Broadcasting Planning and Entrenched Protection of Incumbent Broadcasters

EXECUTIVE SUMMARY

Broadcasting planning and licensing should be primarily a technical function facilitating orderly operation of broadcasting services.  Instead, policy makers and regulators have used it as a tool for economic control of the nature and rate of development of broadcasting services, promoting private interests ahead of the public interest.  The recent decisions on digital broadcasting are yet another example of the protection extended to private interests with little concern to its effects on social welfare.

The current broadcasting planning and licensing arrangements are highly biased in favour of incumbent broadcasters and severely restrict new entry competition.  The major reasons for this include:

• conservative and restrictive interpretation of planning and licensing provisions;
• technical criteria that are weighted against intensive use of spectrum to provide more services;
• allocation of channels that discriminates against demand for additional services in larger cities;
• allocation decisions that rely heavily on information in submissions by vested interests rather than on independent analysis of demand;
• undue concern by the regulator with issues of commercial viability of services that should be left to markets to determine;  and
• apparent bias towards allocating scarce and highly valuable spectrum to community radio use likely to generate benefits of low or uncertain value.

Broadcasting planning and licensing should concentrate on facilitating orderly operation of broadcasting services rather than being used as a regulatory mechanism to restrict the operation of a legitimate commercial activity.  The efficiency of spectrum planning and licensing could be improved by:

1. The broadcasting spectrum not being managed differently from the rest of the radiofrequency spectrum.  As a scarce resource, it should be applied to the most valuable uses as determined by the market and not by regulators attempting to outguess the market.  All the spectrum not set aside for national and community services should be allocated by auction to the highest bidders.
2. Broadcasting licence fees should reflect the scarcity value and the amount of spectrum used.
3. Licences to conduct a broadcasting business should be separated from spectrum property rights and should be issued separately.  These licences should be concerned only with the social obligations of broadcasters.
4. Broadcasters should not be extended any special protection from competition.  The market should be allowed to determine the number of commercial broadcasters.
5. The amount of spectrum allocated to community broadcasters should be determined after extensive cost-benefit analysis of the benefits accruing to society.

INTRODUCTION

The public interest has seldom been a priority for policymakers and regulators responsible for the planning and licensing of broadcasting services in Australia.  Apart from the early days of radio -- when new entrants were actively encouraged to take up licences for the provision of new services -- policymakers and regulators have repeatedly put the interests of incumbents ahead of those of new entrants and consumers.  Although the announcement of policies is invariably dressed up in rhetoric which pays lip-service to the public interest, claims that the community is well served by policy simply do not stand up even to minimal objective scrutiny.  Most of the significant policy changes since the Second World War have been shrouded in controversy.  The recent decisions on the introduction of digital television are merely the latest manifestation of an ongoing pattern whereby coalitions of powerful political and media interests endeavour to protect private interests without much concern for the effects on social welfare.

The principal function of planning and licensing has always been to facilitate orderly operation of broadcasting services.  Although this is primarily a technical function, policymakers and regulators have turned it into a tool for economic control of the nature and rate of development of broadcasting services.  Indeed, there is considerable evidence, over many years, that policymakers and regulators have been "captured" by commercial and political vested interests and have used this function to promote private interests ahead of the public interest.  The history of Australian broadcasting is littered with examples of costly mistakes by governments intent on protecting the private interests of established broadcasters with little consideration of market forces and consumer demand.  As a result, the Australian public has regularly been denied access to popular services that people in other countries had been enjoying for many years.

With digital transmission technology, the broadcasting industry is at the threshold of massive change.  The introduction of digital technology is much more than a change in the way broadcasting signals are delivered.  When digital conversion is completed in a few years, the television industry will be completely different from what it is today and will have the capacity to supply a much broader range of services.  The conversion presents enormous opportunities for the development of efficient, market-oriented industry structures that maximise economic and social benefits to society.  The current, highly prescriptive licensing policies -- protecting as they do the interests of commercial broadcasters at the expense of everyone else -- need to be changed to avoid waste and to ensure that the industry is not encumbered with inefficient structures for decades to come.  Now is the time to rethink the digital television and datacasting decisions and do away with their highly protectionist mechanisms rather than place a burden on future policymakers to correct what will undoubtedly prove to be very expensive mistakes.

Orderly management of the broadcasting spectrum is not a unique problem.  It faces the same technical and property rights issues as orderly management of the broader radiofrequency spectrum of which it is a part.  There is no reason why the approach so successfully used for the allocation of spectrum to telecommunications service providers could not be used equally efficiently to allocate the broadcasting spectrum.  Policymakers and regulators should stop trying to outguess market outcomes and should allow the market to do that at which it is best.  A pro-market approach to planning and licensing of the broadcasting spectrum would ensure that maximum possible use is made of a highly valuable scarce resource and that the available licences are allocated to the most valuable economic and social use.  This paper highlights the inappropriate use of regulation in broadcasting planning and argues for a system where planning decisions are driven by market incentives rather than by regulators exercising their judgments about market developments.

HISTORY OF FAILURE

Broadcasting planning and licensing in Australia have a very poor record.  Their history is one of inappropriate use as a de facto constraint on increased competition to protect the interests of incumbent broadcasters rather than to promote the public interest.  Although several controversies have erupted on occasions when public dissatisfaction with the "institutionalised" protection became extreme, the remedies that followed have typically been short-lived.  It is almost beyond belief that generation after generation of policymakers have allowed this extraordinary protection of incumbent commercial broadcasters to continue for three-quarters of a century, particularly when assistance to other industry groups has been greatly reduced.

The protection of incumbent broadcasters is deeper than what might be expected from industry capture of regulators.  Our political system gives the ultimate power for the licensing of broadcasting to politicians whose own short-term interests are more likely to be better served by keeping powerful media proprietors friendly.  Fearing a political payback, politicians have been reluctant to introduce policies potentially detrimental to the commercial interests of established players.  The recent decisions on digital television and datacasting provide a vivid contemporary example of such behaviour.  At the same time, regulators have felt compelled to act in accordance with the perceived wishes of their political masters.  To do otherwise would run the risk of being criticised or overruled by the politicians, as happened on the rare occasions when regulators attempted to exert a degree of independence in their operations.  There is no question that political influence has played a major role in the planning and licensing decisions of broadcasting regulators.  Myles Wright, chairman of the Broadcasting Control Board (ABCB) between 1966 and 1976, for example, readily acknowledged that the Board's plans were "very substantially influenced by political considerations" (Armstrong, 1979).

Search for the Public Interest Discussions of the "public interest" that commissions are supposed to seek frequently seem unreal.  Usually, the public interest is conceived as a balancing by a commission of the interests involved in regulation.  In its search for an equilibrium among the interested parties, it is assumed that a commission will be guided by its legislative mandate.  Unreality begins to creep in, however, as soon as it appears that the commission's enabling statute may in fact provide only the most general guide to the goals of regulatory policy.  Left largely to its own resources, which are apt to be weak relative to the strengths of the organised parties, a commission will probably be guided by dominant interests in the regulated industry in its formulation of the public interest.  Thus the public interest may become more private than public .... How shall the commission define the public interest in the light of dominant factors in a regulatory situation?  The private parties compete for the right to identify their respective interests as the public interest.  The commission must determine the weight which should be given to the rival demands and the extent to which governmental power and authority should be used to modify relationships among major groups in a regulated industry.  Lacking effective and continuing political support and faced with organised opposition of the parties in interest, a commission finds its survival as a regulating body dependent heavily on its facility in reaching a modus operandi with the regulated groups.  The principal condition of its survival may be its willingness to accept the statement of the parties in interest concerning the nature of the regulatory problem and the way in which the demands of the rival parties should be resolved.  The limits of regulatory policy tend to be set by the acceptability of regulatory policies to the dominant parties of interest. Extract from:  Bernstein, M.H., (1955), Regulating Business by Independent Commission, Princeton University Press, Princeton, New Jersey, pages 154–56.

Apart from the pioneering days of radio when commercial broadcasters required substantial encouragement to invest in an unproven medium, demand for broadcasting licences has always outstripped supply.  The supply was unnecessarily restricted by the licensing authorities, not because of technical constraints but primarily because of commercial considerations.  Cole (1966) was the first to expose the ongoing but unsubstantiated claims by the then regulator that expansion of radio services in Australia had been held back by spectrum shortages.  Cole quotes testimony to the Joint Parliamentary Committee on Broadcasting from both the Postmaster-General's Department and the Federation of Commercial Broadcasting Stations acknowledging the technical possibility of accommodating several hundred stations on the available spectrum as early as 1942.  The regulatory authorities, however, persevered with the baseless claim that spectrum shortage was to blame for no growth in metropolitan radio for another 30 years.

Finally, in 1974, after widespread criticism, the ABCB was forced to make the embarrassing admission that it was possible to double the number of AM radio stations by the simple expedient of changing planning policy parameters (Minister for the Media, 1974).  Momentous as it was, even that admission continued to conceal the much larger capacity for services that could have been possible by more efficient use of the available spectrum.  For example, regulatory authorities in the United States and Europe were able to accommodate up to twenty times more stations even though they were faced with tighter constraints on the use of the same spectrum.  In Australia, the ABCB's planning criteria appeared to have been focused exclusively on a high degree of technical excellence without regard for the considerable benefits that the community would have gained from more services.  Indeed, in 1973, the ABCB publicly boasted about the "superiority" of its planning approach:

Because of our remoteness, and the consequent lack of interference from other countries, Australia and New Zealand have been able to share the whole of the 100 medium-frequency channels among 200 stations;  with central planning this has provided a service much superior to that in the U.S.A. or Europe, (each with about 4,000 stations) (ABCB, 1973:20).

MAJOR CONTROVERSIES

The development of Australian broadcasting has a disgraceful record of attempts by policymakers and regulators to burden major development initiatives with ill-conceived and inefficient schemes.  Typically these actions have been motivated by a desire to insulate incumbent operators from increased competition.  The results have generally been disastrous and in some cases have subsequently required costly remedial schemes.  For example, the short-sighted decision to use the international VHF FM band to accommodate television services in the early 1960s necessitated their costly relocation to other spectrum bands when FM radio was introduced.  While there are many broadcasting policy decisions that have generated considerable controversy, three in particular have received widespread condemnation.

FM Radio Decision

FM radio has operated in the United States since 1940, but was not introduced in Australia until 1974, even though considerable unsatisfied demand for new radio services had existed for decades.  Interest in FM radio had been quite strong, with experimental stations being established in Sydney and Melbourne as early as 1947, and subsequently in Brisbane and Adelaide.  Indeed, in 1948, the Government announced its intention to use VHF FM for the provision of additional ABC services and to prohibit its use for commercial services.  No services, however, were introduced.  Then, following an ABCB inquiry in 1957, FM "was not proceeded with further at that stage" because, although the introduction of FM was supported in some quarters, it was opposed by a "considerable body of opinion" (primarily incumbent broadcasters) (ABCB, 1972, parenthesis added).

Pressure for the introduction of FM continued throughout the 1960s and a new ABCB inquiry was commissioned in 1970.  In 1972, the Government accepted that inquiry's recommendation for the introduction of FM in the UHF band rather than the international VHF band.  This made the proposed Australian service unique as no other country had adopted, or had indicated an intention to adopt, such a system.  Indeed, at the time, a receiver for UHF FM services had not even been developed.  The controversy surrounding this decision has many obvious parallels with the current proposals to introduce a unique HDTV system as part of the analog-to-digital conversion of television.  Like the current decision on digital television, the UHF FM decision was widely criticised.  Unlike the current situation, however, opposition to the decision was championed by the influential Senate Standing Committee on Education, Science and the Arts (McClelland Committee).  The Committee's second progress report was highly critical of the decision:

In 1972, the Broadcasting Control Board recommended that Australia develop an FM service, but in the UHF, or ultra high frequency region.  There is no FM radio in this region anywhere in the world, and this recommendation would require the development of a new set of standards and new technology.  We ... question the recommendation to develop a UHF FM system.  Our questioning is based on evidence we have had from the Board itself, and from technically qualified people outside the Board.  The technical evidence we have leads us to believe that there are technically feasible alternatives open to enable the service to be accommodated in the international (VHF) band, where every other FM service is located, and that the Board has not adequately considered these alternatives, both from the technical point of view, and from the economic and social point of view.  We also have evidence and information which lead us to conclude that the disadvantages of developing a UHF service are enormous, and we believe that every possible avenue open to avoid this course should be evaluated, and their costs calculated, in view of those disadvantages (McClelland Committee, 1973:19).

The final chapter in the FM broadcasting decision was the appointment of an independent inquiry, along lines proposed by the McClelland Committee, that recommended the introduction of VHF FM and the clearing of television services from the international FM band (Independent Inquiry into Frequency Modulation Broadcasting, 1974).

The Pay-TV Decision

The introduction of subscription television in Australia also was preceded by an extraordinary series of delays to insulate established commercial television operators from competition by new services.  Despite its awareness of strong demand as far back as the early 1970s, the Government did not allow the introduction of the service until the 1990s.

There has been considerable representation to the Board and the Minister concerning the possibilities of establishing, in the more populous areas of Australia, widespread cable systems to distribute television programmes and other material.  However, because of the wide range of complex policy and legal considerations involved in any such development, particularly in relation to the existing television services and their continued operation, ... no such services have been authorised (ABCB, 1973:45).

Although introduction of subscription television "as soon as practicable" was recommended by the Australian Broadcasting Tribunal (ABT, 1982) the government of the day did not act on the recommendation.  The issue continued to be considered following a change of government in March 1983.  In September 1986, introduction of pay-television was banned for at least four years to give regional commercial television operators time to adjust to other policies for the introduction of competitive services in their markets.  Why pay-TV services were also banned in metropolitan markets not affected by those policies was not explained.

