans, surely organic crops are better for the environment, preventing the misuse and accumulation of various chemicals that pollute the our lands and waters and threaten biodiversity?  Yet even here, the score card is mixed.

The yields from organic agriculture are substantially lower than those obtainable from conventional methods -- let alone the yields that may eventually result from genetically modified crops.  A really significant shift towards organic farming would mean the clearing of considerable amounts of extra land, which could otherwise be preserved for wildlife.

Please don't misunderstand me.  If people are willing to pay higher prices for organic produce because they believe it is good for them, that is fine.  I think they are wrong, but it is their money.  And if our struggling farmers can make greater profits by meeting the increasing local and overseas demand for "natural" and organic foods, that is even better.

Just as long as no-one pretends that organic agriculture could ever make a greater contribution to human health, prosperity and environmental management than a dynamic and properly regulated GM technology industry.

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World Economic Forum Protest Loses the Plot

"It is clear that globalisation and free markets left to themselves do not always produce the desired or necessary results for society at large".  These words came from the latest annual report of the World Economic Forum, the talkfest for the leaders of the world's top one thousand global corporations.  Its regional arm will meet in Melbourne next month to discuss matters of interest in the Asia-Pacific.

Its basic philosophy is that the great challenges facing humankind can only be met through joint efforts on the part of government and business and that these efforts have to be stimulated by the best minds and have to be made transparent to the public.  Basically, it's a chance for German bankers, Hong Kong industrialists, American retailers and Australian miners and more to network.  The Prime Minister and key economic ministers will address them and after it's all over, those who chose will travel to Sydney to view the Olympic games.

The capitalists get together to chew the fat, Australia's political elite uses the opportunity to impress, and local firms like Minter Ellison and NRMA act as host.  Sounds fine to me.

But not to S11.  This group of fringe activists and copycats wants to shut down WEF and say no to global corporatisation and capitalism.  I presume S11 comes from the fact the WEF meets on September 11.  Well, at least they are numerate.  S11 is an umbrella of all sorts of non-government organisation's.  Trades Hall and the churches get a mention in their literature, but the real stars of the protest show are the Progressive Labor Party -- "couldn't we live perfectly well without money", Snuff Puppets -- "non-violent direct action", Tempest -- "education through poetic saturation", Feminist Avengers -- "militantly anti-capitalist, anti-sexist, anti-homophobic women", Xborders -- "our struggles are as global as capital", Plant Seeds For Our Future -- "our food is locked up from us", Workers Liberty -- "we use Marxism to analyse capital", Civil Action -- "stop these savages from taking our planets resources", and lots more.

Misdirected, but harmless enough?  Their support groups suggest otherwise.  The S11 Bicycle Courier Service will be there to transport supplies and information across Melbourne "during the blockades".  The S11 Medical is organising first-aid and is calling for donations of saline solution and bandages!  And who might the storm troopers against capitalism be?  Your sons and daughters!  S11 are recruiting around the High Schools, seeking a student walkout.

Like the activists who protested at the World Trade Organisation meeting in Seattle, S11 want to piggy-back the WEF to advance their agendas -- abolish the International Monetary Fund, the World Bank and the Asian Development Bank, stall the WTO, open the borders to refugees, abolish Third World debt and so on.

Do they not know that the very banks they want to abolish are the instruments that give enormous assistance to the Third World?  Those banks do not forgive the debt of nations whose leaders are thugs and murderers and racists.  The banks use those obligations to drum some sense into corrupt political leaders.  To abolish the debt or the banks would be to let the crooks go free and subject their people to more corrupt practices.  The S11 protests are misguided and immature.  They are hoping for the sort of strife that brings publicity.

Civil disobedience is a good thing when it is justified.  It is not justified when it is a ploy to recruit the young and unsuspecting.  I call on the responsible NGO's in the churches, aid, environment and trade union organisations to talk some sense into these idiots and tell them the truth about who are heroes in our world and who are not.

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Submission to the Inquiry into the Gene Technology Bill 2000

A Submission to the Senate Community Affairs References Committee
August 2000

GENE TECHNOLOGY

We wish to make a submission to the Inquiry into the Gene Technology Bill 2000.  The Inquiry's terms of reference are attached.

Our aims and aspirations -- such as a prosperous economy with full employment, sound environmental management, care for the disadvantaged and a tolerant and peaceful society -- are shared by the vast majority of Australians.

We believe that society's goals are best achieved through an efficient, competitive private sector, small but effective government, individual freedom with personal responsibility, and an open and peaceful exchange among nations.

We are totally independent.  We do not accept any donations from political parties or grants from government.

