Recourse and clarity the keys to partnerships

According to The Australian Financial Review, community support for public-private partnerships depends on transparency and accountability.  (Editorial, p54, February 18).  This raises the true challenge for state and federal governments:  to develop appropriate measures against which performance under the contract can be assessed.

Performance measurement is an area in which governments had no experience, and needed none, until relatively recently.  Many of the problems that have arisen where services have been contracted out are because of the inability of governments to adequately manage their contracts.

Take education as an example of what could be achieved under a properly designed contract regime.  For over a century, since the introduction of legislation to enforce compulsory schooling, governments have assumed that to ensure that every child receives an education, government has to provide that education.  But it doesn't have to be that way.  Whether a child attends a government or private school is irrelevant to the state fulfilling its responsibility of compulsory education.

Private companies could receive payments according to specified criteria such as attendance levels, test scores, and employment rates after the students have left school.

The performance of schools does affect student achievement, just like the management of hospitals effects patients.  A broader conception of contracting out government services in addition to improving the quality of service would also force governments, and in turn the community itself, to ask exactly what is expected of government services.

Contrary to what critics claim, this could herald a new era of transparency, because for the first time the public would be told what it could expect from government and from private providers.

If we are to gain the full potential from the emergence of more public/ private partnerships, both governments and the private sector must deal with some threshold issues.

As a matter of principle both parties must accept that unless there are extraordinary circumstances all contracts should be public.

Part of the reluctance of the community to accept public/ private partnerships is due to secrecy provisions in contracts.

Private operators must come to appreciate that at least initially they will be subject to far greater scrutiny than applied to government undertaking the same activity.

Companies in partnership with governments will learn that their obligations will extend not just to the other contract party but also to the clients of the service and the community more generally.

Governments and public servants must also understand that accountability does not end when a signature is placed at the bottom of the page.  Regardless of whether a service is contracted out or not, the community will expect a right to ultimate recourse.  We have already seen this expressed with the resignation of the responsible ministers in various jurisdictions throughout Australia.

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Meltdown in the Land of the Rising Sun

The world economy is facing a full blown crisis with its epicentre in Japan.

The world's second largest economy -- and Australia's largest trading partner -- has failed to address is severe structural problems and is now running out of policy options.  What is worse the Koizumi Government is proving bereft of leadership.

The Japanese miracle burst in late 1989.  While the Japanese economy contained many world class manufacturers, its service sector, which makes up over 60 per of the economy, remained highly inefficient and uncompetitive.  The economy was badly bloated and distorted by unsustainable levels of corporate debt.  On top of this, the banking system was opaque, corrupt and incompetent and the political system was incapable of leading changing.

In 1989 when the bubble economy started to haemorrhage, instead of trying to address its root causes -- as the US did for it savings and loan crisis in the mid-1980s -- the Japanese tried to stem the leak with government largess.  The government put in place one massive spending spree after another, to no avail.  The economy limped from one recession to another.  Now there are no more rivers to straighten or bridges to be built and Japan has become the most indebted nation in the developed world.  Goldman Sachs estimates that total household, corporate and government debt in Japan at about $58 trillion or six times Japan GDP.  (US debt levels are about twice GDP).

The government also tried to stimulate the economy via monetary policy, but again to no avail.  The official interest is now virtually zero with no room for further cuts.

The trend on the asset side of the ledger has been if anything been worse.  The Japanese stock market (Nikki 225) has lost 75 per cent of its value over the last dozen years and last week hit a18 year low.  Indeed the Nikki which at its peak in 1989 was 15 times higher than the Dow Jones Industrial Average is now below the Dow Jones for the first time in 45 years.

The reasons for the decline in asset prices are clear.  First they were grossly overvalued in the first place.  Second, investors knew that that many firms and their banks were loaded with dud debt and discounted them accordingly.  Third the Japanese economy became trapped in a deflationary spiral with the wholesale price index declining at an annual rate of 4 per cent.  Deflation not only makes the debt burden greater but puts down ward pressure on profits and asset prices.

The concerns for the world is threefold.  First, it means that the world's second largest economy will remain a drag on the world economy.  Second, Japan could drag the rest of the world into its deflation spiral -- remember deflation was a major cause of the great depression.  This is real risk if Japan tries to solve it problem by devaluing the yen.  Finally despite rapid build-up of debt, Japan remains the world largest creditor and largely responsible for funding the current account deficits of the US and Australia.  If its banks are panicked into calling-in overseas loans -- to for example shore up losses at home -- a economic disaster could well sweep the world.

Even the Australia's teflon economy would not be able to shrug-off a tsunami from Japan.