What Was Wrong with the UHF FM Decision In 1972, the Government accepted a recommendation by the Australian Broadcasting Control Board for the introduction of FM radio using the UHF band.  Internationally the VHF band was used for FM radio.  The decision was controversial and was widely criticised.  It was condemned in a highly critical report by the Senate Standing Committee on Education, Science and the Arts (McClelland Committee, 1973).  The Committee's major criticisms included: UHF FM system would be unique in the world: Everywhere, with no exceptions, the service has been in the VHF band (p. 18). The Board provided an inconclusive account of "possible" or "potential" interference between FM radio services and television services operating in the same frequency band. We have had evidence, from technically qualified people, that these difficulties could be fairly cheaply overcome, but nowhere does the Board give any evidence of having investigated and costed the methods of overcoming them (p. 19). The wide separation between channels used by the Board considerably understates the number of services possible in the unused portions of the VHF band. The Board's estimate of the number of stations ... is based on a certain spectrum space separation between channels (0.8 MHz).  But there is an intriguing reference in the Board's report to there being "some technical justification" for a closer spacing (0.4 MHz) which would greatly increase the number of stations available.  Yet, incredibly, the Board did not develop or explain this point further.  Technical evidence we have had supports the closer spacing, and technical documentation from reputable overseas sources affirms the support (p. 20). The Board overstressed claimed advantages for UHF FM stereophonic and quadraphonic broadcasting for which standards had not yet been developed and for which consumer demand was unknown. While acknowledging the superiority of VHF for FM if space can be found, the Board made some point of stressing the claimed advantages of stereophonic and quadraphonic broadcasting in UHF FM, where it says new standards could be developed, which would be better than those presently used in VHF FM overseas.  In its more recent statement, tabled in Parliament on 7 June 1973, even greater stress was laid on this, and by the time the Board appeared to give evidence, it appeared to be a major reason.  We seriously question this, firstly because the major benefit of FM in our view is that it makes more stations available, which has nothing to do with stereo or quadraphonic broadcasting.  Secondly, we believe that the stereo standards used in FM overseas have proved satisfactory to music lovers.  Thirdly, we wonder what proportion of the population will be interested in stereo equipment anyway, let alone quadraphonic equipment.  The Board appears to have made no assessment of the interest (pp. 20-21). VHF receivers would be cheaper because of worldwide economies of scale, rather than having to be made especially for Australia as would be the case for UHF.  Cheaper receivers would boost the adoption rate by consumers.  Also, because the number of sets already in Australian homes was "already equal to about 5 years" sales of UHF sets' there was a greater incentive for commercial investment in FM services (p. 22).

Finally, in 1992, the Government decided to allow limited introduction of pay-television services using satellite transmission.  The decision was largely motivated by a desire to make the sale of the government-owned, financially-troubled, domestic satellite operator AUSSAT more attractive to prospective buyers.  No consideration was given to alternative delivery platforms such as cable or MDS that were permissible under the new 1992 broadcasting legislation.  However, when an entrepreneur began to accumulate MDS spectrum licences in major cities with the intention of providing a pay-television service, the Government amended the legislation prohibiting such services until 31 December 1994 -- a date beyond the originally anticipated start of the satellite services. ⁽¹⁾

As a further protection of incumbent free-to-air broadcasters, pay-television services were banned from selling advertising or making sponsorship announcements before 1 July 1997.  After that date, subscription fees were to remain the predominant source of revenue.  Anti-siphoning provisions were also introduced giving free-to-air broadcasters the right to broadcast major sporting and other specified events ahead of pay-television services.  Pay-television operators cannot buy the exclusive rights to those events.

The folly of the arbitrary restrictions on the development of pay-television was ultimately demonstrated by the utter failure of the satellite pay-television model originally mandated by the Government.  The current pay-television services on offer to the Australian community have nothing in common with the Government's original model.

The Digital Decision

The decision to introduce digital television in Australia is perhaps the most extensive overt protection yet offered to commercial broadcasters.  The decision has been widely and strongly criticised by media and independent observers alike.  Indeed, according to newspaper reports at the time of the initial decision, allegedly it was also widely opposed by government departments.

The Government's initial decision was very similar to proposals advanced by existing free-to-air television operators.  It mandated the introduction of high-definition television (HDTV) requiring a full 7-MHz channel for its delivery, rather than standard digital television services, four of which could have been accommodated in the same spectrum space.  This makes the Australian position unique.  No other country has mandated HDTV, although the USA permits it.  Existing free-to-air television operators are being given free use of spectrum for digital television during the mandated simulcast period of at least eight years, but are required to give up their analog channels (also 7-MHz) at the end of that period.

The licensing of additional competitive television services was banned until 2007. ⁽¹⁾  However, as all the available television channels in major cities will be tied up during the simulcast period, competitive entry is effectively blocked until at least 2009.  Further protection of free-to-air television operators is being provided through an artificially restrictive definition of datacasting services to prevent the development of new television-like services.  In an apparent concession to pay-television operators, use of the digital spectrum by free-to-air services to provide multiple standard television services has been prohibited pending a review in 2005.

The Minister for Communications cited "special circumstances" as the basis for the Government's decision.  He said that while the Government "would normally welcome additional competition, in any industry, as healthy and likely to lead to benefits for the consumer" it makes no apologies for the special treatment given to existing television operators.  According to the Minister:

Australia has a world class TV system, with a strong local content component and a highly skilled production sector.  This could be threatened if the existing networks had to battle a new competitor at the same time as paying huge sums to transfer to digital broadcasting, or if Pay-TV networks found themselves faced with significantly stronger free-to-air opponents while still trying to find their feet (Alston, 1998).

The Australian Financial Review, in an editorial the day after the announcement, labelled the decision "information age mockery" and was more brutal in the assessment of its motivation:

This decision was not made on the basis of an open and transparent public policy review, but was designed to grant a political favour -- from which it expects a political reward -- to the incumbent broadcasting oligopoly (25 March 1998).

As subsequent developments demonstrate, the protection of incumbent broadcasters was central to all the elements of the digital television decision.  To ensure the effectiveness of its ban on the licensing of new broadcasters, the Government has developed a convoluted set of regulations that severely constrain the development of new services such as multicasting and datacasting.  As acknowledged by Senator Alston (1999), both the ban on multichannelling and the highly restrictive definition of datacasting services were intended to prevent "back door" competitive entry into broadcasting.  Overall, the government decision will result in a highly wasteful use of spectrum and severely constrained consumer access to new services that would otherwise have been possible by the introduction of digital broadcasting.  While the decision provides considerable benefits to incumbent broadcasters, the benefits accruing to consumers will be small and will undoubtedly retard the migration of viewers from analog to digital television.  It will also severely constrain industry development and the delivery of innovative services.

THE PLANNING AND LICENSING PROCESS

Traditionally, all aspects of the planning and licensing of radio and television services were controlled by statutory powers exercised by a minister of the Commonwealth Government.  The minister had ultimate responsibility to determine what technologies were permitted for the delivery of broadcasting services and the number, geographic distribution and all technical operational criteria of the permitted services.  The minister also issued licences to authorise the operation of commercial and community services.  Prior to the establishment of the ABCB in 1949, all the planning and licensing powers were vested solely in the minister.  From then until 1987, in making licensing decisions, the minister was required to consider recommendations made by the ABCB after a public inquiry, but was not bound by those recommendations.  The issue of a licence was solely at the discretion of the minister with no requirements to give reasons for a decision.  Commercial considerations, particularly the protection of incumbent broadcasters, played a major role in the issue of licences.

With the establishment of the ABT in 1987, the power to grant a licence was transferred from the minister to the regulator.  The minister, however, retained the power to determine the service specifications and to call for applications to be lodged with the ABT.

Before granting a licence, the ABT was required to hold a public inquiry including consideration of the impact that the proposed licence would have on the "commercial viability" of existing services.  This arrangement remained in place until 1992.

A new planning and licensing policy, promising a considerable advance on the arrangements applying previously, was established by the Broadcasting Services Act 1992 (BSA).  The Act provides for a three-stage process for the allocation of the available broadcasting spectrum for the delivery of radio and television services throughout the country.  What was envisaged was an integrated national plan for broadcasting services based on the different levels of demand likely to exist in different areas and on a range of social and technical considerations.  Within the constraints set by the availability of spectrum, the process also aimed to provide greater scope for market forces to determine the viability of additional services and to allocate commercial broadcasting licences (introduced a price allocation mechanism).

In brief, the three stages of the planning process are:

1. Setting of priorities for the development of detailed area plans and thus establish the sequential order for the licensing of new services in different areas of the country over a period anticipated to last several years.
2. Development of frequency allotment plans identifying the notional number of services to be made available in particular areas throughout Australia.  The number of channels available for allotment is highly dependent on the technical criteria chosen by the planners.
3. Development of licence area plans, using the frequency allotment plans as a guide, to determine the number and type of services (commercial, community or national) to be licensed in a given area.

PLANNING AND LICENSING CRITERIA

According to the explanatory memorandum, the planning and licensing provisions of the BSA were intended to make the planning process "more open and accountable to its users, ... to minimise barriers to entry to the broadcasting services industry" and to facilitate competition "through the quicker introduction of extra services".  The planning and licensing functions were assigned to the Australian Broadcasting Authority (ABA), subject to ministerial directions on the reservation of spectrum capacity for national and community services.

In the exercise of its planning functions, the ABA is required by section 23 of the Act to promote the objects of the BSA "including economic and efficient use of the radiofrequency spectrum" and to have regard to:

1. demographics;  and
2. social and economic characteristics within the licence area, within neighbouring licence areas and within Australia generally;  and
3. the number of existing broadcasting services and the demand for new broadcasting services within the licence area, within neighbouring licence areas and within Australia generally;  and
4. developments in technology;  and
5. technical restraints relating to the delivery or reception of broadcasting services;  and
6. the demand for radiofrequency spectrum for services other than broadcasting services;  and
7. such other matters as the ABA considers relevant.

A clear intention of the legislation was that the commercial viability of existing or proposed services was not to be a major consideration in the allocation of licences as had been the case with the previous legislation.  However, the distribution of channels throughout the country (the primary function of planning) was to be guided by the broad economic considerations listed in section 23.  As stated by the explanatory memorandum:

It is at the planning stage that judgements will be made about the number and type of services to be available in market areas.  There will no longer be a provision at the licence allocation stage for consideration of whether or not there should be another service of a particular category in a licence area ... .

The legislation does not provide specific directions to the ABA on the exercise of its planning function.  While promotion of the objects of the BSA is required, the relative importance accorded to the different objects is a matter for the ABA to determine, as is the relative weight given to the specified planning criteria.  The lack of specific direction also left the ABA exposed to pressure from vested interests.  Lacking precise definition of its powers and intent on avoiding litigation, the ABA adopted a rather restrictive interpretation of its powers, particularly in relation to the licensing of new services.  The ABA's reticence to implement a pro-market approach to its planning function is evident from its actions at every stage of the planning process.  Overall, the net effect of the ABA's timid approach has been a considerable winding back of the pro-market focus that had been envisaged by the framers of the legislation.

Although the setting of priorities for the preparation of frequency allotment plans and licence area plans is a relatively simple process, it has a considerable impact on the economic and social benefits accruing to society and on the efficient development of broadcasting services.  According to the explanatory memorandum, there are competing priorities "between particular areas of Australia, and between different parts of the broadcasting services bands" and "prioritisation" is necessary because limited planning resources "must be allocated to the areas of greatest social and economic need".  Because of the necessarily long duration of the planning process, the order of completion of area plans can have considerable social welfare implications.  In such a situation, sound public policy practice dictates a determination of priorities on the basis of the relative level of benefits accruing to society from the different licence areas (the higher the expected level of benefits, the higher the priority).

Because of government-imposed restrictions on the further development of television (six Australia-wide high-power channels, no more than three commercial television services in any one area) the ABA rightly focused its planning efforts on development of radio services.  In setting its priorities, however, the ABA astonishingly decided that what it termed the "least served areas" were to be planned for first.  Primarily these were remote and regional areas.  Metropolitan areas, where demand was likely to be greatest, were to be last in the queue.  Because the planning process is lengthy, this meant several years' delay in the planning of services for capital cities ⁽¹⁾ with considerable loss of benefits to consumers and substantial protection from competition for incumbent broadcasters.  The ABA has provided little explanation for its decision.  In a somewhat candid admission that the decision may not have been well thought out, the Chairman of the ABA, in recent evidence to the Productivity Commission Inquiry into Broadcasting Services, stated:

The authority took a decision at that time (when the BSA was introduced in 1992) that it ought to ... prioritise on the basis that the least served areas ought to done first.  Perhaps in retrospect one might have said, "You should do the areas in greatest demand first". ... It's because of (that) decision ... to come down to the capitals last, that there are areas still unresolved.  Those are the areas where most people live. ... Perhaps we should have started the other way around but that wasn't how we did it (Transcript of Proceedings, 28 May 1999:  529 and 532).

The loss of benefits to society was compounded by the ABA's determination of the frequency allotment plan.  In preparing the allotment plan, the ABA appears to have given little, if any, consideration to potential variations of technical planning criteria for more intense utilisation of the broadcasting frequency spectrum.  As a matter of policy, the ABA decided that there would be no change to earlier plans that assumed six wide-coverage television channels throughout Australia and that there would be little scope for the introduction of additional AM radio services without replanning of the AM band.  For FM radio, it adopted the following arbitrary targets for the distribution of services:

• 16 wide-area coverage channels in mainland State capital cities;
• 12 wide-area coverage channels in other major cities;  and
• 8 wide-area coverage channels everywhere else.

While these arbitrary formulas for channel allotment might be appealing because of their superficially equitable treatment of geographic locations, they give little consideration to the very different consumer demand patterns in those markets or to the number of stations they can support.  Indeed, such an approach is inequitable to residents of larger cities.  By allocating the same number of channels to all the cities in a group, the process is heavily biased against residents of the larger cities.  For example, a market like Sydney would have a much greater demand for, and capacity to support, a substantially larger number of broadcasting services than a city like Adelaide with a population that is less than 30 per cent that of Sydney.  The ABA's approach, however, implicitly assigns to residents of Adelaide a per capita demand for broadcasting services that is more than three times that assigned to residents of Sydney.

Economic and efficient use of the spectrum requires allocation of the available channels to their most valuable use taking account of both economic and social benefits.  Although the ABA claims that the channel targets were developed "in the light of demographic and social and economic characteristics of areas", it offers no explanation of how the targets are derived from those factors (ABA, 1998).  It is clearly evident, however, that in economic terms at least, an additional licence in Sydney would be worth much more than an additional licence elsewhere.  To justify its arbitrary allocation, therefore, it would be incumbent on the ABA to demonstrate with detailed cost-benefit analysis that the lower economic values of licences outside Sydney are balanced by commensurately higher social benefits.

The technical criteria used to determine the signal quality and coverage of a service can have a considerable influence on the efficiency of spectrum use.  The ABA's application of the planning criteria focuses on ensuring an unnecessarily high signal quality throughout the licence area and gives only scant consideration to the tradeoff between signal quality and the number of services that can be accommodated in a given amount of spectrum.  The more intensively channels are used, the greater the likelihood of interference between them.  Because services using the same or adjacent frequencies can interfere with each other, not all channels can be used in any one location.  The number of channels available in any one location depends on:  the acceptable level of interference between them, which in turn is dependent on the intensity with which the channels are reused;  the power and coverage pattern of transmitters;  the location of transmitters;  the height of the antenna;  and several other factors.  A variety of well-tested techniques is available to planners to increase the intensity of use of channels as is done in many other countries that have had to cope with considerably greater spectrum scarcity than is the case for Australia.

