The Regulatory Wave of the Future

Having pushed governments to their democratic limits, green groups are now increasingly focusing on leveraging the financial sector to achieve their regulatory ends.

Two tests case of this strategy will be played out in Australia over the next week.  The first is a campaign run by the Wilderness Society against the Tasmanian timber company Gunns Ltd.  The second is a Greenpeace campaign against the large biotechnology multinational Monsanto.  Both campaigns attempt to use advice from friendly financial analysts to convince investors, specifically banks and superfunds, to stop these firms from undertaking activity.  In each case, the disliked activity -- logging of native timber in the case of Gunns and developing and selling genetically modified seed in the case of Monsanto -- is approved by governments, is profitable and is central to the firms' financial strategy.

This is not just some more green madness.  Banks and super funds are actively considering the strategy.  Indeed BT, a large Australian funds management company, now owned by Westpac, has announced that it will abstain from voting during Friday's general meeting on whether Gunns accedes to the Wilderness Society demands.  That is, it has decided not to express an opinion on behalf of its unit holders on a decision, which on the Wilderness Society's own research, will reduce earnings per share by 11 per cent and increase the riskiness of the Gunns' earnings profile.

Why would otherwise hard-nose bankers support actions that reduce returns?

Well, the reasons are three fold.  First the banks are concerned with protecting their brand name.  The new stakeholder groups, such as the Wilderness Society and Greenpeace, are masters of brand-mail.  They have, and will, undermine the reputation of firms that do not support their views;  witness the anti-Nike Campaign.  On the other hand, they will promote the brands of firms that do cater to their desires, as witnessed by Westpac's ascendency to the top of the "ethical ratings".

Second, the banks are concerned with regulatory risks.  The new stakeholders have been highly successful in getting what they want through the democratic process.  The banks may make the judgement that, while reluctant now to accede to the new stakeholders' demands, government eventually will.  Moreover, individual banks may see the new stakeholders as ideal partners in lobbying for regulations that give them a competitive advantage.

Third, banks may be lured by the promised wave of "ethical investment".  Ethical funds, which take into consideration non-financial factors in the selection of investments, are growing at a double digit rate (albeit from a miniscule level).  Moreover, many large industry funds, which play a pivotal role in the funds management industry, are particularly enamoured with ethical investment principles and may direct monies accordingly.

The strategy is, however, flawed -- not only from the perspective of society and investors, but from the banks that jump on the bandwagon.

There is no doubt that the risk of brand-mail is real and the results are personally painful to the executives involved.  However, there is little evidence that it has a real impact in the market place.  Just look at Nike.  Despite the-mother-of-all-campaigns it has out-performed its competitors in terms of market share and stock value.

While the new stakeholders have influence beyond their numbers, it is, in the end, limited.  In the case of Tasmania, they have successfully locked away the lion's share of the State's forest and shut down all logging companies, bar Gunns.  The cost of this is now clear to Tasmanians, and the community strongly supports Gunns.  Indeed, Gunns has what other firms would die for:  strong bipartisan community support, resource security guaranteed by a joint Act of the Commonwealth and Tasmanian parliaments, and a union militantly on side.  This is why the Wilderness Society is seeking solace in Sydney.

Investors are likely to become more discerning about the ethical standards of their investments.  However, as with society in general, the view of what is ethical in the market will vary widely.  To some, like Greenpeace activists, GM crops are unethical.  On the other hand, to the better informed, banning GM crops from people scraping a living out of subsistence agriculture, is not just unethical but inhumane.

In the end, however, financial result will rule.  Firms like Gunns and Monsanto which have been star performers in an otherwise dismal market will always be able to get low-cost funding -- even if a few banks say "no".

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Tunnel Vision With Cars

Road construction is proving to be the Bracks Government's Achilles heel.

The Labor Government appears to unable to avoiding empowering NIMBYs, the anti-car brigades and other special interest groups.  It succumbed again to these groups this week when it decided not to proceed with further investigation of a tunnel connecting the Eastern and the Tullamarine freeways.

While such a tunnel is no lay-down-misere, it clearly warrants further investigation.

The Kennett Government first proposed the project.  Although previously critical, Labor in Government agreed to investigate it and its high level Infrastructure Planning Council offered support for it.

Instead of following the Infrastructure Planning Council's recommendations to investigate the project within a statewide framework, the Government opted for a more narrowly based review.  It gave the task to the Northern Central City Corridor Study (NCCCS).  This considered it from the limited perspective of the areas just north of the city.  Clearly the effect of a tunnel on the area through which it passes needs to be considered.  However, its statewide benefits potentially overwhelm the local issues as the area functions as a major transit hub.

The NCCCS went further to bias the result against a tunnel option.  It allowed its community consultative committee to become stacked with anti-car and anti-tunnel advocates and to include few voices with a statewide perspective.  It adopted a target of reducing the proportion of total trips taken by cars.  Since a tunnel would redirect traffic from routes outside the NCCCS study area, it would necessarily violate this target and in doing so benefit the wider community.