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Integration the Only Way to Break the Cycle of Despair

Another day, another story of Aboriginal tragedy in a remote community.  The Australian newspaper's report of publicans selling alcohol to Aborigines, and using their bank access cards to pay, creates the predictable response:  do something!  Right on cue, the Premier of Western Australia leaps into action.  "Find me a power to stop this terrible practice".  The fact is, it is common in non-English speaking Aboriginal communities for Aboriginal people to leave their credit cards and PIN numbers with trusted white people -- shop managers, charter aircraft operators, outstation managers and so on.  Publicans are no different in that regard.

How do we make sense of the fact that many Aborigines, especially in remote communities spend much of their money, which we give them, on grog?

The answer lies in the fact that we have made Aborigines radically dependent on whites, and in such a way that prevents them from living in the modern world.  The missionaries who developed the first outstations wanted to help Aborigines escape the pressures of contact with the outside world, especially alcohol.  The intention was to allow for a degree of self-government, and to provide a buffer as Aboriginal people were drawn inexorably into mainstream life.

The idea was hijacked.  Funding grew and more non-Aboriginal "support" personnel were needed.  Secular white missionaries and new Aboriginal leaders wanted to convert the buffers into permanent monuments to difference.  As outstations have proliferated in the post missionary era, the original rationale has been dramatically altered.  They may now be the most blatant example of spiritual destruction caused by uncontrolled, well-funded, white "benevolence" ever invented.

Remote Aboriginal people have been dragged onto the median strip of change and cannot go back to a traditional lifestyle.  They want to integrate, but they desperately want control.  While this may be naïve on their part, so too are our contradictory beliefs that remote Aboriginal people are authentically and unchangingly indigenous yet are somehow able to deal, without our help, with the unstoppable incoming modernity.  Aborigines need proper protection to buy time and build skills and confidence.

We want Aboriginal people to have equal access to school, but we insist they continue to master their own cultural learning.  Our ignorance of their culture is no disadvantage to us.  Their ignorance of ours is killing them.  We want Aboriginal people to have the freedom to drink despite the genocidal impact of alcohol on remote communities, despite the strong voice of many Aboriginal organisations calling for legislatively imposed control on their own people's drinking.

People who learn to operate in the society into which they are born, do not, by and large, spend most of their money on grog and hand over their bank cards to pay for it.  Despair, ignorance and a radical dependence combine to ensure they do.  But dependence is not abolished by the imposition of a black power structure, at least not one intent on cornering white wealth.  Almost every Aboriginal person is cynical about both the Land Councils and especially about ATSIC.

There have always been two Aboriginal policies, integration and separation.  The first has been practiced in a quiet way in the last thirty years, teaching people the skills they need to compete in the modern world.  The second has been promoted and shouted from the rooftops, "look how we have freed our indigenous people"!  And the more we freed them into the hands of their own politicians and their white agents and programs, the worse it became.

The pretence that a separate Aboriginal society, a collective solution to "the Aboriginal problem" exists, should be exposed.  The real successes in Aboriginal policy are those people of Aboriginal descent who have learned the skills to help them cope with the modern world.  When we are more honest with ourselves, Aboriginal leaders will be forced to be more honest too.  Policy must be explicitly aimed at integration, the long experiment in separatism must end.

The Commonwealth Minister's hands are full at present, but if he or another can give the question their undivided attention, there is a radical task to think outside the orthodoxy of Aboriginal separatist self-determination.

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Entitlements, by any Other Name, are Forced Loans

The core problem with worker entitlements is the very use of the term entitlements which confuses the focus of the debate and policy options.  Worker entitlements are in fact forced loans from employees to their employers.  A person on a wage of say $500 a week has about $90 a week or 18% of their wage not paid to them.  Every week $90 is held by the employer, accumulates and is returned to the employee when they take holidays or leave.  In a year a minimum paid worker loans their employer over $4,000 on which no interest is paid.

Seen within this reality of forced loans the problems and solutions become clearer.  Where employees are forced to maker a loan they should have an automatic right to security from the employer and whoever enforces the loan.

The problem afflicts the 5.2 million permanent employees in Australia but could spread to the entire workforce if protections are not considered.  The 1.5 million casuals employed and the 1.6 million independent contractors engaged do not suffer from forced loans.  They receive their full payment regularly with nothing withheld.  However campaigns to stop casualisation and independent contracting will remove the security of payment enjoyed by these Australians.

Three groups force the loans and permanent employees are powerless as are many employers to prevent the enforcement.

The first enforcer is government through the instrument of industrial relations acts.  Under awards and other industrial instruments the Industrial Relations Commission is required to force employers to withhold money from permanent employees.  The reasons are historical but the idea is illogical!  If the law mandates worker loans to employers, on principles of equity taxpayers must secure forced loans in the event of employer insolvency.  This has been achieved under the Federal Governments employee entitlements and redundancy scheme (GEERS) but which has been limited to amounts that must be withheld under minimum award requirements.  Quite reasonably where an employer, for example Ansett agreed to redundancy amounts above the award minimums the Federal Government has refused to use the taxpayer as guarantor.