In addition, the current licensing arrangements are inherently inefficient.  They provide for the supply of sufficient spectrum to guarantee adequate signal coverage of the specified reception area.  This usually involves more than one single-channel frequency as more than one transmitter may be necessary to achieve adequate coverage.  Thus, although there are 100 channels in the FM radio band and 51 channels in the television bands, on the basis of the current planning criteria the ABA is able to accommodate no more than 16 wide-area coverage FM channels in State capital cities and no more than six nationwide analog television services.  Licence fees, however, are based on advertising revenue with no consideration for the amount of spectrum used.  Broadcasters pay the same licence fee irrespective of the number of channels they use to service their licence area.  Consequently, they have no incentive to use the spectrum efficiently or to develop other cost-effective delivery systems.  Indeed, the current arrangements have an inbuilt incentive for broadcasters to use up as much spectrum as possible and thus reduce the scope for competitive entry by other broadcasters.

Principles of a Good Broadcasting System The McClelland Committee (1973) expressed the following view on the desirable attributes of a good broadcasting planning system in the context of its examination of decisions on FM broadcasting in the early 1970s: Firstly, we acknowledge that broadcasting arrangements should be determined by social, economic and, necessarily, technical criteria.  We deliberately rank them in that order of descending importance.  We realise that technical criteria are the easiest to judge by.  Relative to other areas, technical matters tend to be clear cut, and easy to evaluate.  The danger is that engineers, having a monopoly of expertise in the technical field, may unconsciously and with the best motives, tend to impose a sole criterion of technical excellence on the decision making process.  Decision makers may be too easily persuaded that technical considerations rule out alternative arrangements which may have worthwhile social or economic advantages, and for which it may be worth forgoing a degree of technical excellence.  We accept that technical expertise is the handmaiden of economic and social planning, but no more than that.  When there is a choice between an increment of technical excellence, and an increment of social or economic cost or benefit, as we believe there often is, the judgement must be more than a narrow engineering judgement.  It is the role of the engineer to present a set of technically feasible alternatives, and the choice of these should be made on social and economic grounds.  We acknowledge that there is plenty of room for conflicting views about what should be done, especially in social matters.  But the resolution of these is what government is all about. Technical criteria may be more precisely measured than economic criteria.  Nevertheless, the calculation of costs and benefits by the best procedures possible at the time should be mandatory for all broadcasting development.  The calculation should involve benefits forgone.  The costs and benefits of the widest possible set of resource use mixes should be estimated.  We refer, for instance, to the allocation of frequency space between use for non-broadcasting communications, and use for broadcasting.  Where are the detailed studies which confirm that our present usage is best?  Where are the detailed studies of the economics of commercial television?  What is the value of a MHz of VHF or UHF spectrum space?  Nobody knows (p. 4). Unfortunately, policymakers and regulators do not appear to have heeded the Committee's advice, nor is there a similar parliamentary committee today advocating efficient planning of the broadcasting spectrum and examining the efficiency of current policy decisions.

The loss of benefits to society is further compounded in the third stage of the planning process.  This is the most detailed stage of the process and many of the elements are left to the discretion of the regulator to determine.  A recent assessment of the planning process by lawyers Gilbert & Tobin (1997) concluded that because of a lack of clarity in the provisions of the legislation, the ABA's considerations of some important factors may be unnecessarily restrictive and inconsistent with the initial intentions of the legislation in relation to the viability of existing services and efficient use of the spectrum.  The impact of the ABA's approach is best illustrated with reference to the licence area plan for Sydney, the first such plan for a metropolitan market.

THE SYDNEY LICENCE AREA PLAN

The Sydney licence area plan for radio was determined by the ABA on 17 December 1999.  The final plan is virtually the same as the draft plan published a few months earlier (ABA, 1999a).  Almost every aspect of the licence area plan is inherently biased in favour of incumbent commercial broadcasters and against new entry competition.  While the final plan is essentially a formal determination by the ABA, the draft plan discusses in some detail the ABA's planning approach and reasons for its conclusions.  The Sydney draft plan, therefore, provides a good case study of the innate tendency of regulators to limit change to the status quo and highlights the inefficient outcomes likely to emerge when decisions and judgements about market developments are removed from market players and are entrusted to regulators. ⁽¹⁾

As indicated above, the frequency allotment plan for the development of radio established a target of at least 16 wide-area coverage FM radio channels for the Sydney area.  Of the available channels, 11 are currently in use (two by the ABC, one by the SBS, four by commercial operators and four by community broadcasters).  The draft licence area plan for Sydney identified five additional FM wide-area coverage channels for allocation to new services.  Three of the channels have a high power capacity of 150 kW giving them comparable coverage to existing commercial services.  The remaining two services are restricted to 15 kW and 50 kW and thus have a more limited coverage.  The ABA's determination allocates only two of the wide-area coverage channels for additional commercial services.  However, only one of these channels will be allocated immediately with the allocation of the other being delayed for four years.  The remaining three wide-area coverage channels were set aside for community radio services.

The ABA's determination arguably undermines the intentions of the Broadcasting Services Act and, for several reasons, is unlikely to produce the greatest possible net benefits to society.  The determination and the underlying analysis have the hallmarks of an attempt to insulate established broadcasters from increased competition by greatly underestimating the market potential and by unnecessarily delaying new entry.  Furthermore, the ABA does not provide a detailed analysis to demonstrate that the allocation of wide-area coverage channels for the provision of community radio services represents the most valued use of a scarce resource consistent with its obligation to promote "economic and efficient" use of the spectrum.

DEMAND FOR ADDITIONAL COMMERCIAL SERVICES

Given that commercial licences are to be allocated by a market mechanism (auction), there is no need for the ABA to be concerned with the level of demand or to try to second-guess what the market outcome might be.  If the demand for channels is greater than the supply, the allocation mechanism will ration the channels to those placing the greatest value on the licences.  Alternatively, in the unlikely event that supply exceeds demand, some of the channels would be passed in at the auction.

The ABA should also not be concerned with the feasibility of additional commercial services.  Decisions on the feasibility of an investment should be left to investors to make.  In an auction, the onus is on bidders to assess the value of a commercial licence to themselves.  If they overestimate the value and pay a higher than warranted price, the return on their investment is diminished and so is their capacity to compete effectively with other broadcasters.  If investors overestimate the capacity of a market to support services, the least efficient services will fail and only the number that can be efficiently sustained by the market will survive.  Incumbents will survive only if they are more efficient than new entrants.  The net result of this market process is that consumers are assured access to the services they value most.

In a situation where the number of services that can be licensed is restricted, as is the case for the Sydney market, the auction will efficiently ration the licences to those who value them most.  The scarcity value of the licences is factored into the price which investors are prepared to pay to ensure that it is secured by the community and not by a few licence-holders.

The ABA relies heavily on incumbents and aspirants for its information on market demand (Gilbert & Tobin, 1997).  This is likely to distort its assessment in favour of incumbents who have a huge incentive to argue against increased competition.  The incentives to aspirants, on the other hand, are limited and indirect because they are not assured of securing a licence in an eventual auction.  Incumbent broadcasters would be expected to argue strongly that there is no demand for additional services or that the quality of services will decline if new licences are issued.  For them, the less intense the competition, the greater their profits.

In a normal market, suppliers compete with each other both in terms of price and quality.  In free-to-air broadcasting there is no price competition and quality becomes the main driver of competition for audiences.  A reduction in programming quality could occur only if all services simultaneously agree to a reduction by, in effect, forming a cartel.  Notwithstanding that such an arrangement would be in breach of the Trade Practices Act, it would be difficult to sustain.  Restricted spending on programmes would encounter the classic dilemma of cartels because individual broadcasters would not see reduced programme quality as being in their best interest.  There is an inherent incentive for individual members of such a cartel to break the agreement and increase quality.  Increased programming quality by one service seeking to gain advantage over its competitors cannot be left unanswered if competitors wish to avoid losses of audiences.  There is pressure, therefore, for overall programme quality to be driven up.  The larger the number of competitors in the market the more difficult for cartel-type arrangements to be sustained.  Broadly, incentives to increase quality will not stop until an industry's profits are driven down to normal economy-wide levels.  In a restricted market, there is less pressure for intense competition on the basis of quality and above-normal profits will be a feature of the industry.  Furthermore, as acknowledged by the ABA, an increase in the number of stations will increase the diversity of programming available to audiences.

IMPACT ON REVENUE AND PROFITABILITY

The number of commercial radio stations in Sydney has not changed since 1981.  Radio advertising revenue, however, has recorded a cumulative growth of 75.4 per cent in real terms between 1981 and 1998.  Cumulative growth in GDP for the same period was 58.6 per cent.  Growth trends indicate that radio advertising revenue is likely to continue growing faster than GDP in the foreseeable future.

The average revenue of Sydney commercial stations ($17.2 million in 1997/98) is more than twice that of commercial stations in all other State capital cities ($8.4 million).  The average revenue of the four FM stations in Sydney was $24.5 million in 1997/98 and that of FM stations in other capital cities was $10.0 million.  Use of the capital cities (excluding Sydney) average as a yardstick indicates that the Sydney licence area could support twice as many stations than at present (i.e., an additional nine stations).  As the new services will be operating in the FM band, the average revenue of capital city (excluding Sydney) FM services may be a more appropriate guide.  On that basis, the Sydney licence area could support approximately six additional stations.

The ABA's own analysis and conclusions in the recently published draft licence area plan for Melbourne (ABA, 1999b) imply that Sydney would be able to support more than the two proposed additional commercial FM services.  As for Sydney, the draft Melbourne plan envisages the licensing of an additional two commercial FM services.  It follows from this that the ABA considers an average revenue of $11.7 million to be sufficient for profitable operation of a capital city FM service. ⁽¹⁾  On that basis, Sydney could support at least four additional FM services.  These estimates are conservative as the average revenues used as yardsticks are overstated by the extent that cities other than Sydney and Melbourne can also support additional services.

The validity of these comparisons is even acknowledged by the ABA.  The statement of assumptions used in the preparation of licence area plans says that the ABA "assumes the demand for additional broadcasting services can be inferred from demographic, social or economic indicators within a market or from comparison with other markets with similar demographic, social or economic characteristics ..." (ABA, 1998).

Revenue, of course, is only one aspect of business operations.  Costs must also be taken into account.  The operation of radio services should not differ greatly with its location in the various State capital cities.  The operation of transmitters, studios, programme costs, etc. would be expected to be similar.  Some costs such as agency commissions and licence fees are related to advertising revenue.  Similarly, salaries and wages may be partly related to revenue, but are also likely to reflect the ability of some key personnel such as executives and popular presenters to secure some of the monopoly rents from restricted entry to the industry.  Office rentals would be expected to vary from city to city.  After allowing for these variations, estimates of costs indicate that several additional FM services could operate profitably in Sydney (Papandrea, 1999).

RETURN ON INVESTMENT

Radio licences represented 60 per cent by value of all the assets of the commercial radio industry in 1997/98.  For the Sydney radio market, 70 per cent of the value of the industry's assets are represented by licence values.  For Sydney FM stations, licences represent 79.9 per cent of all assets.  In 1997/98, the average book value of an FM radio licence in Sydney was $44.3 million.  This is approximately four times the average value of all the other assets of Sydney FM radio stations ($11.1 million).  The average value of radio licences for FM stations in other State capital cities was only $15.1 million.  The average value of total assets other than radio licences for FM stations in State capital cities was $8.3 million.

The profits before interest and tax (PBIT) to tangible assets ratio for the Sydney FM stations is very high relative to the ratio achieved by investments in other industries. ⁽¹⁾  This means that acquisition of licences for FM stations in Sydney would be very attractive to investors.  As acknowledged by the ABA, the value of a "broadcasting licence ... represents a capitalisation of expected economic rents" (ABA 1999a).  In part this is reflected by the substantial variation in the value of radio licences of FM stations in different capital cities.  The value of other assets of FM stations varies much less from city to city.  The fact that the value of an FM licence in Sydney is approximately three times the average for licences in other State capital cities is a good indicator of high potential earnings for new stations.  Thus, it is also an indicator of the value that investors may be willing to pay to secure a licence at an auction.  Obviously, an investor's willingness to pay will be affected by the number of licences to be allocated.  The fewer the licences, the higher the expected returns and thus the higher the price that investors would be prepared to pay.

The ABA notes the high ratio of PBIT to tangible assets for Sydney radio stations in its analysis (ABA, 1999a).  As noted by the ABA, the ratio for Sydney radio stations (44.3 per cent) is a little more than twice as large as that for the Australian radio industry (including the Sydney stations) as a whole (21.5 per cent).  This comparison is somewhat inappropriate as it tends to understate the difference between the Sydney stations and the rest of the industry (i.e., total industry less Sydney stations) for which the ratio is 17.1 per cent.  However, even with that adjustment the true extent of the difference is considerably understated.  As calculated by the ABA, the PBIT to tangible assets for Sydney refers to all commercial (AM and FM) services in the Sydney market.  As the proposed additional services for Sydney will be FM services, the PBIT to tangible assets ratio for the existing FM services in Sydney is the relevant ratio for consideration.  In 1997/98, the PBIT ratio for the four Sydney FM stations was 70.8 per cent.  This is twice as large as that of FM stations in other capital cities and more than four times that of the Australian commercial radio industry excluding Sydney FM stations.

DELAYED ALLOCATION OF LICENCES

The foregoing analysis clearly indicates that the Sydney market would be able to sustain several more commercial radio stations.  The ABA's decision, however, not only unrealistically underestimates the market's capacity to support additional services, but also astonishingly defers the licensing of one of the two proposed new services for four years.  The decision to delay licensing of the second service stands in sharp contrast with the intentions of the Act to minimise barriers to entry and facilitate competition through "quicker introduction of extra services" (Explanatory Memorandum).  According to the ABA, the delay was motivated by a concern that licensing of two additional stations would be a "shock ... likely to have undesirable consequences on the industry" (ABA, 1999a).  The ABA also stated that it was "concerned at the possibility that a substantial increase in the number of commercial licences in the Sydney market would lead to a decline in revenues and profitability for the industry as a whole".  It is difficult to imagine why the ABA should be so concerned.  It is obvious from its own reasoning for delaying the second licence -- to "allow for further growth in GDP to be factored in" -- that the ABA expected continued growth in the industry's revenue.  Increased competition, on the other hand, would help dissipate some of the supernormal profits accruing to existing stations and would lead to decreased profitability.  This is, however, a normal outcome of market competition acting to align high rates of return on investment in one sector of the economy to more normal rates applying elsewhere and is thus not a justifiable reason for ABA concern.

Delayed introduction will also run counter to the desire of introducing competition quickly and encouraging new entrants.  Indeed the staged introduction of services may end up having an adverse effect on competition.  Bidders for the first licence will take account of the delayed entry and will accordingly adjust upwards the price they are prepared to pay to secure the licence.  The new entrant will thus face a higher investment, a higher cost structure and lower potential return on investment than its competitors and will be disadvantaged in its attempts to compete with the incumbent broadcasters.