Even so, the NCCCS could not avoid giving the tunnel high marks.  It recognised the tunnel would significantly reduce congestion in the local area and by reducing congestion help public transport demand.  It acknowledged the tunnel would not harm heritage values and would provide planners with flexibility to improve amenity values.  It also accepted that the tunnel would improve air quality and reduce noise.  Indeed, the study found "improved public transport and the east-west tunnel would best address the objective of catering to increased residential population in the inner north and surrounding area".

But the study recommended against the tunnel.  It did so partly because it failed to consider the many economic benefits it would bring to areas other than the inner north area.  In addition, it failed to consider that commercial users place a particularly high value on such a tunnel.  It also evaluated the tunnel option solely on a no-toll and no-public/private partnership basis.

Despite all these biases, the best tunnel option (the study examined three) was estimated to have a benefit/ cost ratio of 1.2:1 (benefits exceeding cost by 20 per cent).  This is high enough by itself to warrant further study.

But, under pressure by the NIMBYs, the study disregarded its own calculations and recommended against a tunnel.

For its part, the Government bowed to the wishes of a noisy group of appointees which adopted a biased, local perspective.

Given that the faults of the NCCCS are enshrined in the Government's Melbourne 2030 Planning Strategy, we can expect this process to undermine road development into the future.  So much for Government's motto of "Linking Victoria for all Victorians".

Power in ACCC's Hands

Allan Fels, in his last month at the ACCC, left a poisoned chalice to successor Graeme Samuel.  Fels opposed a consortium's acquisition of the giant Loy Yang generator, putting at risk the resolution of its financial distress.

Loy Yang is one of the lowest cost electricity generators in Australia.  But former Treasurer Alan Stockdale got a great price for the asset, a price paid by buyers who expected electricity prices to rise.  Instead they fell and the firm has spent three years dancing on the edge of bankruptcy.

A consortium comprising AGL, Tokyo Electric and the Commonwealth Bank is the only white knight offering to prevent this.  In opposing the move, the ACCC wants to see an electricity market with retailers, line companies and generators under separate ownership.  It argues that with the takeover of Loy Yang AGL would become an integrated generator and retailer of electricity, which would be followed by Origin and TXU seeking similar liaisons.  The upshot would mean restricted opportunities for new players to break in.

It is doubtful that the ACCC should place itself in the position of imposing its own favoured industrial structure on a sector but, that aside, its opposition is harmful to the industry and consumers.

Loy Yang's parlous financial state makes it a classic "failing firm".  Although it is not about to cease producing electricity, its financial distress means that retailers are somewhat cautious in taking out longer term contracts with it.  In his prime at the ACCC, Allan Fels argued forcefully that a "failing firm" made a strong case for overriding opposition to mergers that bring greater concentration.  Such a firm, as well as denying value to shareholders and others, means a poorly working market.

In addition, the ACCC failed to understand the changes taking place in the electricity industry.  Retailers have taken energetic steps to operate at arms length from other producers in the electricity chain, even where they have common ownership.  AGL's retailer Agility is fully autonomous from the rest of the company, while Powercor actually sold its own host retailer to Origin.

These developments stem from the retail manager's need to minimise the risk of inadequate electricity contract cover.  Prices can suddenly increase a hundred fold and the uncontracted retailer can face enormous losses.  The retail manager therefore requires the maximum available sources of energy of energy contracts and cannot afford to jeopardise supplier arrangements.  Favouring a particular source, divulging contract information, etc. will make others reluctant to deal.  Hence though regulation requires "chinese walls" between different company activities, separation is now driven by commercial factors.

It must also be remembered that AGL is only taking a 35 per cent stake.  The acquisition's co-owners would not allow AGL to obtain better value from the shares than they get for themselves.  AGL would, therefore, readily offer any assurances that it would operate its interests independently, because it automatically faces these same disciplines from its own and its partners' self interest.

But all this requires some means by which Graeme Samuel can avoid the Fels poisoned chalice and not emerge looking like a pansy.

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Charities' That Are Really Political Lobbyists Must Be Exposed

This is not about the Government silencing critics.  It's about accountability.

The response of the non-profit sector to the Howard Government's draft charity legislation is an example of the sector's aversion to accountability.

The legislation was condemned as an attempt by the Government to "silence its critics".  This response itself illustrates the problem, which is that a growing proportion of the sector has moved away from providing services to political lobbying.

This trend has been masked from the community by poor standards of transparency and accountability and is not only at odds with the original intent of the law but with the expectations of the community.  It has also spawned dangerous liaisons between business and political parties and charities.

The draft legislation correctly attempts to limit the politicisation of the sector and its attendant problems.

Over the past decade successive governments have indirectly relaxed the definition of charities by allowing ministers to give gift-recipient status for a wider range of purposes, including the environment, culture, education and health.  This has resulted in a large increase in the number of "charities".

The draft legislation accepts the need for a wider range of charitable purposes and for these to be explicitly spelt out in the law rather than being left to the discretion of ministers.