We act as developer, test pilot and promoter of free market ideas.  We take the view that the onus is on those who promote more regulation and government intervention to put a strong case that such measures are necessary and cost-effective.

Our approach is to address only those issues in the Terms of Reference in which we can offer useful insights.  Our role in the gene technology debate has been one of examining the public policy issues on a matter that has assumed considerable public profile against our core beliefs.

We have published three Backgrounders on the subject;

• Risk Assessment and Decision-Making for Genetically Modified Foods
• Regulating Biotechnology:  Some Questions and Some Answers;  and
• Biotechnology and Food:  Ten Thousand Years of Sowing Seeds, One Hundred Years of Harvesting Genes

In addition we have made two submissions to the government on different aspects of the matter:

• Proposed national regulatory system for genetically modified organisms:  How should it work?;  and
• Labelling Genetically Modified Foods.  A Submission on Proposed Labelling Provisions for Genetically Modified Foods under Food Standard A18, December 1999.

In addition, we have published several press articles promoting our views.

ADDRESSING THE ISSUES RAISED BY THE COMMITTEE

THE OBJECTIVES OF THE BILL AND THE REGULATORY BODIES

(a) whether measures in the Bill to achieve its object "to protect health and safety of people and to protect the environment" are adequate.

We believe the measures proposed are adequate.  Indeed we are of the view that there is considerable overkill since the technology poses no threat to humans and is likely to improve environmental outcomes.

The environmental impact follows from the main feature of GM foods and other crops to date.  These normally have genetic modifications to allow better properties in combating pests and chemical sprays designed to prevent weeds.  They are also likely to allow for less waste in the crops (e.g. shorter stems) and to allow reduced consumption of water.

All of these features have a benign environmental effect either because they allow conservation of resources or because they allow crop production with fewer chemical inputs.  There have not been be any superweeds developed as a result of the technology and scientific evidence rates such developments as highly improbable.

With regard to protection of people's health and safety, the new products have undergone greater testing prior to release than any previous food technology.  Indeed, although all plant and animal food we now consume has been the creation of human induced cross breeding, no previous food has ever been subject to the oversight required of GM foods.  And objectively, the latter should in fact warrant a reduced oversight since the genetic modification, which is somewhat hit-and-miss in traditional cross breeding techniques, is precise with gene technology.  Specific genes can be introduced or changed without fear of also importing genes that may have adverse impacts.

We should also bear in mind that the technology has now been in common use, especially in North America for the past four years.  It is likely that most North Americans eat GM food every day.  Moreover, such is the nature of world food trade, and the ubiquitousness of soya (47% of which is GM ⁽¹⁾) in foods, it is also certain that virtually all Australians have consumed GM product.  There is no case anywhere in the world of harm having been recorded from this consumption.

We do not believe that either the environmental conditions in Australia or the susceptibility of Australians to different foods is sufficiently unlike those elsewhere in the world to justify the additional level of testing that is being put in place.

The real issue is whether the extreme and unnecessary caution in permitting the adoption of this technology is creating harm through depriving consumers of cheaper and more nutritious food.  These issues, of course, loom larger in developing countries where more expensive food may mean people go hungry or become susceptible to inadequate nutrition with consequent adverse health effects.

As improved and healthier foods become available through the GM route, delays in bringing these to market will have a particularly adverse effect.  For example vitamin A enriched "golden" rice has the capacity to prevent tens of thousands of cases infant blindness in developing nations.

The overwhelming majority of scientists favour the technology.  Some 3000 have signed a petition that says the "techniques ... can contribute substantially in enhancing quality of life by improving agriculture, health care, and the environment".  And that, "The responsible genetic modification of plants is neither new nor dangerous".

To put all fears to rest, in the past few weeks, seven premier scientific academies, (including the Chinese and Indian science academies, the British Royal Society and the US National Academy of Sciences) have issued a joint report promoting the benefits of the technology and the need for it to feed a growing world population with increasing aspirations for food quality.

(b) whether the proposed regulatory arrangements and public reporting provisions will provide sufficient consumer confidence in the regulation of the development and adoption of new gene technologies

The procedures announced and presently in place are, in our view, designed solely for public re-assurance purposes.  As outlined above, the technology itself should warrant less oversight of the new products than that traditionally required -- which is to say no oversight.

It is likely that all new GM foods introduced in Australia will have first been introduced in countries like the USA with robust assessment requirements and bureaucratic procedures and skills that are unmatched anywhere in the world.  This doubles the surety of the safety of the products, a safety that already has a high degree of insurance in view of the reputations and financial penalties that firms marketing these products place at risk.