COMMERCIAL VERSUS COMMUNITY CHANNELS

Australian broadcasting policies accord considerable social value to the availability of non-commercial services.  National and community radio services compete with commercial services for the same spectrum.  Within a licence area, they all have to be catered for within the channels that have been allotted by the ABA for that particular area.  Efficient allocation of available channels among these different categories of services requires extensive consideration of both economic and social benefits.  Because of these considerations, the BSA had envisaged that the minister would retain the power to determine and set aside channel capacity for national and community services and to direct the ABA accordingly.  All the unreserved capacity was to be available for the ABA to allocate to commercial services.

In the absence of a ministerial direction to do so, the ABA's power to set aside three of the five available wide-area coverage channels in Sydney for community services, as it proposes to do, might be doubtful.  In its discussion paper for the draft licence area plan for Sydney, the ABA says "(t)he reference in section 26 to the 'characteristics' of services includes, in the ABA's view, the category of each service".  Section 26 of the Act sets out the ABA's responsibility to "determine the number and characteristics, including technical specifications, of broadcasting services that are to be available in particular areas ...".  The explanatory memorandum, however, suggests that this section relates primarily to the technical criteria as follows:

The licence area plan will contain the precise detail of all licence areas, including such matters as:  the areas covered by each licence area;  the nominal carrier frequency of the services;  the nominal transmitter sites for each service;  the nominal technical conditions for each service, including operating power and radiation pattern;  and whether or not there will be a need for any translators for any of the services.

The ABA's view is apparently based on a legal opinion on the interpretation of "characteristics" in the wording of section 26 of the Act.  However, other legal interpretations are possible.  For example, Gilbert & Tobin are of the view that "on balance ... it appears likely that what was envisaged was a scheme in which the Minister did retain control as to the number of national and community services that would be made available" (p. 44).  In other words, until a court makes a definitive interpretation, the ABA's view could be open to challenge.

Notwithstanding its potentially doubtful power to set aside channels for community use, the Act imposes an obligation on the ABA to plan for "the economic and efficient use of the radiofrequency spectrum".  The maximisation of social welfare requires the application of scarce resources to activities that produce the greatest level of benefit to society.  The determination of what is the most productive use of resources takes economic efficiency as its starting point.  Society, however, may wish to give up some of the economic benefits to pursue social goals that are valued more than the associated loss of economic efficiency.  In other words, a particular policy choice implies a collective judgement that the social value of the outcome is worth more than the opportunity cost of not applying those resources to the most valuable alternative use.

Such a judgement requires more than an appraisal of considered opinions.  A sound and reliable judgement cannot be made without rigorous cost-benefit analysis of the alternative uses of the channels.  It is incumbent on the ABA, therefore, to justify fully how the proposed allocation of three wide-area coverage channels for community services represents the most efficient and productive use of the scarce radiofrequency spectrum.  Such an allocation would involve a considerable transfer of highly valuable resources to a small proportion of Sydney's population.  Because of spectrum scarcity, the estimated value of new commercial radio licences in Sydney is of the order of $20 million to $50 million (Collins, 1999).  This value represents only a part of the opportunity cost of using the spectrum for the provision of community radio services.

While leading to an eventual increase in the number of FM commercial services in Sydney from four to six, the ABA's determination will also increase the number of wide-area coverage community FM stations from four to seven.  This means that Sydney will have more FM wide-area coverage community stations than commercial FM services.  Given the relative valuation of the two categories of stations, it is highly unlikely that such a distribution of frequencies represents the most efficient and productive use of the associated radiofrequency spectrum.

Eighteen community radio services already operate in the Sydney licence area.  Of these, four are wide-area coverage FM services, one is a wide-area coverage AM service and 13 are local-area coverage FM services.  The ABA proposes to license another seven:  three wide-area coverage and four local FM services.  If the proposal is implemented, 25 out of a total of 44 services (including the two proposed commercial services) would be community services.  Commercial services would be restricted to 11 (nine existing and two proposed).  In principle, the allocation of four additional local community services appears to be consistent with the envisaged function of community services.  The explanatory memorandum says that "community broadcasters differ from other broadcasting services in that they have a local focus and role in attracting local community participation in broadcasting".  On this basis, however, the allocation of additional wide-area coverage channels for community services may not be consistent with that function.

Licences for FM community services are issued free of charge on the basis of assessed merit to community groups seeking to operate services.  It is not surprising, therefore, that demand for licences exceeds supply.  A high level of demand for free community licences is not necessarily an indication that community radio services are highly valued other than by the small groups who seek to be community broadcasters.  Audiences of community services are small.  Studies on how well community services cater for their target audiences and to what extent the services are valued and used by audiences are virtually non-existent.  There are no comprehensive Australian studies of the intensity of demand for additional community services nor of the relative valuation which the community places on them vis-à-vis additional commercial services.  FM radio licences are also highly sought and highly valued by commercial operators.

While the small audience of a community station may derive a substantial social benefit from the operation of the station, it is highly likely that such a benefit would be smaller than the aggregate social benefit that an additional commercial station would confer on its much larger audience.  In any event, it would be incumbent on the ABA to demonstrate that the Australian community is prepared to transfer up to $150 million to the operators and audiences of three additional wide-area coverage community stations in Sydney.  In the absence of a detailed assessment of all the costs and benefits clearly demonstrating that the benefits of allocating the channels for use by community services outweigh the opportunity costs of using them for commercial services, the ABA's proposal may well be contrary to the wider public interest.

The BSA envisaged the use of narrowcasting licences for the provision of services targeted to special interest groups whose members may be widely dispersed throughout a licence area.  The explanatory memorandum indicates that "a special or common interest group" refers to groupings "such as members of a particular occupation, profession, club or association, or say, persons who enjoy Baroque music".  The Act also provides for the use of non-broadcasting band licences for the delivery of community broadcasting services (section 82).  According to the explanatory memorandum that provision was in recognition "that the use of the broadcasting services bands may not always be the most efficient, cost effective method for delivering a community broadcasting service".  Narrowcasters are permitted to raise funds from advertising and as for commercial services, licences are allocated by auction.  However, as community licences are issued free of charge, community groups overwhelmingly seek a community licence in preference to a narrowcasting one for which they would have to pay.  The ABA draft plan provides for the allocation of three new narrowcasting licences in the Sydney licence area.

NEED FOR REFORM

The planning and licensing of broadcasting services involve three distinct components with different attributes, some of which are potentially in conflict with each other:

1. Planning and licensing are about assigning the right to use a limited public resource.  Although the spectrum has unique attributes, allocation of the right to use the spectrum is essentially the same as the allocation of property rights over other resources.
2. Because signals using the electromagnetic spectrum as the carrier can interfere with each other, planning and licensing involve a technical element to limit potential interference to manageable proportions.
3. Licensing involves the right to conduct a broadcasting business with several cultural and social obligations.  In a sense this is also a property rights issue.

When radio was first introduced, the principal problem facing authorities was prevention of interference between broadcasters operating in the same or different areas.  As this was primarily a technical problem, the property rights to use the spectrum and conduct a broadcasting business were tacked onto the technical function.  This early focus on technical issues has since evolved into a highly centralised and prescriptive system that determines the size of the broadcasting industry as well as the nature and location of the services that are available.  All the important decisions are made by policymakers and regulators with only notional reference to the market in an environment that is highly conducive to influence by vested interests.  The net result of all this is a system that leads to a highly inefficient and wasteful use of a very valuable scarce resource and to the advancement of the interests of private rent-seekers at the expense of the wider public interest.

Since the early days of radio, technological advances have minimised the necessity for detailed technical controls on the use of spectrum and the development of enforceable spectrum property rights has virtually done away with the need for centralised control and policing of interference between users.  These developments have made a pro-market reform of broadcasting services possible and highly desirable.  The desirability of reform was partially recognised in the development of the Broadcasting Services Act 1992.  The legislation incorporated some major market liberalisation aims including:

• maximum possible (economic and efficient) use of the broadcasting spectrum;
• minimisation of barriers to entry including rapid allocation via auction of all available frequencies not set aside for use by national or community services;  and
• no consideration of commercial viability of services by the regulator.

Because of imprecise wording and directions, however, what appeared to have been a promising start to reform has since been largely undone by the regulator's restrictive and overly legalistic interpretation.  According to Gilbert & Tobin (1997):

Fundamentally, a policy choice needs to be made between the ABA's current approach and a market driven approach which would maximise the entry of new services into the market and accommodate the possibility of the failure of some services.  The Explanatory Memorandum for the current Act does state that it was intended that barriers to entry to the broadcasting service industry be minimised and that competition in the provision of such services be facilitated through the quicker introduction of "extra services".  The key policy decision to be made is whether the legislation should be amended to achieve this objective (page 34).

Most of the problems with interpretation appear to centre around the requirement for planning to promote the objects of the Act, including the economic and efficient use of the radiofrequency spectrum, and the statutory matters (section 23 of the BSA) to which planners must have regard.  Some of these matters have economic and social implications, and have provided the vehicle or justification for the ABA to impose its own judgements of the market on the development of broadcasting services.  Evaluations of demand, feasibility of investments and other market parameters are best made by market players and should be left to them to make.

The capacity of a market to sustain broadcasting services should be left entirely to investors to assess.  Excessive protection of incumbent broadcasters over many years has been based on the misguided concept that it is undesirable for broadcasting services to fail.  Why broadcasters should be singled out for such special treatment is not apparent.  Other media are not protected this way.  Newspapers have been allowed to start up and fail with no obvious harm to the social fabric.  But even if broadcasters had special attributes making their failure undesirable to society, it does not follow that a regulator is the best judge of the market's capacity to sustain services.  Market players are much better judges of commercial viability and have a considerable incentive to make efficient choices because it is their investments that would otherwise be at risk.

There are three possible outcomes of a new player entering a market:

• all services including the new entrant are viable albeit one or more of the incumbent services may experience a reduction in their profitability;  or
• the new entrant fails;  or
• one of the incumbents fails and the new entrant succeeds.

The desire of investors to enter a broadcasting market reflects an assessment that they can earn a higher rate of return on that investment rather than on alternative investments.  Investors will continue to seek to become broadcasters up to the point where expected returns from broadcasting are equal to expected returns from alternative investments.  Through this process, market forces will ensure that the number of broadcasters in a market will be no more and no less than the number that can earn sufficient revenue to sustain efficient operations and provide an adequate rate of return on investors' funds.  As is the case for other industries, this will be achieved without a regulator attempting to outguess the market.

In the event that one more investor than the number that the market can sustain enters the market, either the new entrant fails or one of the existing operators fails.  In either case, the least efficient operator will be the one that fails.  This will ensure that the services to consumers are the best and most efficient possible.  Unlike the current situation where incumbents are protected from competition from new entrants and can thus afford to operate at less than maximum efficiency, the threat of entry into the market will ensure that full efficiency is maintained.

The broadcasting band is only a small portion of the radiofrequency spectrum.  Problems of interference between services, which can occur just as readily in other bands as they might in broadcasting, have been adequately addressed by technical developments.  However, in contrast to the highly prescriptive approach to licensing of the broadcasting spectrum, market forces play a dominant role in determining how the spectrum is used.  Technical considerations come into play only in the identification of available bands for allocation to users.  Property rights are well defined in terms of coverage area and maximum signal permitted to extend beyond the coverage area.  Within the coverage area, spectrum owners are free to employ the spectrum to the fullest extent possible and have an incentive to apply it to the most profitable uses.  Spectrum rights may be subdivided and leased or sold to others.  Management of the radiofrequency spectrum, other than the broadcasting band, is the responsibility of the Australian Communications Authority (ACA).  Apart from basic technical specifications, technical planning of services is the responsibility of property rights holders and interference problems are matters to be resolved between users.  In common with other property rights, spectrum rights are enforceable in the courts.

There is no apparent reason why the approach used to manage non-broadcasting spectrum should not be used to manage the broadcasting spectrum as well.  There is nothing unique about the broadcasting spectrum that would prevent this.  Other spectrum is also subject to international agreements and to reservations for public interest use (e.g., defence, emergency services, etc.).  The only unique aspect of broadcasting is the imposition of social obligations on those who carry on the business of broadcasting.  Those obligations are not dependent on the carriage platform that broadcasters choose to deliver their services to consumers.  If desired, therefore, social obligations can be imposed as a condition of doing business independently of the system used to manage the spectrum.  This would be no different from what happens in other industries (e.g., safety regulations on the handling and storage of dangerous goods).

Automatic sale by auction of all broadcasting spectrum not set aside for national or community services would considerably improve the efficiency of allocation and use of spectrum for new services.  However, as most of the broadcasting spectrum has already been allocated on the basis of earlier policies, action will also be necessary in relation to existing allocations so as not to entrench previous inefficiencies.

Under current arrangements, the holder of a broadcasting licence is assigned a block of spectrum which the regulator determines to be necessary to ensure an adequate signal throughout the licence area.  This often involves more than one frequency channel as one or more translators, in addition to the main transmitter, may be required to broadcast the signal in accordance with the technical criteria determined by the regulator.  Under those circumstances, the broadcaster may be concerned with the cost of operating the necessary transmitters, but essentially has no choice to vary the regulator-determined arrangements.  In particular, as the licence fees paid are independent of the amount of spectrum used and as the spectrum cannot be applied to other uses, the broadcaster has no incentive to seek to use the spectrum efficiently.

Licensing of Non-Broadcasting Spectrum Use of the radiofrequency spectrum, except for the band used by broadcasting services, is planned and managed by the Australian Communications Authority.  Licences for the use of the spectrum are allocated by auction. Spectrum licences are issued for a fixed, non-renewable term of up to 15 years.  Licensees have a property right over the spectrum space and are free to apply it to whatever use they choose provided it is consistent with the conditions of the licence.  Property rights are defined in terms of geographic coverage area and frequency bandwidth.  Licensees can operate from any site within their spectrum space and are free to change the nature or technical characteristics of their services in response to changes in technology or market conditions.  Licences are tradable in the open market.  They may be bought, sold or leased, and may be aggregated or subdivided as the need arises. For licensing purposes, spectrum space is subdivided into finite, indivisible units called standard trading units (STUs).  At a spectrum auction, all spectrum space lots on offer are auctioned simultaneously and bidders can bid for any combination of lots reflecting their needs for bandwidth and geographic coverage.  After the auction, transfers of spectrum licences are a matter for commercial negotiations between the parties involved. All the spectrum in a designated band is offered at auction.  Incumbents can bid for the spectrum they occupy in competition with other potential users.  Unless they successfully bid for the spectrum they occupy, they will only continue to have use of that spectrum until their licences expire.  Any use beyond the expiry date of their licence has to be negotiated commercially with the successful bidder.

To improve efficiency, licence fees paid by a broadcaster should reflect the amount of spectrum used as well as its relative scarcity at the use location.  At present, broadcast licence fees are based on advertising revenue which in part reflects the scarcity at the location in which the spectrum is used but not the amount used.  The larger the population within the licence area, the larger the potential earnings from advertising and hence the higher the demand for spectrum for additional services.  Licence fees should reflect this scarcity value.  For new services, the scarcity value of the licence would be reflected in higher auction bids.  The payment of licence fees based on the amount and scarcity of spectrum used would encourage broadcasters to minimise their use of spectrum and release what they do not require for sale to other users.