The second enforcer is usually assumed to be businesses that want worker loans, both to gain access to free credit but also as a management tool.  The need to withhold money for holidays and leave has traditionally been an employer control mechanism to ensure employees work at the employers managerial convenience.  But tradition has given way to more sophisticated management demonstrated by the use of casuals and independent contractors.  Where employers choose or are required to withhold workers money they should be required to provide security.  The current debate is excessively focused on this single issue of trust accounts and other possible financial security mechanisms.  The problem with Manusafe type ideas, is suspicion that they would be rorted like some superannuation and long service leave funds as career and income sources for special interest groups.

The final enforcer of employee loans to employers are unions.  Some influential unions believe membership can only be secured through permanent employment.  The moral posturing and campaigning against casualisation and independent contracting smokescreens union motivation for its own business survival.  But this union campaigning puts workers money at risk when enforced loans come with permanency.

To be fair many unions guard employee security interest by accepting and accommodating casualisation.  The retail sector is an example.

If, for example as is often alleged, unions coercively "negotiated" redundancy entitlements at the defunct Ansett way beyond the capacity of the company to pay, those unions should at least admit some responsibility to secure workers lost money.  This idea may appear politically fanciful but the principle is sound!  For future reference, employers faced with coercion from unions should consider placing requests for union supplied, asset security on the negotiation table.

Eventually through the problem needs to be addressed at it root.  It's a human rights issue.  Permanent employees don't have a choice.  They are forced to give employers interest free, unsecured loans.  They should have a right to choose.  Casual employment and independent contracting should be available to them without hindrance.  Even if permanent employment is the choice employees should have the right to decide if and how much money is withheld from them and how and where it is secured.

The political reality however, is that the solution of worker choice is too radically simple to attract universal support either from employers, unions or political parties.  The idea challenges too many entrenched institutional and economic interests.  Instead employees are likely to continue to find their money used as a bargaining tool in complex political and commercial games over which they have no control.  That's the normal fate of employees!

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Power to the People

On 13 January of this year, the Victorian Government introduced Full Retail Competition for electricity.  Household customers became free to seek better deals from retailers.  But at the end of last week there were only 3,600 Victorian applications to change retailer (even this was better than in the NSW government owned system where hardly any applications were made).

Why are so few people are seeking better electricity supply deals when electricity retailing has lots of scope for competition?

One reason is that the competitors are less keen to win new business during the summer months when energy costs are high.

But the most important reason is price controls.  Soon after its election, the Bracks Government decided that households' electricity supply was too politically sensitive to be left to the cut and thrust of the market and foreshadowed competition accompanied by price caps.  Such policies were not adopted for business customers groups, which were progressively allowed choice of retailer over the past half a dozen years.  Nor were they needed -- competition ensured that most business customers saw lower prices.

Recent rising energy costs have increased Government fears of a backlash from higher electricity prices to household consumers.  These developments led electricity retailers to seek average price increases of between 15 and 21 per cent.  On the advice of the Essential Services Commission, the Government pared these back to between 2.5 and 15.5 per cent.

Though this price dampening offers a short term benefit to many consumers, price controls risk undermining business economics.  At the extreme, holding customer prices down puts retailers at risk of the Californian nightmare, crushed between the hammer of rising costs and the anvil of fixed prices.

In addition to caps on overall prices, electricity retailers are required to keep price increases for each customer class to less than 3 per cent of the benchmark.  This cements-in distortions, making it easier for new retailers to avoid those customer classes whose tariffs have become highly unprofitable -- for example those with off-peak water heating.  The danger is that the host retailers will gradually be left servicing the highest cost customers.

This distortion will be intensified by the lack of "smart" household meters, which means all household customers are treated as having the same daily electricity use profile.  Such treatment may be unavoidable but encourages firms to cross-subsidise high volume customers, even those with air conditioning units that cut in just when the energy costs are highest.

The Victorian Clayton's form of Full Retail Competition was introduced during the same week as the UK announced a total deregulation of electricity prices.  Previously, the UK had Victorian-style price caps to phase-in full price deregulation.  This worked, because the price caps were introduced when energy costs were falling and therefore did not bite.

Victoria is unlikely to have such luck.

Price caps that hold down average prices and prevent them adjusting to shifting costs sap business innovation, deny customer choice and increase firms' risks of incurring huge losses.  Victoria must therefore avoid further delays to Full Retail Competition and allow competition its rightful role as the price regulator.

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