In addition the new Regulator is to be totally independent of Government.  The Regulator will have extensive powers of investigation and will be adequately funded.  In addition, the Ministerial Council, the Gene Technology Community Consultative Committee and the Gene Technology Advisory Committee will offer further assurances.

All this said, there are likely to be those who will wish to oppose the technology at all costs.  Some of these express opposition to the technology by destroying trial crops in deliberate attempts to prevent the knowledge being gathered.

We believe the Government has leaned over backwards to put in place suitable machinery to offer Australians a guarantee that the GM food they eat is safe and wholesome and that GM crops have a benign environmental effect.  Some people will not be satisfied by such levels of assurance because of an ideological opposition to the technology -- an opposition frequently grounded in deep-seated hostility to "big business", "capitalist exploitation" or other epithets for the free market system which has brought us our present levels of prosperity.

Others may prefer to avoid GM foods for similar reasons to vegetarians who avoid meat or those who seek only "organic" foods.  Many would regard such choices as eccentric but they are freely made and based on the individuals' value systems the rights to which nobody should deny.  However, the rights of people to such choices should not require others to bear unnecessary costs.

These matters have come to a head in the debate on labelling.  To make a clear statement that a product does not contain any GM material (and processed foods contain hundreds of ingredients) would entail a vast cost, while bringing no benefit in terms of health.  Doubtless some of those calling for increased labelling are doing so in the hope that the increased costs will abort the development of the technology.

If some consumers want to avoid GM foods, sufficient demand for the absence of these ingredients will cause suppliers to make the products available.  This already happens with "organic" foods.  Some, including many organic food producers, have called for labelling where any of the food might include GM substances.  This is ironic since organic food producers could not agree to a standard that guaranteed their produce to be 100% organic -- it is impossible to be certain of an absence of an admixture of modern technology.

The best solution is to leave niche suppliers to market non-GM products to the customer (if they can do so truthfully).  The rest of us can also buy the products we want without having a needless cost imposed.  Australian and New Zealand Health Ministers did not adopt this position during their August 2000 meeting and have opted for a system that requires labelling although not on such a comprehensive basis as called for by some opponents of the technology.

OTHER ISSUES

liability and insurance issues relating to deliberate and accidental contamination of non-genetically modified crops by genetically-modified crops and how those issues are being addressed in international regulatory systems

Accidental contamination is a highly emotional issue.  The very use of the word "contamination" in this context gives an impression, perhaps intentionally by some parties, of at best "adulteration" and at worst "pollution" or "putrefaction".  We need to bare in mind that there is absolutely no health issues with the products under discussion.

Nonetheless, some governments, especially that of France, appear to have gone to extraordinary costs in destroying fields where inadvertent admixtures of GM seed at levels of less that one percent have been discovered.

Liability for GM foods has not become an issue.  This is because all foods presently available are "substantially equivalent" to existing foods.  Nobody has sought insurance and no insurance provider would be in a position to offer it.

the validity and practicability of any proposed clause allowing individual States the right to opt out of the scheme and the implications of such an option in the context of Australia's international trade and related obligations

Individual States cannot pass blanket legislation to require an absence of GM in the crops they produce.  Freedom of interstate commerce is guaranteed under the Constitution (article 92).  It is possible for areas to opt for a GM free position as a means of promoting themselves into niche markets, though this is unlikely to be practicable on a whole state basis.  If this were to be attempted on a wide scale, as the advantages of GM products became apparent, individual farmers would wish to take advantage of the increase in productivity and would appeal against any decision by a state jurisdiction to deny them that opportunity.

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Attachment

INQUIRY INTO THE GENE TECHNOLOGY BILL 2000

TERMS OF REFERENCE

The Senate has referred the following matter to the Senate Community Affairs References Committee for inquiry and report by 5 September 2000.

The provisions of the Gene Technology Bill 2000, with particular reference to:

Objectives

(a) whether measures in the Bill to achieve its object "to protect health and safety of people and to protect the environment" are adequate;

(b) whether the proposed regulatory arrangements and public reporting provisions will provide sufficient consumer confidence in the regulation of the development and adoption of new gene technologies;

The Office of Gene Technology Regulator

(c) the structure of the Office of the Gene Technology Regulator (OGTR) and its assessment processes compared with other proposed stakeholder models and similar overseas bodies;

(d) whether the powers and investigative capability of the OGTR are adequate to ensure compliance with conditions imposed in licences;

(e) whether the proposed cost recovery and funding measures for the OGTR are appropriate and will allow for adequate resourcing of the Office;