Alternatively, the spectrum planner could be requested to undertake a replanning of the broadcasting spectrum for maximum possible use, taking account of current technological realities.  Existing broadcasters would be offered sufficient spectrum to operate their service under the new regime.  All spectrum released through replanning would be sold by auction.  Such an approach would have the advantage that the spectrum needs of national and community services could also be reassessed on the basis of current technical practices.  Ongoing licence fees would reflect spectrum use to ensure that broadcasters have an incentive to respond to technical developments as they arise and ensure efficient use of the spectrum.

CONCLUSIONS AND RECOMMENDATIONS

The current broadcasting planning and licensing arrangements fall short of the desirable pro-market arrangements envisioned by the framers of the BSA, are highly biased in favour of incumbent broadcasters and severely restrict new entry competition.  Several factors contribute to this situation:

• the ABA's interpretation of the BSA's planning and licensing provisions is conservative and restrictive;
• each element of the planning process is weighted against intensive use of spectrum that would allow more services to operate;
• the ABA appears to be more concerned with maintaining a roughly equitable allocation to different areas on the basis of their status as a State capital city or other centre rather than on the area's capacity to support services.  This discriminates against large capital cities such as Sydney and Melbourne that are capable of supporting many more services than other centres;
• the ABA's approach relies heavily on information in submissions by vested interests rather than on its own independent analysis.  The limited market analysis undertaken by the ABA appears to have been prepared more as a justification for predetermined conclusions rather than to assess the capacity of a market to sustain additional commercial services;
• the ABA is unduly concerned with issues of commercial viability of services that should be left to market players to determine;
• the ABA appears to be biased towards allocating scarce and highly valuable spectrum to community radio use likely to generate benefits of low or uncertain value without any detailed cost-benefit analysis to support its decisions.

The principal function of planning and licensing is to facilitate orderly operation of broadcasting services and not to impose economic regulation that restricts the operation of a legitimate commercial activity.  In economic terms, there is no reason for broadcasting enterprises to be treated differently from other economic endeavours.  Desirable social obligations should be imposed by way of broadcasting licences that define the conditions under which commercial broadcasters can conduct their business.  But within any such conditions, decisions on the number and type of services to be provided in any area should be left to investors to make.  Spectrum planning and licensing should facilitate the fullest possible use of the available spectrum.  The following recommendations should improve efficient usage of spectrum and increase the benefits accruing to society:

1. The broadcasting spectrum should not be managed differently from the rest of the radiofrequency spectrum.  It is a scarce resource that should be utilised to the fullest extent possible and applied to the most valuable uses as determined by the market and not by regulators attempting to outguess the market.  All the spectrum not set aside for national and community services should be allocated by auction to the highest bidders.  Those purchasing the property rights to the spectrum should be free to determine the purpose and intensity of use of the spectrum they hold.  They should also be free to sell or sublet the whole or part of their spectrum holdings as they wish.  The ACA has extensive expertise in spectrum management and should be given responsibility to manage the broadcasting spectrum in the same manner it manages the rest of the radiofrequency spectrum.
2. Broadcasting licence fees should distinguish between spectrum usage and other obligations of broadcasters.  Spectrum fees should reflect the amount of spectrum used and the scarcity of the spectrum in a particular locality.
3. Licences to conduct a broadcasting business should be separated from spectrum property rights and should be issued separately.  These licences should be concerned only with the social obligations of broadcasters and should be freely available to anyone wishing to become a broadcaster using the current pay-television model as a guide.
4. Broadcasters should not be extended any special protection from competition.  Regulators should not have any discretion to determine the number of commercial broadcasters.  This should be left entirely to the market to determine.
5. The amount of spectrum set aside for use by community broadcasters should be determined after extensive cost-benefit analysis to assess the benefits accruing to society from community broadcasting use against the opportunity cost of alternative use of the spectrum.  The benefits accruing to society from spectrum already allocated to community use should be evaluated on a regular basis.

REFERENCES

Australian Broadcasting Authority (ABA), 1998, "The ABA's General Approach to Planning", available at http://www.aba.gov.au/what/broplan/pdf/general.pdf

ABA, 1999a, "Sydney, Gosford, Katoomba & Lithgow Draft Licence Area Plans and Reasons for Preliminary Views", Discussion Paper, available at http://www.aba.gov.au/what/broplan/laps/sydney/discussion_sydney.pdf

ABA, 1999b, "Melbourne, Geelong & Colac Draft Licence Area Plans, Draft Variations to Shepparton Licence Area Plan, and Reasons for Preliminary Views", Discussion Paper, available at www.aba.gov.au/what/broplan/laps/melbourne/index.htm

Australian Broadcasting Control Board (ABCB), 1972, Frequency Modulation Broadcasting, Report of the ABCB, Melbourne.

ABCB, 1973, Twenty-Fifth Annual Report for Year Ended 30 June 1973, AGPS, Canberra.

Australian Broadcasting Tribunal (ABT), 1982, Cable and Subscription Television Services for Australia (Volume 1), Report, AGPS, Canberra.

Alston, R., 1998, "Digital:  A Personal Message", Media Statement (36/98) by Senator the Hon Richard Alston, Minister for Communications, the Information Economy and the Arts, 24 March.

Alston, R., 1999, "Digital Broadcasting and Datacasting", Statement by Senator the Hon Richard Alston, Minister for Communications, the Information Economy and the Arts, Parliament House, Canberra, 21 December.

Armstrong M., 1979, "The Broadcasting and Television Act, 1948-1976:  A Case Study of the Australian Broadcasting Control Board", Chapter 6 in Tomasic, R. (ed.), Legislation and Society in Australia, The Law Foundation of New South Wales and George Allen and Unwin, Sydney.

Australian Financial Review, 1998, Editorial, 25 March.

Bernstein, M.H., 1955, Regulating Business by Independent Commission, Princeton University Press, Princeton, New Jersey.

Broadcasting Services Act 1992.

Cole, B., 1966, "What's Really Preventing the Expansion of Broadcasting Services?", The Australian Quarterly, 38(3), pages 72-87.

Collins, L., 1999, "Radio Wars:  FMs Refuse to Share the Pie", The Australian, 29 July, page 15.

Department of Transport and Communications, 1993, Broadcasting Reform:  A New Approach to Regulation, Canberra.

Explanatory Memorandum to Broadcasting Services Bill 1992.

Gilbert & Tobin, 1997, "Broadcasting Planning & Licensing:  Final Report", Sydney.

McClelland Committee, see Senate Standing Committee on Education, Science and the Arts.

Minister for the Media, 1974, "New Medium Frequency Radio Stations", Media Release 74/16, 19 February.

Independent Inquiry into Frequency Modulation Broadcasting, 1974, Report, Government Printer, NSW.

Papandrea, F., 1999, "The Sydney Radio Plan and Protection of Incumbent Broadcasters", mimeo, Communication and Media Policy Institute, University of Canberra.

Productivity Commission, 1999, "Inquiry into the Broadcasting Services Act 1992:  Transcript of Proceedings".

Senate Standing Committee on Education, Science and the Arts (J. McClelland, Chairman), 1973, Second Progress Report on All Aspects of Television and Broadcasting, Including Australian Content of Television Programmes, Parliamentary Paper No. 108, The Government Printer of Australia, Canberra.

---

ENDNOTES

1.  However, problems with the development of appropriate technical standards delayed the introduction of satellite services until 1995.

2.  The Government had previously decided that the ban on new services would stay in place until 2009 but accepted a Senate amendment shortening the ban by two years.

3.  The first capital city licence area plan (Sydney) was determined in December 1999.

4.  The Sydney draft plan appears to have been used as a template for the development of the Melbourne draft licence area plan (published in December 1999).

5.  This is derived from apportioning the 1997/98 revenue of FM stations in Melbourne equally to the existing and proposed FM services.

6.  Given the revelations in the "cash-for-comment" hearings of the ability of radio talkback stars to earn extra income, the returns to incumbency may be significantly greater than the direct revenues of the radio stations suggest.

Honorary Aboriginality for Us All

This is the year of Aboriginal Reconciliation, the culmination of a process the Hawke Labor Government began in 1991 in the hope of heading off the more radical push for a treaty between black and white Australians.  In his New Year's message, and again on Australia Day last Wednesday, the Governor General called on the nation to make a renewed effort to bring about "true and lasting reconciliation".

Nice words, but what do they really mean?  How will we know if reconciliation has been successful?  Will the outcome be announced from on high, with a committee of righteous worthies telling us we have finally transcended our shameful past?  Or will teams of public opinion pollsters tramp across the country to get a take on whether the nation actually feels "reconciled"?

Certainly, the vision promoted by the Council for Aboriginal Reconciliation seems reasonable -- "a united Australia which respects this land of ours;  values the Aboriginal and Torres Strait Islander heritage;  and provides justice and equity for all".  But in fact it is so vague that, depending on your point of view, you could say it has been largely achieved already, or see it as an impossible goal which will always enable critics to complain that Australia has fallen far short of fulfilling its obligations.

In the hope of clarifying some of the woolly thinking surrounding the issue, I put out a paper called Reconciliation:  What Does it Mean? towards the end of last year.  I pointed out that there were contradictions between various parts of the program being promoted by CAR;  for instance, between calls for "a united Australia" on the one hand, and promoting moves towards indigenous separatism on the other.

Among the issues we considered was whether it would really be possible to raise the social and economic indicators for Aborigines to an acceptable level without radical changes to the strategies of autonomy and cultural revival so favoured by the intelligentsia and prominent indigenous activists.  Whether or not our answers have merit, the many questions and inconsistencies we raised are fundamental.

Nevertheless, in the national quest for reconciliation, most of the tough questions have been set aside.  Although CAR released a Learning Circle kit last year "to promote discussion of the issues surrounding reconciliation in the Australian community", the package really seems designed to close down certain kinds of discussion by making participants aware that some matters are effectively out of bounds.

Only a smattering of alternative perspectives are offered, and even then, they are carefully placed in contexts that make it clear that such views are not at all helpful.  The kit refers to a very large number of books, articles and websites for further information, but hardly anything that contains detailed arguments or embarrassing facts that might cause people to question the direction that CAR is taking.  The people who espouse the "correct positions" get the best lines, the most sympathetic treatment, and the greatest prominence.

For example, a list of the underlying causes of indigenous disadvantage makes no mention of the many ways in which contemporary Aborigines are encouraged to see themselves as victims and to avoid taking personal responsibility for their own actions.  True, the kit was prepared before Noel Pearson released his paper, "Our Right to Take Responsibility".  But Pearson's observations about the destructiveness of victimhood were hardly new, as he readily acknowledged.  Indeed, the Learning Circle kit makes its own distinctive contribution towards furthering the mentality of victimhood amongst Aborigines.

If there were a simple and obvious way to end Aboriginal disadvantage, perhaps attempts to keep the reconciliation discussion on a narrow track might be understandable.  But if past dispossession and injustice is to blame for all of today's woes, as CAR and its supporters pretend, why are major social indicators for Aborigines such as life expectancy, suicide rates and violence getting worse rather than better in many areas?  And why are some of the highest Aboriginal mortality rates to be found in regions which have suffered the least amount of dispossession and interference, such as East Arnhem Land?

As the American black critic Shelby Steele has pointed out, when people genuinely want to solve difficult social and economic problems, they take a flexible approach, encouraging anything that might work.  In his recent book, A Dream Deferred:  The Second Betrayal of Black Freedom in America, he contrasts the experimentalism of President Roosevelt's New Deal administration during the Great Depression of the 1930s with contemporary Americans' rigid "politically correct" approach towards racial issues.

Steele explains why liberal-minded white Americans now feel they must support ineffective or counter-productive policies which only benefit a black elite, while eroding the sense of individual responsibility amongst the very people they are supposedly trying to help.  He thinks that many white liberals are not quite as keen to enhance black freedom and prosperity as they claim.

Rather, these whites are preoccupied with their own personal redemption;  with demonstrating their moral virtue in the face of the shame they feel in being identified with America's unpleasant history of racial injustice.  And they know that those who challenge the race-relations industry's favoured notions will find their goodness denied -- they will be called "racists".  Although Steele confines his observations to the United States, they also seem highly relevant to the Australian situation.

Nevertheless, even those most committed to moral posturing on indigenous issues can occasionally offer a constructive way forward.  Take Germaine Greer, who told a British audience last week that she was "an honorary Australian Aborigine".  She didn't say who made her an Aborigine, but it is a wonderful idea.  If only all the rest of us could be offered this status, there would be no need for reconciliation.

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Openness Needed on Aboriginal Issues

Last week Deputy Prime Minister John Anderson probably put himself offside with the majority of Aborigines.  He had a private meeting with Geoff Clark, the recently elected Chairperson of the Aboriginal and Torres Strait Islander Commission, an organisation regarded with such disdain by many indigenous Australians that less than 1 in 4 bothered to vote in the 1999 elections for ATSIC regional councillors.

The percentage of Aborigines voting in ATSIC elections has steadily declined since it was established by the Hawke Government in 1990, despite admonitions from indigenous leaders that a high turnout would send a "message" to the rest of Australia.  If most of its own supposed constituency is unwilling to take ATSIC seriously, why should anyone else?

However John Anderson's office says that the talks with Clark were constructive, focusing on common ground rather than on matters which divided them.  Given the displays of moral fervour which indigenous issues occasion amongst the nation's intelligentsia, it is understandable that even a politician with Anderson's refreshing candour would tread gingerly.

But if Australia is to make real progress in dealing with the seemingly intractable issues of Aboriginal disadvantage and social breakdown, a number of divisive and unpalatable issues will need to be openly discussed.  These include the continued existence of ATSIC, and the whole structure of government legislation and programs which are predicated on the notion of a distinct Aboriginal people with rights different from those of other Australians.

In an article criticising the American government's unwillingness to adopt colour-blind policies in the face of growing black integration (AFR, January 17), New York columnist Deroy Murdock cited the rapidly increasing number of interracial couples in his country.  In 1993 nearly 9 per cent of black men married white women, which seems impressive until it is compared with Australia.  The 1996 census revealed that 64 per cent of Aboriginal families involved a union between an Aboriginal and a non-Aboriginal partner, a figure that indigenous organisations such as ATSIC are most reluctant to publicise, given its implications for the separatist sentiments harboured by many of their leaders.

Nevertheless, since Noel Pearson's discussion paper "Our Right to Take Responsibility" was circulated last year, a number of non-Aboriginal commentators have felt less diffident about raising the need for indigenous people to develop a greater sense of personal responsibility over their own lives.  Pearson acknowledged that although previous generations of Aborigines suffered much greater discrimination and abuse than their descendants ever experience today, contemporary Aborigines are still encouraged "to see themselves as victims and to take on the mindset of victimhood".