The bill also takes the next step and codifies a short list of disqualifying purposes.  These are:  illegal activities;  advocating a political party or cause;  supporting a candidate for political office;  and attempting to change the law or government policy.

The first three disqualifying purposes, which so far have received little attention, will threaten the charity status of several organisations.

For example Greenpeace, which regularly engages in trespass and other breaches of the law, would have its charity status threatened by a requirement to not break the law.  The Wilderness Society and many other environmental groups regularly run marginal-seat campaigns during elections and their charity status would be threatened by a rule against such action.

Indeed, green groups and the green parties are increasingly acting as political tag teams.  This behaviour is a matter for them, but it should not be funded by government.  The law excludes political parties from becoming charities.  It is vital that it also prevents charities from becoming de facto political parties.

The most controversial issue in the draft legislation is the clause restricting lobbying, that is, attempting to change the law or government policy.  The reaction from the sector on this clause was disingenuous.  The draft does not rule out lobbying.  What it does is exclude organisations from accessing charity status whose "dominant purpose" is lobbying.  Charities such as Anglicare, St Vincent de Paul and the Red Cross that are primarily involved in service delivery will not be affected and will be able to lobby governments on behalf of their clients.

The clause is consistent with US and Canadian charity laws, and both those countries boast far more vibrant charitable sectors than Australia.  In the US, charities that have the most common legal status are able to spend up to 5 per cent of their revenue on lobbying.  The Internal Revenue Service audits them each year and requires that their lobbying activities be fully disclosed and itemised.

The Australian draft legislation poses a challenge for some environmental groups.  They often do not provide any services other than lobbying.  These groups would be forced to change, and, I think, for the better.  For example, instead of just chaining themselves to trees, the Wilderness Society might be forced to get their hands dirty and plant trees or hire scientists rather than political activists.

Charity status comes at great cost to taxpayers and with huge benefits to organisations.  Charity status, in effect, gives an exemption from all Commonwealth, state and local taxes.  The taxpayers' subsidy to charities stands at $1.4 billion a year and is growing rapidly.  The primary beneficiaries are the employees of the charities, who are exempt from fringe benefits tax.

Any responsible government must restrict access to this privileged status.  It must also guard against the privilege being exploited, and ensure "charity" status does not give its holders improper political standing.  Importantly, government must also ensure that the personal benefits that come with the status do not pervert the sector.

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Charitable Lobbies

The Treasurer has assured charities that the Charities Bill 2003 Exposure Draft, does not attempt to restrict criticism of public policy by recognised charities.  There is no change from existing practice.  But should there be?

Charities used to help the poor, now they want to overcome inequality.  Russell Rollason of Anglicare said on Thursday, "Is the role of charities and churches simply to apply band aids to the victims of our competitive society or should charities actively contribute to a fairer more just Australia?"  Why not just run for Parliament, Russell?

Charities, and other public beneficial organisations, argue that times have moved on.  Charity is not all soup kitchens, it is advocacy work.  To the layman, that means lobbying.  It means lobbying government to change the law and/ or provide programs for the purposes that the organisation argues are beneficial.  Should other lobbies be similarly tax-advantaged -- business, for example?  I am not proposing it, but if one organisation is granted a tax-advantage for lobbying, why not another?

Should a government not inquire from time to time if a group has changed the way it does business?  At present, the ATO does not have the resources to audit tax-advantaged organisations.  At present, and until 2004 when the law changes, it is not even possible to ask the ATO if an organisation is a charity!  This is not to say that funds are improperly used or that organisations are not audited under State legislation, but the department that gives them Commonwealth tax status does not test it.

Then there is the question of the lobbying arm of charities.  For example, the Australian Council of Social Services does not undertake charity work, it is a policy and political lobbyist.  Should such organisations have tax-free status?  Indeed, ACOSS receives direct government funding for these purposes.  This is hardly a government that is about to quieten the welfare or other lobbies.  The Commonwealth funds just about every peak lobby group in the charity, environment, migrant, arts, indigenous, human rights -- ad infinitum -- sectors.

What if the government were to fund the ATO to run an audit on a range of organisations and found that they were spending more time on lobbying than charity?  It could remove their status.  In doing so, it would have to argue a case of what is too much lobbying.  It may even follow the US path of specifying how much lobbying may be undertaken by charities.  Governments have the right to test the credentials of charities, and they do not have to accept the shift from amelioration work to policy-work.  However, it is probably unwise to be too specific about how much policy-work is acceptable.  After all, governments want policy work from NGOs.

A way through this, the need for public scrutiny and the insistence that charitable work involves lobbying, is to let the donors decide.

If charities were required to publish how much money they spent in raising their funds, and how much they spent on policy work, then donors could decide whether or not to give.  The donor market would be better informed, not just of "the cause" -- the pictures of felled trees, and hungry children -- but the efficiency with which the funds are gathered and applied to the purpose, and how much is spent on the conferences, education, propaganda and lobbying.

In 2004 it would be good to be able to check the ATO website for an annual form lodged by these organisations that told the story not only of charity status, but how efficient they were, and whether they preferred to be policy people, or help out in the old way.

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