Other proposed bodies

(f) the role and membership of the proposed Ministerial Council;

(g) the functions and powers of the Gene Technology Community Consultative Committee and the Gene Technology Advisory Committee;

(h) procedures for review of decisions and, in particular, the rights of third-parties to seek review of decisions;

Other issues

(i) liability and insurance issues relating to deliberate and accidental contamination of non-genetically modified crops by genetically-modified crops and how those issues are being addressed in international regulatory systems;

(j) the validity and practicability of any proposed clause allowing individual States the right to opt out of the scheme and the implications of such an option in the context of Australia's international trade and related obligations;  and

(k) the alleged genetically-modified canola contamination in Mount Gambier and the processes followed by the Interim Office of Gene Technology in investigating and reporting on the allegations.

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ENDNOTE

1. EU Directorate of Agriculture, Economic Impacts of Genetically Modified Crops on the Agri-Food Sector, Brussels, 2000.

The Pretension of Virtue

I was reading one of the best, and the funniest, book on Australia I have ever read -- Bill Bryson's Down Under -- when I came across a passage which was a revelation, as one does when reading witty and perceptive observations by an outsider about the otherwise familiar.  On page 125, Bryson writes "that was another very British thing I'd noticed about Australians -- they apologised for things that weren't their fault".

I read this and thought:  now I understand all about National Sorry Day and the apology John Howard won't make.

John Howard's problem is that he takes his formal responsibilities as Prime Minister of the Commonwealth of Australia very seriously.  If he is to offer an official apology then it must be for something the Commonwealth of Australia did.  Since, from 1901 to 1967, the Commonwealth had, very explicitly, no legislative responsibility for indigenous Australians, except in the Northern Territory and the ACT, and since, compared to what many of the States did, the administration of indigenous affairs in the Northern Territory, certainly from 1949 on and arguably considerably earlier, was a model of enlightenment, then it follows that it is not appropriate for the Prime Minister of the Commonwealth of Australia to offer an apology for something that neither his Government, nor preceding Commonwealth Governments going back more than half Australia's life as a federated nation, did.

Moreover, if you offer an apology, and you are serious, then that implies a willingness to make restitution or compensation.  As the person ultimately responsible for proper dispersal of taxpayer funds, offering apologies likely to be followed by substantial demands for cash for something the Commonwealth of Australia didn't do becomes doubly repugnant.

John Howard's problem is that, because he is Prime Minister of the Commonwealth of Australia he is also Tribal Leader, and many people want our Tribal Leader do something felt to be Tribally Appropriate.  And, as Bryson notes, it is very Australian to say sorry for things that aren't our fault.

People want, nay demand, an Aussie politeness apology, the sort of thing any Australian is likely to offer someone in distress.  A gesture of sympathy and understanding.

Now, if John Howard were more of a showman politician, he would understand this, and offer some apology in a flash, with some suitable disarming rider to cut off any cash claims.  A Clinton or a Blair would carry it off without hesitation, even with panache.  But Honest John has the outlook and conscientiousness of the solicitor he used to be.  Such duplicitous flair is just not in his nature.  So, no apology.

He has offered a statement of sorrow and regret which, one would think, would satisfy the demands for a gesture of sympathy and understanding.  This is not true for two reasons;  one his fault, one not.

The reason which is his fault is that he, and his Government, have offered no explanatory context for his expression of regret.  In a democratic polity, the role of leadership is to connect enduring sentiments to contemporary needs by rhetoric and action.  There has been action, but nothing remotely resembling a coherent explanation of what is needed, and why what has been done reflects what is needed.  In this, as in so much else, this is a rhetorically challenged Government.

So, the statement of sorrow and regret just hangs there, connected to nothing, and lacking resonance because it is a solitary statement, lacking any developed context.

Of course, to develop such a context involves investment in intellectual capital:  something the Liberal Party is very bad at.  John Howard, outside a few economic areas, shares this Liberal incapacity.

The other reason why the statement of sorrow and regret has not worked is because the contemporary public agenda of so-called indigenous issues is overwhelmingly driven by the moral vanity of the Australian intelligentsia.

That agenda is all about words and gestures -- saying "sorry", sorry books, a Treaty, statements of indigenous rights, policing public language, pontificating about (and greatly exaggerating the extent of) the "stolen generation".  It is about generating and defending a set of approved opinions which function as moral assets (hence the enthusiasm with which that intelligentsia, particularly many journalists, fell for the Hindmarsh Island concoction).  It is not about anything even vaguely resembling a serious agenda for advancing the long term interests of indigenous Australians.