Unfortunately however, Pearson and most of those who have taken up his concerns still seem to assume that a strong sense of individual responsibility is compatible with contemporary pieties such as special indigenous rights and a resistance to the culture of mainstream Australia.  They have fallen prey to the illusions of a post-modern age, where cultural characteristics and social institutions are treated as though they are supermarket consumables which can be blithely added to the shopping trolley irrespective of what is already there.

The problem is illustrated by remarks of Fred Chaney and Neil Westbury that one of the unexamined critical issues arising out of Pearson's paper is "how to assist communities to maintain strong Aboriginal identity in the face of mainstream values, beliefs and expectations" (AFR, January 14).  The possibility that communities which stress a "strong Aboriginal identity" under such circumstances might be undermining the personal responsibility of their members has obviously not occurred to them.

Similarly, Pearson himself falls into the trap of attempting to justify affirmative action programs on the supposed grounds that race is "all-pervading" for Aborigines, determining their "social, political and economic position" in contemporary Australian society.  But as the black American critic Shelby Steele has eloquently pointed out, giving such primacy to race as the explanation for disadvantage completely subverts the notion that it is individuals who control their own destiny.  If, as the indigenous establishment and its supporters constantly claim, racism really is the major cause of all the misery, then Aboriginal disadvantage is a white problem and there is not much point in urging Aborigines to take more personal responsibility.

Unfortunately, while Steele's writings are widely discussed amongst Americans concerned with race issues -- having been published in journals such as Harper's, New Republic and Commentary -- he is little known to Australia's intelligentsia.  The ABC ignores him, and few university libraries carry his books.  Perhaps he cuts too close to the bone;  although his focus is solely on America, his diagnosis of the destructiveness of affirmative action and other race-based compensatory programs is almost as applicable to the Australian situation.

Steele argues that the "black grievance elite" of academics, politicians and bureaucrats maintains its power by exploiting white America's justified feelings of shame at its past treatment of blacks, which compromised the moral principles on which America was based.  The liberal-minded whites of the post-Civil Rights era who were most sensitive to this "national legacy of unutterable shame" -- to use an Australian judicial phrase -- were hungry to recover their lost moral authority and show that they were not like their forebears.

Their quest for redemption beguiles these whites into seeing themselves as largely responsible for the freedom and advancement of blacks.  In the Australian context this translates into the refrain that Aboriginal domestic violence or alcohol abuse is "our shame", rather than the responsibility of the individuals who beat their spouses or drink to excess.  To suggest otherwise is "blaming the victim", a sure sign of the absence of moral virtue and an epithet which promotes structural explanations of disadvantage at the expense of an ethic of personal responsibility.

As Steele has observed, "it is precisely the rejection of the very idea of black responsibility that protects whites from the charge of racism".  And because moral redemption is their overriding concern, these white liberals are most reluctant to scrutinise policies and programs supported by the grievance elite, even when there are strong grounds for thinking that the programs are counter-productive for blacks suffering genuine social and economic disadvantage.

Steele's analysis helps us understand the moral indignation that invariably envelops those who stray from accepted positions on Aboriginal issues.  It also suggests that white Australians who respect the human dignity of the Aborigines they meet, but who are otherwise indifferent -- or even hostile -- to the urgings of the indigenous industry may prove better friends than those who smother Aborigines with their righteous concern.

ATSIC Chairperson Clark portrays himself as a radical.  This is no bad thing, considering Australia's lack of success in achieving genuine freedom and economic equality for Aborigines despite all the energy and resources that have been devoted to indigenous issues over the past few decades.  A true radical is prepared to go back to basics, and struggle against the power structures that perpetuate the problems.  It would be utopian to hope that Clark might push for the abolition of ATSIC itself.  But perhaps he may be willing to challenge the black establishment and its posturing white supporters.  Inviting Shelby Steele to Australia could be a first step.

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All Eyes on Electricity Regulators' Price Reset

Over the past two years, Victoria's privatised electricity businesses have been on a merry-go-round of analysis and lobbying.  The focus has been on Victoria's Regulator-General, John Tamblyn.  The major issue has been the 2001 price re-set for line charges, which comprise 30-50 per cent of the final cost of electricity.

In the Kennett Government's privatisation, the five electricity distribution businesses sold for $8.5 billion -- twice the book value of the assets.  Since the 1995 reforms which preceded privatisation, they have all achieved considerable productivity gains.  The rural based Eastern Energy, for example, has made operating cost savings of 22 per cent.  Even greater savings were made in the metropolitan based businesses, large parts of which were previously owned by municipal authorities which even made the SEC appear efficient.  Thus, CitiPower has achieved operating cost savings of 38 per cent.

Most people consider electricity lines to be mainly (some say overwhelmingly) natural monopolies.  Hence the need for a regulated price overseen by two key puppeteers:

• efficiency incentives:  and the greater the profit left in the hands of the owners, the greater is their incentive to find more productivity improvements;  and
• controls on price gouging:  with governments determined to deliver lower prices to electricity customers.

One reality check on the 2001 price re-set will be subsequent share market or takeover activity.  In the UK in 1995, failure to provide sufficient reductions saw rapid share price increases., forcing an embarrassing revisit of the decision.  One problem with this reality check is asymmetry -- although leaving more profits with the businesses than investors expected will boost share prices, the adverse productivity incentives from under-pricing will only become apparent over time.

This direct focus on profits was not what the Kennett Government originally had in mind in its electricity reform and subsequent privatisation.  The requirement on the Regulator-General was to re-set electricity charges based on price not profit control.  However the Regulator-General knows that the harshest and most politically powerful criticisms will be visited on him if he sets prices too high.  As prospective profits are the best gauge of this, in a classic use of Orwellian New-speak, he has interpreted the "explicit price capping" approach he is required to use, as offering him license to use a form of profit control.

Price re-sets in utility industries overseas have usually incorporated two key elements, an initial cut to account for productivity gains in the preceding period and an annual reduction (the X-factor) to account for forecast productivity increases.  The Regulator-General has indicated that he prefers to use only the X factor so that the businesses get to keep efficiency savings longer and have a stronger incentive to find new cost savings.  But he has also indicated that "windfall" gains that are not due to the management skills of the businesses will be handed back in lower prices from the outset.  And he wants to adopt a wide definition of these "windfall" gains.

UK developments offer a guide -- chilling for the electricity businesses -- on the outcome for the Victorian re-set.  There, the regulator eventually reduced line charges by about 25 per cent at the 1995 re-set and imposed an annual X-factor real price reduction of 3 per cent.  In the re-set of December 1999, the UK regulator has reduced line charges by a further 23 per cent and maintained the 3 per cent annual price reduction.

This has already brought pressure on some business's share prices, including GPU, the owner of Victoria's gas and electricity transmission lines.  The Wall Street reaction from the price reduction forced on GPU's UK subsidiary brought a change in the firm's strategy, including a proposed sell down of its Victorian holdings.

On first assuming office the Kennett Government raised then progressively lowered prices to end customers.  It also required the new distribution businesses to reduce line charges of 1-1.92 per cent per annum.  This was a form of X-factor impacting only on contestable customers.  Non-contestable customers, those not free to choose their own electricity supplier, now comprise only households and the smallest businesses.  The 2001 price re-set also coincides with freeing all customers' choice of supplier.

The scale of the X-factor and other price reductions so far required of the Victorian businesses would appear to be considerably less than those of the UK.  Even though the UK businesses sold at a steep discount to their book value and those in Victoria fetched twice that value, the productivity improvements demanded of the businesses at the time of corporatisation now seem modest.

But this does not reduce the difficulty of setting prices to achieve a profit goal.  Shortly before Christmas, the Regulator-General issued a report that tried to summarise and compare each of the five distributors' price proposals.  However, the myriad different price and service bases defied the ability to standardise them.

This points to the need for a simpler method, perhaps one that draws upon the principles used over a century ago when natural monopoly utilities first emerged.  The nineteenth century procedures put in place required a specific sharing of profits with customers, in the form of price reductions, for profits above a threshold.  A modern variation of this may be to set prices based on an anticipated level of profits and require a share of profits above this to be handed back in the form of lower tariffs.  The share could even be on a progressive rate scale.

In the next week or so the Regulator-General is to put out an Issues Paper on the distribution businesses' proposals.  The sheer complexity of the price/ quality mix in electricity and the likelihood of a substantial waste of resources in the analyses counsels in favour of greater simplicity.  If a profit based approach to tariff setting is inevitable, it is best to make maximum use of an explicit profit sharing formula rather than persisting with the attempt to establish a synthetic profit forecast as a base for prices.

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Battle of the Giants

Back in October of last year, BHP announced that it was moving from an industrial award to individual workplace agreements in its Pilbara operations.  It offered its 1,000 iron ore workers the option of moving over to staff conditions.

This marked a major shift in BHP's industrial relations philosophy.  For over thirty years BHP's approach was to work closely with unions in the management of its mines and factories.  This approach worked especially well in the Hawke/ Button years of the 1980s.  With tripartite industry/ management/ government plans all the rage, it made special sense for BHP to cooperate with a trade union dominated government.  For the company, the steel industry plan that emerged from this process delivered real benefits in terms of investment concessions and import protection.

But Government industry plans for steel and other industry sectors gradually lost their allure as outcomes elsewhere, particularly the US, showed that planning did not bring home the bacon.  The plans themselves distracted management and often impeded the flexibility of firms to adapt to shifting circumstances.  By the Keating era, the Labor Government itself had quietly shelved or downgraded its industry plans in favour of more economy-wide measures.

The appointment of American Paul Anderson as Managing Director of BHP signalled radical changes at BHP across a range of areas.  Many previous ways of operating had run out of steam.  It had become clear that globalisation required a fundamental change for BHP if it was to remain competitive.  As an outsider, Anderson carried none of the baggage of the past which had, for example, led BHP to incur lavish termination payments as a means of exiting its Newcastle facility.  As an American, he had an indifference to unions rather than the Anglo-Australian tradition of deference.  And with Labor out of office in Canberra a key underpinning of union influence was removed.

BHP's move to introduce individual agreements to its Pilbara operations is also the final chapter in the mining companies' managements' long march to regain control of their operations from unions.

The process started in 1986 at Robe River where productivity had been falling, and the owners found they were paying an increasing proportion of its workforce to be nothing more than full time union agitators.  Initiating the reform took great courage on the part of the firm's management, especially its CEO Charles Copeman.  In addition to desperate and vicious union attempts to maintain themselves as the virtual management of the facility, the local supervisory staff had little stomach to fight, and rival firms (including BHP) did not want the system threatened.  Copeman also confronted intense denigration from ALP Governments in both Western Australia and Canberra.

In addition Robe River faced the hostility of an Industrial Relations Commission guarding the myth that it was the arbitrator of workforce arrangements even where it simply endorsed lavish conditions the unions had extracted.  The Robe River dispute did much to undermine the old industrial relations framework and laid the groundwork for the vast improvements in industrial relations seen in Australia over the past decade.  From the dispute, which lasted over a year, Robe achieved a doubling of labour productivity.  CRA followed suit in its own Pilbara mines and achieved similar gains.  The Pilbara, once notorious for massive overmanning and union demarcation disputes, has, until the recent dispute, become an island of industrial peace and prosperity.

BHP's management had long displayed strong skills in playing the industrial relations game.  But working within the system could not provide the quantum leap in productivity achieved by Robe's staff run Pilbara facility, and later at CRA's operation.  BHP found in the Pilbara -- as P&O is finding on the wharves -- that there are areas where unions are institutionally unable to accept the workplace gains that are delivered by individual staff agreements.

The advantage of workers being on staff is greater flexibility and mutual agreement of the firm's employees and its owners on the best outcomes for the business.  This brings win-win outcomes which mean benefits for shareholders, and better pay and more satisfying employment conditions for the workers.  For BHP it had become clear that the improvements from this approach that its competitors in the Pilbara were reaping were bringing richer dividends than the traditional industrial relations approach.

Compared with the bitterly fought pioneering struggle at Robe River, the unions' fight against BHP's decision has been foot-stamping and posturing.  This dispute is their last gasp.  And even if BHP concedes some on-going role to unions, they will cover few workers and be influential in even fewer workplace issues.  The individual employment agreement approach is now the dominant form of workplace arrangement in Western Australia.  It is generally recognised as bringing improved productivity and wages.

The changed approach of BHP in its iron ore operations may presage similar changes in its coal mining and steel divisions.  The unions' reactions to the Pilbara change show this is uppermost in their minds.  Even though, over recent years, the traditional union bargaining approaches have delivered good productivity gains in both steel and coal, the Western Australian developments are a direct shot across the union bows.

This is particularly so for the CFMEU.  At the very least BHP's determination to effect change in the Pilbara demonstrates the Big Australian will adopt an alternative approach if there is a return to the bad old days of confrontation in the coal mines.  The union leaders' nightmare is that it may even trigger a renewed acceleration of the decline in union importance and membership.

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Give GM Foods A Go

The green/consumerist radicals had great sport last year in demonising genetically modified foods.  They catapulted GM foods into one of the celebrated causes at the World Trade Organisation meeting in Seattle.  And prior to Seattle they managed to create public alarm with none-too-subtle images of "Frankenfoods" and claims that genetically modified tomatoes were really pigs in disguise.

There was no substance behind the fear-mongering, as scientific advisers told their political masters.  Even so, politicians in Australia and many other countries were spooked into contemplating draconian regulatory measures to control GM products.

And the radicals claimed the scalp of Monsanto, the firm most associated with biotechnology and food.  The NGOs organised an internet attack to undermine the value of the Monsanto brand name, forcing a sale of its GM division.

Data now becoming available is showing productivity from GM products falling short of Green Revolution breakthroughs but still allowing valuable improvements.  The increased yield for the two main GM crops in the US, corn and cotton, averages 6% and 11% respectively.  Some nations can afford to forego such gains but Australia, with agriculture providing 30 per cent of exports must remain in the vanguard of competitiveness and cannot reject technology to improve agricultural productivity.

Issues of productivity aside, the built-in insecticides at the core of most GM products is leading to reduced use of agricultural chemicals.  US studies show chemical spraying for GM crops fell by 14% for corn and a massive 72% for cotton.  This is a major commercial saving -- pest control accounts for 12% of the costs of producing cotton.  And, of course lower levels of spraying pay an environmental dividend.  When confronted with this evidence, the radicalised environmental groups have buried their heads in the sand rather than risk alienating some of their support base by praising business innovation.

In assaulting genetic engineering the radical lobby steered clear of attacking genetically modified products used in medicines.  The public would just not buy that.  Some GM medicines that are clear improvements on the "natural" products are already around.  These include the drug to combat growth hormone deficiency, which previously resulting in premature deaths when it was it was derived from a "natural" source, the pituitary glands of corpses.

Currently, the improved productivity from GM crops is difficult for consumers to translate into tangible benefits as the lower price is not apparent.  Consumer views will change as improved new GM products in the pipeline are brought to market.  These include:

• Vitamin A enriched rice which will reduce the annual death and blindness toll in children with Vitamin A deficiency;
• the elimination of a natural allergenic protein in milk that prevents many children from consuming the product;
• eggs with high levels of peptides to allow healthier weight reduction.

The first round of GM improvements to agricultural products came without visible improvement to the consumer.  Scaremongers had a field day pushing the fear buttons.  With subsequent rounds of technology developments, quality improvements will add to the productivity gains.  Significant public opposition to GM products will disappear just like it has to the products of selective breeding that form the bulk of our present diet.

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The Sorcerers' Apprehension

Do you want some comforting thoughts to help you face the tribulations that various experts have predicted for the years ahead?  Cast your mind over all those terrifying forecasts about the world-wide catastrophes that the millennium bug was going to cause.

Meltdowns at nuclear power stations;  devastating food shortages as essential services and transport systems collapsed;  planes and satellites falling from the sky;  global economic depression;  these and other expected calamities would lead to social mayhem.  Some on the loony right of American politics even convinced themselves that Bill Clinton would use this turmoil to declare martial law and make himself president for life.  (Surprisingly, they didn't seem to recognise the bright side of this scenario -- wacky Al Gore would never get to occupy the White House).

Faced with the embarrassing disparity between their forecasts of doom and the actual course of events, Y2K consultants resorted to what can be called the "witch-doctor gambit".  When things turn out well, sorcerers in tribal societies attempt to claim all the credit for everyone's good fortune.  But when disaster strikes it is because the sorcerers were not taken seriously enough, or because they were given too few pigs or shells, or for some other self-serving reason.

Some information technology specialists tried to portray themselves as heroes whose timely warnings and valiant efforts had saved our civilisation from a terrible fate.  Unfortunately for them however, there was just too little difference between the experiences of those who paid the sorcerers a great deal, and those who virtually ignored them.

As the year 2000 began, the only place that seemed to suffer serious computer problems was The Gambia, an almost make-believe nation which occupies a sliver of country 295 km long and 25 km wide in the middle of West Africa, and whose whole economy is based on peanuts.  But things are always breaking down in The Gambia.  So no-one can be sure whether the real culprit was the Y2K bug, or the normal chaos of everyday life.

Nevertheless, it would be quite wrong to argue that the hundreds of billions of dollars that were spent around the world in attempting to rectify the Y2K problem were completely wasted.  The failure of computer programmers in the early days of the industry to allow for years to be entered with four digits rather than just two could have caused some computers to treat the year 2000 as 1900, with potentially serious consequences for systems which depend on accurate dates.

It would have been highly irresponsible to ignore the risks to computer controlled operations in certain critical areas -- nuclear weapons systems, aviation, and essential services such as health, water and electricity.  In this sense, there was at least one significant difference between tribal sorcerers and Y2K consultants.  Despite what some people are now claiming, the latter were not involved in a complete con.  A genuine problem did exist, and it was necessary to take certain precautions.

But how much caution was justified?  The humbug which surrounded the Y2K bug offers some useful lessons for thinking about other areas of contemporary life which also attract self-interested doomsayers, such as the state of the natural environment.

Both greens and Y2K consultants would argue that they are forced to hype up the dangers, because otherwise they might be ignored.  As one prominent Cassandra once confessed, in order to obtain public support, scientists involved in environmental causes "have to offer up scary scenarios, make simplified, dramatic statements, and make little mention of any doubts that we might have.  Each of us has to decide what the right balance is between being effective and being honest".

The trouble with this kind of approach is that it ignores one of the more valuable ideas that environmentalists have popularised -- the need to think "holistically".  Nothing exists in isolation, so we should always consider the effects that our actions might have on other areas of concern, no matter how unrelated these might initially seem.

This means recognising that precautions always come with costs.  Resources devoted to addressing one set of possible dangers inevitably require funds to be diverted from somewhere else.

Many governments, organisations and individuals spent vast sums of money to fix potential Y2K problems which at worst would have produced only minor irritations, or which could have been fixed by a simple manual adjustment of the date once the millennium began.  As spokespeople for various interest groups like public health and education observed, some of the $12 billion spent on the Y2K bug in Australia alone could have found far better use in dealing with problems in their own sectors.

When every potential risk, from greenhouse gases to the Y2K bug to genetically modified foods, is presented as threatening the end of the world as we know it, it becomes so much harder to apportion our limited resources on the basis of a rational assessment and comparison of the genuine threats that we may face.

Rather, the greater share of funds will go towards meeting the concerns of those who can develop and successfully market the most disturbing scenarios, whether or not their jeremiahs are really justified.  And as each scary prediction proves unfounded, the voices of doom become more and more strident, crowding out the calm and rational public debate on which sensible policy depends.

These conditions are fine for talented and unconscionable doomsters, whether their focus is technology, the environment, or some other seemingly plausible calamity.  But their successes are invariably won at the expense of the broader community, which at best has its resources misallocated, and at worst finds that economic and technological developments that can bring new sources of prosperity are being prevented.

Faced with advocates who promise to deliver us from disaster, informed scepticism is the only cautionary approach that always repays its costs.

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Apocalypse now? Let's just hang on a moment ...

No wonder Bob Carr always looks morose.  The poor man has fallen for the apocalyptic scenarios promoted by the peddlers of environmental gloom.

In a remarkable cry from the heart, the NSW premier announced that there is little hope for humanity ("The Doomsday Millenium", SMH 6 January).  World population numbers have reached catastrophic levels and even in the unlikely event that they are reined in, it will be too late.  The global environment has been irreversibly damaged.  Perhaps the most we can wish for is to be distracted by the tinsel of mariachi bands and fireworks displays.

What I found particularly surprising was the premier's apparent certainty about the bleakness of the future.  Less erudite greenies might be forgiven if they are blind to the hazards of predicting outcomes in systems as complex as those involving human societies and the physical environment.  But as a well-read and thoughtful man, Bob Carr has no such excuse.  He must be aware of history's marvellous tendency to utterly confound the jeremiahs of experts.

The past few decades have been particularly unkind to predictions made by those of Mr Carr's persuasion.  When he stated that "only 30 years ago ...  global warming was considered a possibility for late in the 21st century" he was telling only half the story.  Thirty years ago, many scientists, including a number who are now riding the global warming bandwagon, were confidently warning about the ominous signs of world-wide temperature declines caused by industrial pollution.  A new ice age, bringing devastating crop failures, would soon begin.

And thirty years ago Paul Ehrlich, the grand master of scary environmental stories induced by the "population explosion", was in full flight.  The world's supply of oxygen would be seriously depleted by the burning of fossil fuels and the clearing of tropical soils.  By the mid-1970s 200,000 people a year would be dying from "smog disasters" in American cities.  American life expectancy would drop to 42 years by 1980 as a result of pesticide-induced cancers.  Ehrlich also told British biologists that if he was a gambler, he "would take even money that England will not exist in the year 2000".

Questioned about his unenviable record as an environmental tipster a few years ago Ehrlich explained, "Everyone wants to know what's going to happen.  So the question is, do you say 'I don't know', in which case they all go back to bed -- or do you say, 'Hell, in ten years you're likely to be going without food and water' and [get] their attention".  Professor Ehrlich clearly got Bob Carr's undivided attention.

But those who foreclose hope by presenting the unknowable as awful and inexorable certainty are being wildly irresponsible, particularly when they are people whose words might be expected to carry some authority.  Why strive for a better society, or for the amelioration of environmental problems, when things are so bleak?  Young people foolish enough to take seriously Premier Carr's insinuation that they are unlucky to be alive at this "very scary moment" are more likely to take heavy solace in mind-altering substances than seek to become good citizens.

Mr Carr's argument about overpopulation and the devastation of nature depends on the idea that specific environments have a fixed carrying capacity, which can be "outstripped" by the birthrate.  Because carrying capacity appears to be a soundly-based and quantifiable scientific concept, it is a powerful weapon for those who want to claim that there are intractable limits to population growth.

But while carrying capacity is great for mobilising anxiety about the environment, it is a very dubious scientific concept, at least as far as humans are concerned.  Attempts to provide actual numbers for the earth's supposed carrying capacity produce extremely diverse results.  The biologist and demographer Joel Cohen recently noted that in 1994 alone, published scientific estimates varied from less than 3 billion people to 44 billion, or over 7 times the world's current population.

Similar problems arise when claims are made about environmental capacity at a regional or national level.  As Australian geographer Harold Brookfield has observed, despite repeated predictions about the human carrying capacity of country after country for over 50 years, "in almost every significant case these limits have been exceeded, while in most cases the present people are now better off than their less numerous predecessors".

Professor Brookfield could have added that at least in many developed countries, the environment is also better off.  Analyses of major environmental indicators in the United States and Canada by the Fraser Institute and the Pacific Research Institute point to dramatic declines in overall pollution levels and significant improvements in the condition of forests, waterways, and wildlife habitat over the past couple of decades.  Scientific and technological advances, flexible economic and political institutions, and a widespread commitment to sound environmental management all combine to allow a larger and wealthier population to create more, rather than "less nature".

Under the appropriate social, economic and legal conditions, such causal links can exist even in Africa, which Mr Carr seems to regard as beyond all hope.  In a highly acclaimed recent study, Mary Tiffen and her associates examined changes over a 60 year period in a densely populated region of Kenya.  They discovered that rapid population growth had been a driving force for greater prosperity and environmental improvement.  Researchers in some other parts of Africa are making similar findings.

The greatest threat to prosperity and effective conservation measures in much of sub-Saharan Africa comes less from increasing numbers of people than from the terrible ravages of AIDS on the most productive and talented sections of the population.  Deluded into believing that Africa already has too many people, there is a danger that many Western environmentalists will actually believe that this tragedy will be good for the planet.

This is not overwrought speculation.  Lynn White, the historian whose famous and highly influential 1967 article blaming environmental degradation on the Judeo-Christian tradition made him an early hero to greenies, later wrote an extraordinary essay called "The future of compassion".  This called for Christians to assist "a drastic global rollback in population".  White said that while he hesitated to pray for a new Black Death himself, "perhaps, whether we pray for it or not, a global atomic war will once more temporarily solve the population problem".

I am sure that Premier Carr would be as appalled as I am by such demented statements.  But they are little more than the logical outgrowth of the kind of foolishness he offered Herald readers last week.

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Moving Back to Full Employment

In August 1999, 653,000 Australians were officially unemployed, with an unemployment rate of seven per cent after eight years of sustained economic growth.  Almost 30 per cent or 192,000 people had been unemployed for a year or more:  of these, 113,000 had been unemployed for two years or more.

This represents a tremendous waste of human potential and lost production.  It also increases costs to taxpayers and imposes great strains on the welfare system and community services.

It fosters a sense of hopelessness and alienation, particularly in the long term or chronically unemployed.  Unemployed people have increased levels of sickness and mental illness, and there is also a high level of correlation between young male unemployment and young male suicide.

The average duration of unemployment has steadily increased in Australia since the early 1970s when it was as low as seven weeks.

Economic growth does increase employment, but has not been sufficient.  Since the early 1970s, Australia has been experiencing what might be called the "rising mountain" pattern of unemployment, where each business cycle has seen unemployment peak at a higher level than the previous one.

Finding the Factors

The deteriorating performance of the Australian labour market is the result of a range of factors:

• governments have loaded more and more regulations on employment, raising the costs and risks of hiring;
• youth wage rates have continued to rise towards adult rates, disadvantaging young people against those with greater experience, productivity and proven track records (almost 40 per cent of the unemployed are aged 15 to 24 years);
• The award system's complex series of minimum wages, making illegal a whole series of potentially successful bids for employment by the unemployed, has a range of effects, including ensuring the results of the wage "break-outs" of the Whitlam and late Fraser years remained embedded in the system, retarding employment recovery.  It also inhibits the ability of regions hit by economic changes to adjust, resulting in higher structural unemployment.

Regaining full employment

Ultimately the best protection for workers is full employment, the ability to easily change jobs to a more satisfactory one.  It is precisely the most disadvantaged workers, such as people with a disability, who most benefit from full employment, and who are most hurt by entrenched unemployment, since they are the ones most likely to fall by the wayside as the threshold of employment is raised.

So the greatest step to improving the employment prospects for the disabled is to lower the threshold at which workers and employers can reach mutually satisfactory employment exchanges.  This sets in train a virtuous circle of higher employment leading to higher production and incomes, feeding back into more jobs being offered and so it goes on.

Legitimate concerns that some people may thereby fall below an acceptable benchmark of income can be met by devices such as an "earned income tax credit", where the government tops up employment income.  Such an arrangement could be extended to provide various forms of extra assistance to those, such as the disabled, with extra needs.

Even that may not be enough for some people who have become so divorced from the employment experience that their productivity is not sufficient to interest any likely employer without extra assistance even in a de-regulated labour market.  In such cases, wage subsidies are a rational policy response.  Work-for-the-dole can also have particular value in keeping people in touch with the employment experience.

Setting the policy direction

So the appropriate policy thrust is clear:

• government should stop intervening in labour markets in way which discourage employment;
• an earned income tax credit or similar mechanism should be used to "top up" labour incomes to an acceptable standard rather than regulation of wages,
• such "top-ups" should include adjustments for specific disadvantages,
• extension of reciprocal obligation via such programs as work-for-the-dole and
• use of bridging wage subsidies for those whose productivity is insufficient to interest any likely employer.

The income "top up" mechanism would raise issues of effective tax rates and it, along with the wage subsidies, would have involve significant expenditures.

Such expenditures would be offset by reductions in unemployment benefits and increased tax receipts.

Consider the opposition

Most of the government interventions in the labour market ostentatiously give benefits to the employed majority, with the costs being hidden and largely carried by the unemployed minority.

They are also justified on the basis of grand social values, like equity, social justice, stopping exploitation and so forth.  Unemployment is also a risk confined to a relatively small percentage of the population, if the young and the long-term unemployed are excluded, unemployment rates over the last 25 years have been in the range of two to four per cent.

This explains why persistent mass unemployment has been so tolerated and why it becomes salient as a political issue only when unemployment is rising rapidly, that is, when there is suddenly a much larger pool of people threatened by unemployment:  either themselves or a member of their close family.

There is also a range of special interests fostered by the current arrangements, particularly all those employed in or around the arbitration system, lawyers, union and employer organisers, industrial relations specialists.

For more than 25 years, this conjunction of factors has been sufficient to keep Australia's labour market institutions in place:  resulting in entrenched mass unemployment and consequent waste and human suffering.  Like other disadvantaged workers, the disabled suffer particularly badly from this failure.

Justified Contempt

Also published in the Canberra Times on 22.01.2000 as "Protests against WTO a case of never mind the consequences, feel the pretension"

It has long been an open question which group or institution in Australian public life engages in behaviour most worthy of contempt.