The moral vanity game is all about being ahead of a designated set of moral inferiors, so it is about constantly upping the ante.  "Sorrow and regret" is therefore not good enough -- it must be an apology.  If an apology was offered it then would not be good enough -- too late, too begrudging, and not backed by compensation.  The forcible removal of wanted children from functioning families -- which happened at some places at some times -- becomes genocide, and so on.

In all the settler societies, the indigenous peoples have major and endemic problems.  The reasons are not particularly mysterious, but are acute in the case of Australia.

The scattered and diverse indigenous societies of mainland Australia had not experienced the agricultural revolution of the Neolithic Age.  They did not create settled, urban communities.  They did not create any political structures which extended beyond people personally known to each other.  Their cultures were rich in many ways -- the richness of indigenous Australian art is even now exciting the art world -- and their ancestors engaged in ocean-going voyages long before any other human society.

But all the things indigenous Australian cultures had not done made them spectacularly ill-equipped to deal ineffectively with the immeasurably more capable invading British one.  Ill-equipped to resist, ill-equipped to participate.  These problems linger.  For example, cultures which have no concept of formal obligations beyond kin-groups have enormous difficulty running large organisations.  In these, nepotism and cronyism are sins of breaching formal obligations but in a system of kin-based obligations, they represent virtue.  Nor can, as my colleague Ron Brunton points out, one achieve industrial-age life expectancies with hunter-gatherer notions of good health practice, and success in improving indigenous health has to deal with real barriers, however ideologically awkward they may be.

Dispossession is often cited as the European Original Sin which is the root of the problems of indigenous Australia.  The problem with that hypothesis that Aboriginal communities which have experienced the least dispossession often have the worst health and other profiles of social pathology.

As Lawrence Harrison explains in the latest issue of The National Interest, scholars are increasingly looking to culture to explain differing social outcomes.

The essential problem for indigenous Australia is surely cultural distance and cultural collapse.  The result of that cultural distance has been an endemic and continuing disconnection between indigenous and other Australians.  The vileness of the White Australia policy was not in its exclusion of non-European migrants -- even at its height, White Australia was less ethnically exclusory than is contemporary Japanese citizenship policy.  The vileness of White Australia was something quite different.  Talking of preserving a White Australia literally whited-out indigenous Australia.

The solution to cultural distance and collapse is cultural adaptation and renewal.  Now, run through in your mind the items in the contemporary public agenda of "indigenous issues".  What is likely to make a serious contribution to indigenous cultural renewal and cultural adaptation?  Saying "sorry"?  Exaggerating the "stolen generation"?  Statements of indigenous rights?  Demands for a treaty that no government could accede to?

In fact, much of that agenda is harmful.  The vicious policing of public debate on indigenous issues in order to preserve the intelligentsia's moral assets makes even discussing problems and difficulties within indigenous cultures either extremely difficult or simply forbidden.  Debate is made difficult even for people with impeccable Aboriginal credentials.  Noel Pearson was promptly abused for pointing out that welfarism -- the manna from heaven approach to income -- massively undermines development of functional roles in a modern economy and the incentive to renew and adapt.

It makes it difficult for welfare agencies to carry out their proper roles.  In his article in the April 15 Spectator, Michael Duffy tells the sad tale of a 22-month Aboriginal baby girl found stabbed and covered with bruises and bite-marks in her inner city Sydney home;  social workers having not dared to intervene, lest they perpetuate the "stolen generation".  Extreme examples maybe, but of a type that is all too common.

Even native title is a deeply flawed process since the form of property rights given, by statute and by High Court decision, is spectacularly and needlessly ill-designed for effective participation in a modern commercial economy.  It is, however, very well designed to maximise angst and economic disruption for minimum gain -- the current slide in mineral exploration in Australia is, in part, due to the screwing up of rural property rights, a consequence not merely predictable, but predicted (see my 1997 Past Wrongs, Future Rights, pages 116-117).

That indigenous policy has been denied honest analysis of the needs of indigenous Australians is surely one reason that it has been such an unhappy failure, with many indicators of indigenous well-being remaining static or even regressing over the past 30 years.

To contemplate the current politics of indigenous issues is to understand what self-indulgent, self-righteous shits the progressivist Australian intelligentsia really are.  Michael Duffy writes "in 50 years' time, people will look back in horror and wonder how intelligent and powerful white people could have let such things happen while professing so strenuously their concern for black welfare and their superiority to previous generations".  He is right, and at least part of the explanation of failure is to be found in those pretensions to superiority.

John Howard should lift his game, but it is not he who should be saying "sorry".

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