Is it the ABC, paid for by the taxes of all Australians but which deigns to flatter the opinions only of a narrow slice (and to sneer at the opinions of a much larger slice), whose staff are currently whining that the Party of Menzies will not give it more public money when sneering at all Menzies stood for is the posture of choice for so many ABC staff:  a spectacle at once unctuous and pathetic?

Is it humanities and social science academia, using the taxes of working-class families to fund middle-class advantage processing educational certification of diminishing worth, rife with the betrayal of their pedagogical duties and intellectual heritage (either actively or in silent compliance) to purvey an obscurantist pomposity which sneers at human achievements past and present in order to polish an overweening moral vanity?

Is it the education unions, in their stringent avoidance of real accountability as they relentlessly defend teaching mediocrity, doing their best to ensure that public schools imitate soviet production methods with soviet-style results of increasing cost and decreasing quality so that their most lively function is to propagandise (badly) at our children?

Is it the unions in general, reacting to the refusal of new workers to engage their dubious, overpriced services by strong-arming State ALP Governments into giving them ever more outrageous legislative privileges in the hope that state coercion can corral more members than their current mere fifth (and falling) of the private-sector workforce?

A difficult question to answer indeed.  Fortunately, the spectacle in Seattle at the WTO conference has clinched the title.  The groups in Australian public life whose behaviour is most worthy of contempt are those advocacy non-government organisations (NGOs) -- the ACFs, Greenpeaces, Community Aid Abroads and their ilk -- who have used their (massively overblown) reputation for altruism and their almost complete lack of accountability to do their bit to trash a major Australian national interest.

First, a bit of history and a smattering of economics.

The World Trade Organisation is the successor to the General Agreement on Tariffs and Trade (GATT).  The GATT was set up as part of the postwar settlement which sought to ensure there was not another World War.  The single thing which most made the Great Depression of the 1930s so severe was the destruction of international trade by "beggar-thy-neighbour" protection policies.  Countries competed in raising tariffs against each other, sending them all spiralling down into mutually-assured economic destruction.  Out of the Depression came Hitler and the rest is history:  and tens of millions of dead and devastated countries.  Something not to be repeated.

Hence the GATT, an organisation membership of which (like the WTO) has always been entirely voluntary.  You didn't have to play if you didn't want to.  But all countries who wish to trade internationally have an interest in having a common set of rules under which said trading takes place.  Which is what the GATT, and now the WTO, has provided.

As the failure of command economics has become ever more obvious, more and more countries have wanted to gain the benefits of trade, and so have joined the WTO.  And since, unlike the UN, the WTO is about something specific and real (trade) it has genuine effectiveness, again unlike the UN.  So, what the WTO is really about is common rules so trade continues and grows so the world economy does not get devastated so countries do not experience profound crises leading to who knows where (and, after Hitler, who wants to take the risk?).  And since no one will suffer more than the poor from a major collapse in world trade, the poor are major beneficiaries of the trading regime.

So, if you are in favour of world peace and development, the WTO has to be seen as a good thing.

As to the economics, we need to remember what trade is.  Trade is commercial exchange for mutual gain.  If both sides did not benefit, it would not continue to happen.  It is precisely because commercial exchanges leave both sides better off that we all engage in them, and trade is just such exchanges across national boundaries.  Which is why countries have a common interest in trade and common rules for same.  It is all about mutual gain and mutual benefit.

Which is why the protectionist policies of the 1930s were not only disastrous in effect, they were criminally stupid.  One does not get rich by impoverishing one's customers:  it is much better to own a shop in a rich suburb than a poor one.  And you certainly don't get prosperous, nor recover from an economic down-turn, by raising the cost of products to your own citizens (which is what tariffs do).  Even now, rich countries mostly trade with each other -- because they are the countries whose consumers have the money to buy things.  More wealthy countries mean more people able to buy more of our products.

The WTO is a way for governments to mutually agree not to do stupid things.  Or, to be a bit more precise, to mutually agree to each defend their own general interest against their own special interests clamouring for special privileges.

With the current WTO agenda, Australia is in an enviable position.  There was no significant local interest which was threatened by anything on the agenda, but, as a major food exporter, we stood to gain a great deal from liberalisation of agricultural markets.  Something else which stood to gain a great deal from such liberalisation is the environment.  Agricultural subsidies in the US and Europe encourage land to remain in agricultural production which should not be, and use of attendant chemicals.  They also depress the world prices for many agricultural products, undermining the incomes of developing world farmers.  More generally, the more prosperous people are, the more concerned they are with environmental amenity (since they are less worried about where their next meal, etc. is coming from) and the more able they are to do something about it.

So, peace, environmental concern, higher incomes for the developing world and Australia's national interest all argued for a good result in Seattle.  So, what were Greenpeace, the ACF, Community Aid Abroad, et al doing?  Campaigning strongly against it.  Why?

Their official position is that WTO promotes globalisation and globalisation is bad for democracy, the poor and the environment.  This is a line which does not stand up to even cursory examination and can be dismissed.  What really motivates them is straight institutional interest.

All these bodies are in the moral vanity game.  They sell "warm inner glows" to their supporters.  In Gary Johns' words

NGOs consist of mail-order memberships of the wealthy Left, content to buy their activism and get on with their consumer lifestyle.

Since over a century-and-a-half of polemical endeavour has established that opposing capitalism scores the highest moral vanity points -- and the WTO and globalisation represent capitalism-triumphant -- then being agin the WTO and globalisation is the best game in town for those in the moral vanity game.

What they are really trying to do is to beat up on the WTO so they can be "seen" to be "fighting the good fight" while also hoping to lever their nuisance value into being included in WTO decision-making.  It is a straight play for the danegeld of participation and influence.

And the incomes of Australian and third world farmers?  In the moral vanity game one has to remember the basic principle:  never mind the consequence, feel the pretension.  It was good enough for the apologists of Stalinism, and it is good enough for the anti-globalisation activists.

As for their arguments and antecedents:  who was that guy who used to talk about world-capitalist conspiracies, how malign international forces were secretly plotting to use their wealth to enslave unsuspecting decent people, who thought that nature was the true measure of things, and felt that the environment put strict limits on how many people could live in a certain area?  Was always going on about living space -- lebensraum he called it.  Had a funny moustache ...

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And About Time ...

There can be no better time than the beginning of a new millennium to reflect on the nature of time.  While anyone with a correctly set watch can answer the question "what is the time?", take out the "the" and we have a fundamental conundrum;  one that scholars spend years pondering without coming to any satisfactory conclusions.

After quoting a few circular definitions from history's most outstanding thinkers, the respected Cambridge Dictionary of Philosophy tells us that "time might be too basic to admit of a definition".  Some intellectuals are even convinced that time does not really exist;  which is rather a pity given that we spend so much time talking about it and measuring its passage.

Nevertheless, the great scientist Albert Einstein, anointed this week as the Person of the Century by no less an authority than Time Magazine, did argue that time could not be considered independently of space.  According to his theory of relativity, as the speed of an object increases time slows down, until it comes to a complete halt at the speed of light.  A clock in a space craft travelling at 90 per cent of the speed of light, for instance, would take the equivalent of about 138 Earth minutes to record 1 hour, and a person on board the craft would likewise age at less than half the rate of someone who had remained on the Earth.

As unlikely as the theory of relativity may seem, it has been confirmed by scientific experiment.  A few years ago, an ultra-precise atomic clock, accurate to one billionth of a second, was taken by jet from London to Washington and back.  The difference between the elapsed time it recorded and that measured on the ground was exactly as Einstein predicted.

Yet the most convincing answer I have seen to the question "what is time?" was graffiti at a university many years ago:  "Time is nature's way of preventing everything from happening at once".  Although Einstein's theory suggests that this insight would not apply at the speed of light, this graffiti has the distinct advantage of ringing true with our everyday perceptions, which many other definitions and explanations do not.

While all this suggests that us ordinary folk are well advised to trust in our common sense and leave the philosophising to the denizens of ivory towers, there are many questions about time that we can get our minds around without too much difficulty.

For some people the most pressing issue relating to time is whether the new millennium really begins today, or in January next year.  In an article in one of the southern newspapers this week, the nation's most-admired pedant, the Federal ALP president and former quiz king Barry Jones, was quoted as plumping for the latter.  This was despite the fact that all his party's premiers were busy hosting millennium celebrations last night.

The problem about the commencement of the millennium arises because our forebears did not have the benefits of globalisation.  The system of counting years from the supposed date of Christ's birth was devised by a sixth century English cleric called Dionysius Exiguus, or Dennis the Small.  Although by this time Indian mathematicians had already developed the concept of zero as a number, it was many centuries later before scholars in Western Europe learnt about it.  So Dennis made the year of Christ's birth AD 1, (Anno Domini, "the year of our Lord") rather than Year Zero as an informed Indian would have done.  In any case, Dennis also got the year wrong, as Christ was born during the reign of the Judean king Herod the Great, who died in 4 BC.

So strictly speaking, Barry Jones is right.  But he and all the other "the millennium begins in 2001" dogmatists are wrong psychologically, and as good feelings usually take first priority these days, this is what matters.  A year with three noughts at the end of it is much more compelling and gratifying as the turning point for the millennium than a year that ends with two noughts and a one.

However, if it is really important to bring feelings into line with logic, the solution would be to change 1 BC to 0 AD, and adjust all the other BC dates accordingly.  As few influential people take much interest in antiquity anymore, inconvenience would only be suffered by the declining number of classical scholars.  This dating change could be presented as a nice multicultural gesture, finally giving Indian civilisation its due for the contributions it has made towards our own.  And it would be a wonderful gift to our descendants, who would obtain the benefits as early as the year 2100, when they would be spared all the earnest debates about whether or not a new century had really begun.

Surprisingly perhaps, given the piety of the early Middle Ages, it took a very long time before Dennis the Small's innovation of taking Christ's birth as the starting point of the Western calendar was generally adopted.  The first person to popularise his system was another English cleric, the Venerable Bede, who used it two centuries later to date events in his widely read work, the Ecclesiastical History of the English People.  But even so, as late as the year 1000 the Anno Domini system was not particularly widespread in Christendom.

So even in Europe the great majority of people lived through the first millennium without actually being aware of it.  We are the first generation in human history to have experienced a millennium change that has been broadly acknowledged.  And that surely, has been something worth celebrating.

One of the other pressing questions exercising some minds is what to call the new decade that begins today.  Even the pedants have to recognise that the nineties are over.  Most of the possibilities suggested so far are pretty ordinary -- the ohs, the zeroes, the uh-ohs, the earlies.  The Australian Broadcasting Corporation, living up to its dreary auntie image, asked a professor of linguistics at Macquarie University to advise on the correct usage.  The good professor offered up "the two thousands", "the twenty-hundreds", and "the twenty-ohs".  Stolid and worthy perhaps, but most unlikely to take off on talkback radio.

In its current issue, the more adventurous British newsmagazine, The Economist, editorialises that "the naughties" captures "the right tone, rhythm and sense of fun", thus giving influential support to the grass-roots campaign launched on the Internet by Sydney artist David Wales.  (Churlishly, The Economist gives no credit to Wales;  continuing a long Pommie tradition of appropriating to itself the results of Australian creativity.) "Noughties" would be the more preferable spelling however, if only to head off the inevitable complaints from wowsers that the other spelling sets an unfortunate example to impressionable young children.

To me, the most surprising aspect of the change to the new millennium is the lack of protest from the "West is wicked" crew.  After all, there is little that better represents the ascendancy of our civilisation than the near universal triumph of our Gregorian calendar -- named after the pope who introduced it in the sixteenth century.  At the very least, we could have expected demands that we apologise to the world for our calendrical imperialism, which has effectively overwhelmed the thousands of other systems of reckoning dates and times that have been developed by human cultures over the ages.  Why aren't the usual suspects telling us that we are all timeists, complicit in chronocide?

Even many Islamic countries, such as Egypt, Pakistan, Nigeria and Indonesia, have adopted the Gregorian calendar, although some of these countries use the Muslim calendar as well.  Unlike our calendar, which is based on the earth's orbit around the sun, this calendar is based on the lunar cycle, consisting of twelve months of either twenty nine or thirty days long with a 354 day year (sometimes 355 days).  As a result, the months do not keep up with the seasons.  The starting date for the Muslim calendar is the Hegira, Mohammed's move from Mecca to Medina in 622 AD, making today the 24th day of Ramadan, 1420.

In fact however, even in Europe the triumph of the Gregorian calendar was no lay down misère.  As David Ewing Duncan recounts in his engaging book, The Calendar, scholars had long known that the solar year was over eleven minutes shorter than the calendar year, the duration of which had been established by astronomers in ancient Roman times during the rule of Julius Caesar.  Over the centuries the steady accumulation of error meant that the calendar was becoming increasingly out of phase with the seasons, and Christian holy days were being celebrated on the wrong dates.

In 1267 the brilliant English friar Roger Bacon wrote to Pope Clement IV warning that something had to be done about this scandalous situation, but it took another three centuries for the church to act.  In the 1570s Pope Gregory XIII established a commission to investigate the necessary reforms, and as a result of the commission's work, ten days were dropped from the calendar in October 1582.  In order to bring the calendar and solar years into closer alignment, it was also determined that only centuries which were exactly divisible by 400 would be leap years.  This is why this year is a leap year, whereas 1900 was not.

Unfortunately, a lot of people felt that they had lost ten days from their lives, and in some places there were violent demonstrations.  Even worse, Protestant countries such as England and Sweden, and those following the Orthodox faith saw the whole thing as a Popish plot and refused to adopt the Gregorian calendar.  Britain relented in 1752, by which time it had to drop eleven days to bring it in line with other countries in Western Europe.  Under the slogan "give us back our eleven days", mobs rioted in London and other centres, with some people being killed.  Most Balkan countries held out until the 20th century, and ironically, it took the Bolshevik Revolution to make Russia adopt Pope Gregory's calendar.

The Gregorian calendar is not totally accurate however, as it still runs fast by one day every 3,300 years.  This will be rectified by the rule that a year which can be exactly divided by 4,000 is not to be a leap year, which will kick in two thousand years from now.

This should be enough to satisfy everyone, and allow the world to turn its attention to more urgent problems.  But the fires of time reform still burn strong in some people's bellies.  The Swatch watch company wants us to adopt a system that divides the day into a thousand units and abandons time zones so that it is always exactly the same time in any part of the world.  In the hope of making it appealing, they are calling it "Internet time".  But it seems like a none-too-subtle attempt to force us to throw away our existing watches and buy new ones, preferably Swatches.

And then there is the Long Now Foundation, the brain child of that fervent visionary Stewart Brand, who initiated the Whole Earth Catalog in the late 1960s.  The foundation believes we are too focused on the present, and wants us to start thinking about the next ten thousand years.  To help facilitate this long term perspective, Brand and his followers use 5 digit numbers for dates -- so 01999 has just concluded and 02000 has now begun.  It does mean that there will be plenty of time to solve any Y10K problems.  But somehow I can't see it ever becoming a mass movement in my lifetime.

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